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speedybure (< 20)

Dynamics of Precious Metal Miners Valuation Part 1: Broad Metrics To Narrow Those Worth Investing In



April 08, 2009 – Comments (4) | RELATED TICKERS: GLD , SLV , AEM

The first metric which may or may not be useful is the reserve ratio = Enterprise Value(market value of equity +net debt)/Proven Reserves

 A similiar but more telling variation of this can be Production per share with the neccessary adjustments.  

 Take the market value of equity and add or subtract net debt per share which is more easily described at the market price of the enterprise value/production. so this roughly gives you how much you are paying for each ounce. 

Most miners can give you a rough estimate of the next 2-3 years production figures. You then use the same formula with the following years production etc. So in terms of relative valuation, this is a good first step to apply. 

 I compare the reserve ratio- the lower the better against various miners. This can also be done using inferrred and indicated for the up and comers. I tend to weight the ounces produced per share of the enterprise a bit higher because of time preference. (a dollar today is worth more than a dollar tommorrow/ opportunity cost).

It is best to use the equation above for at least 3 years if possible. This will account for companies ramping up production quickly such as Agnico-Eagle, Kinross, Yamana.

 I rank them in order when using the reserve ratio from 1-n   I do the same for production per share but take into account growth - rank them accordingly from 1-n I add up the score for reserve ratio(times 1/2), production ratio this year, and production ratio 3 years from now.

I'm not saying the one with the lowest score is the best but rather as a tool to weed out the bottom 25-50% in my case but obvisously completely subjetive.  There are far more variables to account for, which I will discuss later ( various risks(political, geographic), etc as well as costs which are more complicated than many people think.     

4 Comments – Post Your Own

#1) On April 08, 2009 at 6:07 PM, XMFSinchiruna (26.40) wrote:

Here's an article on Yamana from back in October that looked at relative EV/Reserves.

The comments section below it includes a nice discussion of both the value and the limitations of this metric.

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#2) On April 08, 2009 at 6:30 PM, speedybure (< 20) wrote:

Yeh exactly, I'm going to make 2 or 3 more posts. This is just some basic metrics that can't be used alone. Just some info for people foreign to the industry. 

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#3) On April 08, 2009 at 6:41 PM, XMFSinchiruna (26.40) wrote:


I think it's awesome that you're doing this, and I am delighted that you've come to the CAPS blogs! WELCOME!!

When you get a chance, take a quick gander back through some of my blog archives... not only to see what topics have been covered, but also for relevant links in support of your future posts.

I've added you as a favorite, and look forward to watching your CAPS score skyrocket when gold takes out $1,000 for the last time.

Christopher (also)

aka TMFSinchiruna



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#4) On April 09, 2009 at 8:56 AM, icuryy4me (< 20) wrote:

Can I suggest that this valuation metric could give a misleading indication. I think the "reserves" value needs to be adjusted for the cost of production. 

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