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