Oct 23, 2010

Mining Valuation Part 2 of 5

The next screen that helps identify undervalued miners is the "OCF" multiple. This is a bit easier and faster to calculate than the valuation ratio but definitely worth a look at nonetheless. Note: This doesn't work for exploration mining companies.

*The industry average is around 10.1x give or take for producing miners and 20 for royalty companies.

To determine this metric you only need a few things:

  1. Market Cap
  2. The estimated production numbers for the next 3 years - This is to account for high growth miners.
  3. Cash costs for the next 3 years
OCF = Production for 2011*(spot gold or silver price - cash costs for 2011)
OCF = Production for 2012*(spot gold or silver price - cash costs for 2012)
OCF = Production for 2013*(spot gold or silver price - cash costs for 2013)

Example: Using Jaguar Mining: 
Production: 2011-2013 ==> 220k , 310k, 375k
Cash Costs 2011-2013 ==> $650/oz, $575/oz, $550/oz
Gold Price : $1,330

220*(1,330-$650) = $149,600
310*(1,330-$575) = $234,050
375*(1,330-$550) = $292,500

Market Cap: $543,000

OCF Multiple 2011: 543/149.6 ==> 3.63x
OCF Multiple 2011: 543/234 ==> 2.32x
OCF Multiple 2011: 543/292.5 ==> 1.86x

This indicates Jaguar to be very cheap on a relative basis, again can be very useful for screening mining companies. 

Next: How much are you paying for each proven ounce in the ground

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