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gnatty8
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Evaluating Lease or Own Decision for Precious Metals

July 14th, 2021, 2:53 pm

Trying to develop a basic tool to illustrate optimal strategy for leasing or owning precious metals (i.e. doesn't matter which, rhodium, platinum) and thinking of setting up as an N-year project, modeling PMs price is GBM, lease rate is a variable, with reset once per year.  It's an over-simplification since lease rates will be a function of funding costs, credit plus curve shape, but just trying to illustrate a point.  Any thoughts on best approach?  Again, not making a decision, only trying to illustrate that leasing is preferred option in most states of the world since it avoids the large cash outflow at T=0 which is offset by an uncertain salvage value at T =N, when metals are not consumed.
 
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Alan
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Re: Evaluating Lease or Own Decision for Precious Metals

July 14th, 2021, 3:48 pm

Sorry in advance for the snarky comment, but maybe the WOPR was correct when it said "The only winning move is not to play".  :D
 
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gnatty8
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Re: Evaluating Lease or Own Decision for Precious Metals

July 14th, 2021, 5:56 pm

Haha, OK, I can add a branch to my decision tree..
 
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bearish
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Re: Evaluating Lease or Own Decision for Precious Metals

July 14th, 2021, 7:46 pm

What is the motivation to possess the metal in the first place? I get the buy vs lease question for a car or an apartment, but not for rhodium.
 
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gnatty8
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Re: Evaluating Lease or Own Decision for Precious Metals

September 10th, 2021, 3:49 pm

Precious metals can be used catalyst in many manufacturing processes, with very little losses and most of the metals recovered at later date.
 
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bearish
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Re: Evaluating Lease or Own Decision for Precious Metals

September 10th, 2021, 9:43 pm

Ah - I didn’t know that. So it’s a lot like an apartment. Now the question makes good sense, although I still don’t have much of an answer unless there is a rhodium futures (or OTC forward) market out there.
 
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gnatty8
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Re: Evaluating Lease or Own Decision for Precious Metals

September 12th, 2021, 3:40 pm

None that would be of any help.  One exists for many metals, gold, platinum, etc., but the economic lives of the metals are measured in the multiple years (5 or more), whereas the tenors of the forward market are more like 12 to 18 months.. 
 
Mercadian
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Re: Evaluating Lease or Own Decision for Precious Metals

September 29th, 2021, 6:46 pm

I'm probably way out of my depth here, but a couple of questions that might help move the ball forward:

- This looks more like a optimal cost exercise for manufacturing rather than an asset investment decision, i.e. your optimal solution should be complete consumption of the metals rather than re-sale at higher price, no? otherwise shut down the company or kill the project (GE financial comes to mind).
- How are you measuring the opportunity cost of Cash? how would you finance the purchase vs the lease? how does the cashflow profile look for the business?
- How are you modelling demand for the metal within the manufacturing process? seems like a key component on the decision
- The bit about "Offset by an uncertain salvage value at T =N" goes both ways I think, if you consume the metal that was under a lease you might end up needing to buy it/sell it later on at a higher/lower price, optimal exercise type of issue I guess, unless like you said there is a way recover it but still the cost would be there anyway.