Monday, 18 October 2010

Valuation Metrics of Canadian Gold and Silver Miners

When dealing with mineral rights of mining enterprises, Canada has its NI 43-101 Metal Valuation Report, a standard for mining companies to comply with when reporting on their reserves and resources. Those documents are stored and can be retrieved from the repository at

To make thing easier and allow comparison in a glance, the website 'GoldMinerPulse': gives a fair overview of many Canadian Gold Mining Valuations. There are also specific Valuation Reports for the companies reported on. The list is not exhaustive, as a minor retribution is required to include the company and update the statistics on a daily basis.

Caution: this website has become subscription based as of Dec. 2015. 

Metrics included are: 
  • Mrkt Cap M$: Market capitalization of the company in millions of US$, computed as “Fully Diluted Share Count” × “closing share price on Canadian exchange” × “C$ to US$ exchange rate”
  • Mrkt Cap/Oz: Market capitalization per ounce of gold/silver equivalent
  • In Situ Ag: Ounces of silver in ground from all NI 43-101 proven+probable reserves, measured+indicated, and inferred resource categories
  • In Situ Au also called MORE “Most optimistic resource estimate” adds up all NI 43-101 proven+probable reserves, measured+indicated, and inferred resource categories
  • Ag-Eq Oz: Valuation of all contained metals converted to an equivalent number of silver ounces using closing market prices
  • Au-Eq Oz: Valuation of all contained metals converted to an equivalent number of gold ounces using closing market prices
  • Ore value: Average value of one (metric) tonne of ore in US$, from all deposits, all NI 43-101 classifications, all contained metals from the MORE
  • %Ag: Percentage of the Ag-Eq Oz from In Situ Ag
  • %Au: Percentage of the Au-Eq Oz from In Situ Au
  • PP%: Percentage of NI 43-101 Proven and Probable reserves making up the Market Capitalization per equivalent ounce
  • MI%: Percentage of NI 43-101 Measured and Indicated resource making up the Market Capitalization per equivalent ounce
  • I%: Percentage of NI 43-101 Inferred resource making up the Market Capitalization per equivalent ounce
Other glossary
  • Sym: Canadian stock trading symbol for the company listed. The symbol links to a GoldMinerPulse metal valuation report on the company. The company's metal valuation report contains the full details on the MORE calculation and provides links back to the latest available NI 43-101 compliant disclosures.
  • K Oz, M Oz, B Oz: thousands, millions and billions of ounces respectively.
Market Cap/Oz tells you how many ounces of gold reserves and resources you buy for your investment. At $100/Oz, an investment of $4000 buys you 40 ounces of gold equivalent reserves or resources. Market Cap/Oz is often regarded as the single key metric. This most likely gives a quite distorted view. Enterprises with a low Mrkt Cap/Oz are not cheap by definition. To start with, the denominator contains the total gold (or silver) equivalent most optimistic resource estimate (“MORE”). For an explorer “MORE” can be only inferred resources, based on assays of a few drilling samples. Resources require perseverance, time and a hefty sum of money before turning into mining reserves. An environmental impact study and bankable feasibility study on the project economics are just a few major hurdles before the mining permit can be granted and more capital can be raised for starting mine construction eventually.
The total ‘in situ’ quantity of gold or silver (MORE) adds up all reserve and resource categories. Large projects will benefit some economy of scale and will become profitable more quickly. A limited total ore reserve of some geographically isolated mining concession may be prohibitive for the project to be viable, even when grades are high.
Ore grades can be low or when ore grades are just average, underground exploitation cost can be as high as to render profitability of the pit marginal. Ore veins can be apart by tens or hundreds of meters. This will require removal of considerable quantities of just waste rock. Open pit mining is comparatively cheap in terms of cost per tonne. Lower grades can therefore be mined profitably. The ore processing cost per tonne is flat. As such the processing cost per ounce of precious metal is inversely proportional to the ore grade.
Open pit mining sometimes becomes profitable because of the secondary production. When including secondary (base) metals in the evaluation, the grade metric used is the total ore value per tonne. For reserve and resource evaluation purpose, the value of secondary metal deposits are often converted to the main metal equivalent. So the total gold-equivalent reserve+resource estimate (AuEq) exceeds the MORE. The percentage of gold in the AuEq varies, depending on the prices of the different metals. The value of any copper-gold deposit has surged because of a strong copper rally. In spite of a high gold price, the percentage of gold in the total AuEq has diminished.
Diagram on how resource and reserve categories relate
The repartition between reserves (proven and probable) and resources (measured, indicated or inferred) justifies a fairly different valuation. GoldMinerPulse also provides a quantitative  estimate on the difference in valuation between explorers and producers. For the companies listed, ore value per tonne is shown versus valuation in Market Cap/Oz in a scatter plot. Typical explorers are on a low valuation line sloping upward for better ore values. Producers are on a similar line. Explorers bridging the gap should be about to become junior producers, else they may be overpriced. Producers left of the producer valuation line are either under priced or else there is some inherent risk that cannot be quantified easily.

