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speedybure (< 20)

A Dynamic Adaption Of Ben Graham's Formula For Valueing Gold Stock (Yamana Case Study)



June 19, 2009 – Comments (6) | RELATED TICKERS: AUY

For Those who don;t know Ben Graham's Formula which determines the appropriate price to earninigs multiple based on the  5-7 year CAGR of any given company, it goes as follows: 8.5 + 2 * Growth rate. Which I have adjusted to 8.5 +1.5*G

I have made some slight adjustment to this formula and it has returned similiar valuation ranges from the prvious valuation models I have posted. Here is the adjusted model for Yamana Gold

1) Adjusted this years projected Eps as Follows: Take their eastimated production and multiply it by your projected long term price of gold going forward less the average cash costs per ounce. Then multiply this number by .7 to account for income taxes, which you will then divide by the shares outstanding to get an adjusted EPS. This is done to avoid making 2 different growth assumptions (in the price of gold and in the production growth). So although it will turn out to be much higher than this years numbers, you will be using more conservative growth inputs for the rest of the model. Here is an example.

Yamana Gold:

1) 2009 Gold Production 1.2m/oz , Long Term Gold Price: $1250 , Long Term Cash Costs : $450, 7 year CAGR (Production Wise): 25-36%( 800k in 2008 to 2.2m in 2015, Shares Outstanding : 749k. = EPS : (800* 1200*.7)/729k = $.92 

2) 8.5 + 1.5*25-36 = 62.5

3) Value of Yamana:  $42.32 - $57.5

6 Comments – Post Your Own

#1) On June 19, 2009 at 9:16 PM, XMFSinchiruna (26.55) wrote:


I'm drooling over this post!  Excellent work again!

I consider the $1,250 an exceptionally reasonable expectation for long-term gold prices through at least 2012/2013. It may prove overly conservative, if anything ... which is what you want in a valuation model. :)

Do me a favor ... send me an e-mail through my CAPS profile or through the link below any of my articles. :)


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#2) On June 19, 2009 at 10:12 PM, SkepticalOx (98.52) wrote:

You got a rec...

Question, where is this formula from? Graham and Dodd's Security Analysis? 

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#3) On June 20, 2009 at 11:44 PM, LAJones777 (< 20) wrote:

While that sounds exciting to me also, it sounds very outrageous. It will be very interesting to see the reaction of all the gold investors when the price of gold falls below 700 by the end of the year or shortly thereafter. The bubble is bursting, but keep it up for a little longer to help my AUY calls..

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#4) On June 21, 2009 at 6:02 PM, streetflame (29.32) wrote:

"7 year CAGR (Production Wise): 25-36%"

You seriously misunderstand Graham if you think he would have accepted a growth projection this high.  8.5 + 1.5*growth depends on much lower growth predictions in established large caps. If you are going to use very big growth numbers, you need to use a more conservative formula, for example PEG ratio less than 1.  Better yet do DCF with falling growth rates, that will reflect reality much better.

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#5) On June 26, 2009 at 4:53 PM, speedybure (< 20) wrote:


Yamana has an enormous pipeline, thus the large growth numbers. You also have to remember he uses EPS, and for example if a miner earns 10 cents this year, it is not hard to get really high growth rates. Yes I know Graham used traling earninigs but this is the first time gold mining companies have become profitable quarter and quarter. i do understand where your coming from and in a typical industry I use 6-9% for high growth equities. Thats why It was titled a dyanmic adaptation. I am well aware of Grahams conservative measures and still use his formula in 1 of my 7 valuation tests for any industry, I should have clarified to say this is just for the time being in this particular case. 

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#6) On February 27, 2012 at 10:52 PM, anahin (< 20) wrote:

Graham never intended that growth formula to actually be used to evaluate stocks. This is a very common but dangerous misconception.

See for a scan of the original edition of the concerned page from The Intelligent Investor with a footnote and a warning about this formula.

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