Oct 23, 2010

Mining Valuation Part 1 of 5

First you want to start off with three basic but very informative metrics of the company. An example in excel is available in the link titles Jaguar Mining Valuation Metrics.

  1. Management - You obviously want to pick high quality mgmt, so doing you DD on them should be your starting off point i.e experience, did they add value or successfully create one or more mining companies in the past? etc...
  2. The next is called the "Valuation" Ratio which I will go through step by step.
    1. First find their 2P (proven and probable reserves) which could easily be found on their websites.
    2. Use the prevailing gold or silver price in this measure and use current or the long term cash costs per ounce ( can also be easily found).
    3. Determine the mine(s) values by doing the following
      1. Multiple 2P reserves by ( spot silver/gold price - cash costs per ounce). I.e 2P reserves = 4m ounces, gold price = 1300, cash costs = 500. So 4,000,000*(1300-500) or 4,000,000*800= 3.2B.
    4. Calculate The NAV by taking the 3.2B - any hedges - debt + cash
    5. Find the market cap - shares outstanding * current price
    6. Lastly Divide the Market Cap by NAV - I.e if the Market cap is 1.8B you get a ratio of .5625. Fair value is 1, so the lower the ratio the cheaper each proven ounce in the ground is.
    7. This is a great metric for finding potential buyout targets in addition to providing one screen to filter stocks that are cheap.
    8. If you want to take it more in depth find the M&I ounces (Measured and Indicated) and multiply them by a low percentage 10-50% (depending on how efficient they were at converting these ounces to 2P reserves in the past and then add your output figure to your current 2P reserves. I.e (4m in M%I and they have historically converted 25-35% of these ounces, multiply 4m by .25 = 1m ounces, so now your adjusted 2P reserves jumps to 5m ounces. This has many implications, notably it will lower the valuation ratio making it cheaper than it previously was. 
Part 2: Operating Cash Flow Multiple

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