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By Dennis Boyko
Created on: March 12, 2010
Current version 0.5: July 12, 2010 -- added note regarding Burnside mining permit.
Metrics have been updated with closing prices available on 2012-Feb-07.
Projected fair market stock price for Great Basin Gold Ltd., based on the current NI 43-101 resource disclosures and using very conservative capital cost estimates as well as an extremely pessimistic discount percentage, is C$4.42. The actual closing stock price was C$1.04.
Even with conservative estimates and pessimistic assumptions, the projected fair market stock price for Great Basin Gold Ltd. was well above the current stock price when this blog was started.
A quick review of location and investment risks in recent compmany filing suggests that the market may be discounting much of the potential future value from the Burnstone deposit in South Africa given the unique risks associated with South Africa today. Therefore news on the start of production at Burnstone, which is scheduled for June 2010, as well as subsequent quarterly reports with positive production numbers and gold sales, may translate into a very positive impact on stock price. That is, once production starts, and a steady gold production flow established, the market may reduce the risk premium it is currently extracting from the company's fair market valuation.
At the close of trading on and based on NI 43-101 reports available in March 2010, the current and projected Market Capitalization per ounce of Gold Equivalent for Great Basin Gold Ltd., were:
current market valuation: US$16.89 per ounce of Au Eq.
projected fair market valuation as a gold producer: US$168.54 per ounce of Au Eq.
Great Basin Gold Ltd. in situ metal value is 98.1% from gold. Therefore Great Basin Gold Ltd. should be valued on the Gold Producer Valuation Line.
However, the average ore value per tonne for Great Basin Gold Ltd. is high enough to be approaching or even beyond the linear range of the Gold Producer Valuation Line. To compensate for deviations from a linear valuation line assumption, the expected fair market valuation for Great Basin Gold Ltd. is conservatively set at 80% of the Gold Producer Valuation Line. See Limitations for more discussion.
The average ore value per tonne was US$329.04.
Projected fair market stock price for Great Basin Gold Ltd. is derived using the projected fair market valuation at start of production of US$168.54 per ounce of Au Eq (as derived above) and the following assumptions:
Capital Expenditure for mine development: US$500M -- this is an extremely conservative figure since the Hollister mine is already in production and the Burnstone Mine is already financed.
Risk Premium: 50% applied to the capital expenditure,
Discount Factor: 50% -- set to cover South Africa country risks plus potential resource loses as resources (Measured + Indicated and Inferred) are converted to reserves (Proven + Probable). If all things were equal, a much lower discount factor would be appropriate since Burnstone is scheduled to reach production in June 2010 and Hollister is already in production. A lower discount factor would translate into a higher fair market stock price.
The discounting of the future gold metal prices after the start of production is already fully accounted for in the Gold Producer Valuation Line which is derived from current day market prices and company fundamentals from a number of established gold producers.
The supporting model and the calculations used to produce the projected fair market stock price are detailed in Fair Market Price Calculations.
This blog does not assign any value to potential for organic growth on current Great Basin Gold Ltd. properties or future acquisitions by the company.
The fair market valuation of Great Basin Gold Ltd. illustrates the extent to which a gold producer such as Great Basin Gold Ltd. can be undervalued by the market because of risks/uncertainties with respect to future operations. I believe that some of the risks the market is using to discount the current stock price includes (quotes taken from the Risks More Specifically Relating to South Africa and the Burnstone Property section of the Short Form Base Shelf Prospectus, November 16, 2009
Changes in mining legislation could adversely affect our operations: Our business could be adversely affected by changes in government regulations relating to exploration, mining and the environment. In South Africa, in order to maintain security of tenure of our mineral properties, we are obliged to comply with the MPRDA, the associated regulations and the socio-economic scorecard. As a result of this new legislation, the South African government exercises control over the granting of prospecting and mining rights, beneficiation, mineral exports and taxation. Applications for prospecting and mining rights are required to demonstrate their eligibility based on their compliance with a number of black economic empowerment criteria. These include factors such as ownership, employment equity, human resources development and procurement policy.
Retention of prospecting and mining rights cannot be guaranteed: In South Africa, although we have successfully converted all of our old prospecting rights to new order prospecting rights, and obtained our mining right (effective February 2009), new order prospecting or mining rights may be suspended or cancelled where the DMR, having followed the requisite procedures under the MPRDA, determines that the holder is in breach of the provisions of the MPRDA or the terms under which such new order prospecting or mining rights were granted. Similarly, rights could be suspended under related legislation in respect of health and safety and the environment, including where the mineral is not mined optimally in accordance with the relevant work programme. The MPRDA has also significantly increased the potential penalties and restrictive provisions relating to environmental management, environmental damage or pollution resulting from prospecting or mining activities.
[Several more risks unique to South Africa are identified in the document.]