Composite Score

As many valuation criteria need being taken into account, it is tempting to test a composite score for a quick evaluation and ranking. It is not a straightforward task to define a reliable composite score indicator.
In my attempt to do so, I consider four metrics:
  • Market Cap/Oz
  • Total Au-Eq (or Ag-Eq) resource estimate
  • Ore value per tonne
  • Repartition between reserves and resource categories
CAUTION: Data in the spreadsheet were updated on a regular basis till end December 2012. Since the gold miner pulse website was completely redesigned, The metric "market capitalization / Oz gold equivalent" has been redefined to 'Enterprise value' / Oz of gold/silver equivalent reserves & resources. This implies that the spreadsheet can no longer be maintained in its current form. It no longer has the competitive edge it had when it was conceived.  Moreover, this website has become subscription based as of Dec. 2015.  Apart from the largest price slide in decades, there also have been quite a few mergers and acquisitions since end 2012.  Click here to open the old spreadsheet.
The composite score is calculated and a ranking for the mining stocks is added. Enterprises can be sorted according to their ranking.

1) The Market Cap/Oz being an inverse measure, the harmonic average is calculated for this measure. That harmonic average is divided by the Market Cap/Oz for every single mining stock and the result is multiplied by the weight factor for the component. Note: this measure was discontinued on the GoldMinerPulse site and replaced by 'Enterprise value' / Oz of gold/silver equivalent reserves & resources.

2) The total Au-eq ore content  may vary over several orders of magnitude. As such dividing by an average may yield a distorted measure which is highly favouring the gold majors with a rich reserve and resource base. Economy of scale may highly differentiate between a 100 K oz deposit and a 500 K oz deposit. Yet as compared to a 10 M Oz deposit, both are small and would be ‘punished’ almost equally while being compared to the mining giant.
To obtain a better measure, we compare the total ore contents on a logarithmic scale. Furthermore, the results are scaled by the magnitude range of the set.

3) A similar approach is followed for the ore value per tonne, which can be quite different from one enterprise to another. Yet we don’t have a clue on the cost of producing one tonne of ore. High ore values usually originate from underground mining.

4) The repartition in three categories (%PP), (%MI) and (%I) is measured against the average. Every category is valued differently. Reserves (%PP) are valued roughly three times as high (0.74) as resources (0.26). Within resources the (%MI) category is valued almost twice as high (0.17) as the inferred resources (0.09).

The four components are weighted to obtain a composite score that averages 1000 over the companies listed. Weights are in a small table and can therefore be tuned easily without any modification to the formulas in the spreadsheet.
The dispersion (standard deviation) for the set of miners for each of the four measures turns out to be similar for the total Au-eq, ore value and reserve/resource repartition. It is about 50% larger for the Market Cap/Oz valuation. In spite of its lower weight, this conponent therefore has a potentially larger impact on the valuation composite score.

The Caveats
It is too tempting to just follow a well designed evaluation scheme and to allocate capital accordingly. Therefore some caveats:
For an explorer, the working capital available is not listed. Even if it were, you additionally need a reliable estimate on the capital expenditure requirement to turn the exploration concession into a working mine.

