Sunday, 22 May 2011

Canadian Gold and Silver Miners Valuation Metrics - update

Over seven months ago, I' ve written the posting which was going to turn out one of the more popular among readers of this blog: 
Valuation Metrics of Canadian Gold and Silver Miners  - Oct 18, 2010 - 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.

It was essential in explaining the spreadsheet (Click here to open the spreadsheet. It is updated on a regular basis) The spreadsheet uses the data provided on the website and the previous posting recommends that same website for fundamental analysis of mineral resources and reserves.

New valuation metric
Apart from the composite score, based upon four fundamental characteristics, which is a valuation tool allowing to compare the miners on the list, I have now added a second valuation metric. Unlike the composite score, which averages 1000 by design, the parameter is easy to deal with and allows evaluating how expensive miners are valued relative to their reserves and resources. As such it can be compared over time for one specific miner or be compared among miners and explorers.
Dimensionless parameters
Constants without dimension have something mythical for mathematicians. The best known example is the constant π.
Parameters without dimension have a similar advantage: they are (or can be made) independent of the units used for calculation. When having a dollar value in both numerator and denominator, the currency leaves the equation. The parameter then is currency independent.
The parameter which was added has this advantage of being a number without dimension. It is defined as the Ore value (in USD/tonne) divided by the Market Capitalization per ounce of gold equivalent precious metal reserves and resources. The latter is expressed in USD / Oz and it is often considered the most important metric to evaluate miners.
In dividing the two parameters both expressed as a “dollar value / mass quantity”, the score we obtain indeed has no dimension. Then how do we interprete this new metric?
Ore value per tonne is a useful metric giving credits for the different minerals found. A silver explorer having identified a resource with half an ounce of silver per tonne, will most likely consider not to proceed with that project unless a meaningful secondary mineral is found. Three or four pounds of copper per tonne may turn the project viable. Obviously the potential profitability of a mining project is proportional to its ore value per tonne. The valuation of a miner in terms of “market capitalisation per ounce of gold-equivalent resources” is an indication of how expensive the miner is valued. High numbers make expensive miners, but those higher values may be justified when factoring in high ore value resources that may turn into very profitable mines. The parameter balances out the effects the two most important valuation criteria. This is as far as it goes. A high value for our new score makes an attractive miner or explorer.

Evolution over time
With both precious and base metal prices soaring as they have until April this year, ore values per tonne were climbing rapidly. As miner stocks didn’t follow that steep ascent, miner market capitalisation per ounce rose less rapidly. As such our new dimensionless parameter was rising gently, indicating that miners became more attractive.

Where are the hidden flaws?
Investing can’t be that simple, can it?
The above metric does not consider the resource or reserve qualification. Obviously producing miners usually have an extended reserve base alongside some resources in different stages of development. Explorers might have only inferred resources which they hope will turn into profitable mines after some years of exploration, permitting and mine construction. As such it is normal for explorers to score higher on this new metric.
High ore values by definition make metal extraction cost (the metallurgy step) less expensive. Ball mills are going to produce more metal concentrate per day and the miner is going to have to face less tailings to dispose of relative to the metal concentrate produced. However this says nothing on the cost of mining the ore. High ore values often originate from more expensive underground mining, where ore veins might be narrow or far apart from one another. Undergournd mining may require additional removal of just waste rock, building shafts, invest in transportation systems, ventilation, safety...
Quite often, low grades -hence low ore values- are mined in fairly cheap open pit operations. Then, the cost determining process is not mining the ore but extracting the metal.
A high or low value for the new metric needs being considered in this perspective.

Relation to other metrics
Ofthen you find "metal leverage" as a metric. This is defined as the total ore value a miner possesses, divided by its market capitalisation. We have both in our calculation, so the new parameter can also be expressed as the "metal leverage" multiplied by the "ore concentration", which then is defined as the number of gold-equivalent (or silver-equivalent) ounces per tonne of ore.

Where do I find this metric?
In the spreadsheet updated on May 20, the new metric is added in column “R”, it is labelled: “Ore Value/ MktCap /oz PM” On the silver list, Market cap/Oz is calculated per ounce of silver equivalent resources. Values for the new metric are therefore higher on the silver list than on the gold list.

More on the new update:
Last update of the spreadsheet takes on board several miners that have been included in the GoldMinerPulse database last few weeks.
Gold and Silver Miners added to the GoldMinerPulse database - with underlying links referring to their GMP valuation reports - include:
In the spreadsheet, U.S Silver and Primero are ranked the numbers 4 and 5 on our silver list. Harte Gold and Lydian Resources don't have a favourable ranking. All four newcomers have been underperforming the average of their peers among junior explorers and producers over the last six months.
For any update on the coverage of GoldMinerPulse, please look at:

Further reading:

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

1 comment:

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