With respect to mining licences in South Africa, Great Basin Gold acquired their mining permit for Burnside in October 2008 and Investor Relations at the company confirm that the permit is valid for 18 years.
While the potential risks around the company appear to be overly reflected in the company's current valuation, the potential rewards offered from its successful transition from explorer developer to explorer producer is mostly likely hugely undervalued, thus account for the huge difference current valuation and the projected fair market stock price. See the section Great Basin Gold Life Cycle Considerations at the bottom of the blog for a graphic summary of why the company is now entering a phase of extraordinary potential for increased share price appreciation as all aspects of the company's exploration and development are moving into lower risk profiles.
Gold Key:
AEM
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Place mouse over each key symbol to read graph values.
If the key symbol is shown in bold, click to view the GoldMinerPulse valuation blog
for that company.
For the chart above, Great Basin Gold Ltd. has an average ore value per tonne (y axis) of US$329.04 and a Market Capitalization per ounce of Gold Equivalent of US$16.89.
The Gold Explorer-Producer Valuation Hypothesis is based on the data driven observation that a company's market capitalization per ounce of gold equivalent tends to rise based on the current valuation of the metals contained in an average tonne of ore. For developer/explorers, it is also assumed that the true Explorer-Producer Gap should be large enough (but no larger) to cover the expected future capital expenditures, risk premiums and time discounts.
The original motivation for the Gold Explorer-Producer Valuation Chart was developed in Junior Gold Explorer Valuation Observations. Application steps and the generic factors that need to be considered in applying this valuation method are further described in Gold Explorer-Producer Valuation Exceptions.
This blog is based on the stock fundamentals and current metal prices as documented in the Great Basin Gold Metal Valuation Report.
The Gold Explorer-Producer Valuation chart is updated after the close of trading using closing stock prices, closing spot market metal prices, fully diluted share counts, and NI 43-101 resource and reserve disclosures.
Last update was for the market close on 2012-Feb-07.
This GoldMinerPulse blog is presented for the sole purpose of illustrating how GoldMinerPulse per company metrics may be useful in judging valuation of individual gold and silver mining stocks. This blog should not be considered as investment advise. Anyone using this blog should become familar with the GoldMinerPulse metrics and the underlying assumptions to access their usefulness.
The Gold Producer Valuation Line is shown to be linear with respect to increasing ore value. However, by looking at an extreme case of an average ore approaching pure gold, the valuation lines will be limited by the market's expectation for the future price of gold. In other words, the valuation line will approach but fall short of the a vertial line set at a Market Capitalization per ounce of Gold Equivalent equal to the expected future price of gold. That is, metal in the ground, on an ounce for ounce basis, can never be worth more than the expected future price of the metal.
Great Basin Gold Ltd., with an average ore value of US$329.04 per tonne, is probably at the edge of or may be outside of the linear range of the Gold Producer Valuation Line. GoldMinerPulse needs to add more gold producers with high average ore value per tonne to confirm at what point the valuation curves start to break from a linear line (i.e. transition from a constant slope to a line where slope increases with market cap per ounce of equivalent). For this reason, Great Basin Gold Ltd. is valued at 80% of the linear Gold Producer Valuation Line.
Great Basin Gold Provides operational update for the quarter ended March 2010 quoting:
Ferdi Dippenaar, President and CEO, commented: "We are making good progress at both operations with much improved performance at Hollister in Nevada, USA. Our target date for the delivery of the Burnstone Mine in South Africa remains the end of June 2010, with a significant number of milestones having been reached over the past three months. Much remains to be done, but we continue to be confident that the tight timelines will be met. Photographs and information on the progress at the site is being updated on our website on an ongoing basis. The US$47 million export loan facility obtained from Credit Suisse (announced on April 5, 2010) as well as the cancellation of the put option on the Senior Secured Notes provides the Company with significant flexibility and margin in available cash reserves to deliver both projects and meet our obligations as they come due." ...
Great Basin Gold web site.
Great Basin Gold Presentation April 2010 - presentation by Ferdinand Dippenaar
Great Basin Gold NI 43-101 Metal Valuation Report for the company metrics derived using the last close of trading data.
Canadian Insiders for insider trades on the TSX
StockCharts.com for price charts.
Sedar for all TSX regulator filings. Sorry but you'll have to navigate the Sedar site as they do not allow direct links to company specific lists of document filings.
I have listed the best of links for anyone interested in researching Great Basin Gold Ltd. further. If you have a blog or site withGreat Basin Gold Ltd. specific pages, please send me the link for review and I will include your work in the link section as appropriate.
Got comments? Questions? Please Talk Back.
Great Basion Gold is a company with advanced stage development projects and is poised to become a mid-tier gold producer in 2010/2011. Page 4 of 15 in the May 2010 company presentation, NEW YORK MAY 2010 illustrated the classic pricing evolution of a development companing's transition into a producing company:
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