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speedybure (< 20)

Mining Valuation For Beginners



November 24, 2010 – Comments (6) | RELATED TICKERS: JAGGD , SLV , GLD

First you want to start off with three basic but very informative metrics of the company.

Management - You obviously want to pick high quality mgmt, so doing you DD on them should be your starting off point i.e experience, did they add value or successfully create one or more mining companies in the past? etc...

The next is called the "Valuation Ratio" which I will go through step by step.

First find their 2P (proven and probable reserves) which could easily be found on their websites.

Use the prevailing gold or silver price in this measure and use current or the long term cash costs per ounce ( can also be easily found).

Determine the mine(s) values by doing the following

Multiple 2P reserves by ( spot silver/gold price - cash costs per ounce). I.e 2P reserves = 4m ounces, gold price = 1300, cash costs = 500. So 4,000,000*(1300-500) or 4,000,000*800= 3.2B.

Calculate The NAV by taking the 3.2B - any hedges - debt + cash

Find the market cap - shares outstanding * current price

Lastly Divide the Market Cap by NAV - I.e if the Market cap is 1.8B you get a ratio of .5625. Fair value is 1, so the lower the ratio the cheaper each proven ounce in the ground is.

This is a great metric for finding potential buyout targets in addition to providing one screen to filter stocks that are cheap.

If you want to take it more in depth find the M&;I ounces (Measured and Indicated) and multiply them by a low percentage 10-50% (depending on how efficient they were at converting these ounces to 2P reserves in the past and then add your output figure to your current 2P reserves. I.e (4m in M%I and they have historically converted 25-35% of these ounces, multiply 4m by .25 = 1m ounces, so now your adjusted 2P reserves jumps to 5m ounces. This has many implications, notably it will lower the valuation ratio making it cheaper than it previously was.

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:

Market Cap

The estimated production numbers for the next 3 years - This is to account for high growth miners.

Cash costs for the next 3 years

GRM = Production for 2011*(spot gold or silver price - cash costs for 2011)

GRM = Production for 2012*(spot gold or silver price - cash costs for 2012)

GRM = 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 - Gross Revenue

310*(1,330-$575) = $234,050 - Gross Revenue

375*(1,330-$550) = $292,500 - Gross Revenue

Market Cap: $543,000

OCF Multiple 2011: 543/149.6t; 3.63x

OCF Multiple 2011: 543/234t; 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.

Before getting into the more advanced valuation techniques, there is one more metric that is similar to what we did in part 1 but gives one a different perspective. It tells you how much you are paying for each proven and probable ounce in the ground.


Industry average: $313


This formula, like the others is rather straightforward as all that is needed is:


Market Cap

2P Reserves

Formulas: Market Cap/2P Reserves Using Jaguar Mining


Market Cap: 543,000

2P reserves: 4,300

Resultst; 543,000/4,300 = $126.29

Again, it is very cheap on a relative basis according to this metric

Like step 1 you can include a small % of M&I resources as it is likely a portion of it will be converted into 2P reserves at some point in the future. I.e 4m ounces of M&I * 25% = 1m ounces.

Adjusted 2P reserves = 4,700

Adjusted Result = $102.45

Then there are easier ones such as production per share, but this can often be distorted due to growth rates 

One last metric possibly worth calculating, though not very accurate is running a 1-2 regression of the daily prices of a miner against the daily prices of gold or silver. There are much more advanced methods, but these provide for a preliminary screen.

6 Comments – Post Your Own

#1) On November 24, 2010 at 4:35 PM, MegaEurope (< 20) wrote:

If JAG cash costs per ounce were really $500, wouldn't they be wildly profitable on an earnings and cash flow basis?  Their gross margin is only 22% and their EBITDA margin only 6%.

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#2) On November 24, 2010 at 4:52 PM, speedybure (< 20) wrote:

I;m just pulling out random numbers, for example purposes

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#3) On November 24, 2010 at 5:03 PM, MegaEurope (< 20) wrote:

OK. However I often see all-in costs in the $400-$700 range when the miner is currently nowhere near as profitable as that number suggests (either on earnings or cash flow). My impression of miner valuation is that reserves and production are usually believable, but estimated costs are not.

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#4) On November 24, 2010 at 5:07 PM, speedybure (< 20) wrote:

I;ve been investing the industry for years and I've not had that problem, usually within $20 or so of forecasts except for your occasional dog like jaguar right now

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#5) On November 24, 2010 at 5:20 PM, MegaEurope (< 20) wrote:

I'll have to find an example for you.

I would expect larger miners to be closer to estimated costs than smaller ones (where production and cost structure is changing more rapidly).

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#6) On December 13, 2010 at 3:18 AM, silvermind (< 20) wrote:

Thanks for the great intro to mining valuation/investing in mining.  I have invested in some mining stocks - SLW and Impact Silver in Nov of 2008, SIL and GRPLF in May of this year.  I am looking for growth stocks.

I am also looking for a place to invest some tax-money-to-be (goes in Mar 15) for a couple months - and that is always hard (to find a short term gain given the ups and downs in a market - even in this bull market).  

Anyway - Sinchi said you had some good valuation work - thanks for the help!

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