Good management will contribute in
·    Successfully leading the company through the various stages of  development of the exploration concession: Environmental issues: Environmental Impact Study, Economics: Bankable Feasibility Study, eventual mining concession.
·    Raising capital at the appropriate moment, protecting shareholder value
·    Carefully consider the necessity of any partnership for development of the concession, choose a partner offering the synergy required, negotiate the partnership terms,
·    Assure financing throughout the development cycle at best possible terms.
·    Good management for an explorer has not necessarily the skills required for operating a mine. If no partnership has been concluded with a producer, sourcing in management staff with the appropriate skills will be necessary.

For junior producers there is no indication of any payment to royalty financing companies having upfront financed mine construction. Sometimes hedges are concluded for any secondary metal streams, just in order to facilitate financing. Bankers will attribute a higher net present value for future revenues if prices are fixed.

Political hazard: Mining is a business that cannot be delocalised. From changes in taxation, over bribery and extortion to expropriation, depending on the stability of the political regime any of those are possible.

Those caveats cannot be quantified. You just need to consider any of them for the list of companies of your preliminary choice. The spreadsheet enables narrowing down this choice to a reduced number of Canadian miners. Avoid drowning in data and do your own due diligence on just these miners.

Data source
Prices of PM miners in C$  on TSX and the Gold Miner Pulse website are used for all data in this article. Their information on ore content, grade and repartition of reserve and resource categories are taken from the latest available NI 43-101 document. Are those data fully reliable? There is at least the legal backing of a regulation that strictly determines the methodology for assays and separates reserve and resource categories, such that for example measured or indicated resources should not be included in inferred resources (the category they used to belong to) as to avoid double counting. Note: The regulation on the NI 43-101 document was voted after the Bre-X Minerals fraud, whereby investors were led astray after assays had been salted with gold particles.
Comparing this information to what can be found elsewhere (for example on 24hgold, what I discussed before), I am happily surprised by the completeness of the data and the freshness (daily updates on market cap and commodity price dependent valuation data.)

Data reliability
If a concession is 100 % owned by one gold explorer, you have only their data to rely on. A NI 43-101 document will inspire more trust than any preliminary press release followed by cautionary statements that nobody really cares to read.
An exploration concession jointly owned by a number of mining or exploration companies, should report identically on the status of the resources and reserves they are exploring. At least if there is any difference, this should only be due to the difference in the reference time frame of the reporting.

Just one illustration of a possible hazard: In the valuation report on Novagold, on GoldMinerPulse, we find  among exploration concessions Donlin Creek, which is jointly owned with Barrick Gold Mining (ABX).
Novagold reports for Donlin Creek an impressive 19.6 million ounces on behalf of their 50% ownership. When checking the 2009 annual report of Barrick (table at page 159), we do find a similar resource estimate 21 million ounces on behalf of their 50% ownership. The 8.6% difference could be due to Barrick having used an updated resource estimate.
However Novagold claims their share in Donlin Creek to pertain for 75% in Proven & probable reserves, 15% in measured and indicated resources and 10% in inferred resources. Barrick on the contrary refers to Donlin Creek as resources only: Measured 300 K Oz, indicated 18,149 K Oz and inferred 2,625 K Oz.
Exploration work at Donlin Creek seems far from finished. Barrick is now revising the feasibility study to include the possible use of natural gas (abundantly available elsewhere in Alaska) as the main energy source for operating the future mine. Are we yet at the ‘reserve’ status for the Donlin Creek natural resources? Is Novagold overstating the quality, hence the value of their main asset or is Barrick purposely underestimating the quality of that same asset? Whom do you believe?
Well: the requirements of NI 43-101 for identification of "reserves" are not the same as those of the SME (US), and reserves reported by Novagold in compliance with NI 43-101 may not qualify as "reserves" under SME standards (as reported by Barrick).

1) If you were to deduce that the Canadian NI 43-101 is the looser requirement as compared to SME, try reading pp19-23 of "International Mineral Resource and Mineral Reserve Classification and Reporting Systems".
2) Miners of the Gold Mining Pulse database, discussed in this blogpost, are being monitored on following thread Miners Due Diligence Center on the KITCO forum or on the thread: "Valuation metrics of Canadian Gold and Silver miners" on the TF-metals forum.
3) In May 2011 a new metric was added, please check out following blogpost for more detail:

More similar papers are linked to in the top section of the list of blog articles.

1 comment:

  1. Thank you; the article and spreadsheet are very helpful!