Estimating Rye Patch Gold Fair Market Valuation
By Dennis Boyko
Created on: February 22, 2010
Current version 0.7: July 20, 2010 -- added Fundamental Research note
Fair Market Valuation Summary - 2010-Sep-02
Projected fair market stock price for Rye Patch Gold Corp. at the close of trading on 2010-Sep-02 was C$1.85. The actual closing stock price was C$0.135.
At the close of trading, the current and projected Market Capitalization per ounce of Gold Equivalent for Rye Patch Gold Corp., were:
current market valuation: US$5.00 per ounce of Au Eq.
projected fair market valuation as a gold producer: US$193.46 per ounce of Au Eq.
Rye Patch Gold Corp. in situ metal value is approximately 82.7% from gold and 17.3% from silver. Therefore, the expected fair market valuation for Rye Patch Gold Corp. should be on the Gold Producer Valuation Line.
Projected fair market stock price for Rye Patch Gold Corp. is derived using the projected fair market valuation at start of production of US$193.46 per ounce of Au Eq (as derived above) and the following assumptions:
Capital Expenditure for mine development: US$300M -- a very rough estimate of the capital costs required to bring the Jessup and Wilco deposits into production. The CapEx value is very much a SWAG at this point. Higher CapEx expenditures could make feasibility questionable at these gold prices, while lower CapEx requirements would increase the fair market valuation. The CapEx figure to be refined once scoping studies or pre feasibility studies are available.
Risk Premium: 25% applied to the capital expenditure,
Discount Factor: 25% -- set to cover a multi year gap between now and a future start of production on the deposit and to also account for the fact that close to 50% of the contained metals are Inferred Resources.
The discounting of the future gold metal prices after the start of production are already fully accounted for in the Gold Producer Valuation Line which is derived from current day market prices and company fundamentals.
Discussion
The supporting model and the calculations used to produce the projected fair market stock price are detailed in Fair Market Price Calculations.
The discounting applied to Rye Patch Gold Corp. is consistent with the discounting the current market applies to the producer Kinross Gold. Kinross Gold has similar ore grades but a slightly lower percentage of total metal value from gold.
This blog does not assign any value to potential for organic growth on current Rye Patch Gold Corp. properties or future acquisitions by the company. Specifically, a value is not assigned to the Lincoln Hill project where the company has planned a US$0.5M 2010 exploration program. Similary a value is not assigned to the Gold Ridge project which also has a 2010 exploratin project. Finally, this valuation does not make any assumptions about possible organic growth at the Wilco project and Jessup projects, both of which also have 2010 exploration budget. For more on the 2010 exploration plans, please see Rye Patch Gold Corp. Presents Nevada Project Update and Commences Drilling Program At Wilco April 28, 2010 news release (viewed May 2010).
The fair market valuation of Rye Patch Gold Corp. illustrates the extent to which current gold explorers and gold developers such as Rye Patch Gold Corp. are undervalued relative to the valuation the market has assigned to Gold Producers.
For more comparables please see:
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For the chart above, Rye Patch Gold Corp. has an average ore value per tonne (y axis) of US$22.67 and a Market Capitalization per ounce of Gold Equivalent of US$5.00.
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 Rye Patch Gold Metal Valuation Report.
Updates
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 2010-Sep-02.
Caution
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 Major Gold Producer Valuation Line is shown to be linear with respect to increasing ore value. From available data, this assumption appears sound for evaluating Rye Patch Gold.
Research Links
Rye Patch Gold Corp. web site.
Fundamental Research Corp. covers Rye Patch Gold.
GoldNewsletter, Vol. XL July 2010 features Rye Patch Gold.
Rye Patch Gold NI 43-101 Metal Valuation Report for the company metrics derived using the last close of trading data.
Rye Patch Aggressively Seeking Trend-Scale Exploration Opportunities in Mineral-Rich Nevada for an good write-up of the company and its goal to build a 10 Million Ounce Gold/Silver Resource at Multiple Properties
Canadian Insiders for insider trades on the TSX
MineSnooper.com Rye Patch Gold page.
StockHouse for a Rye Patch Gold discussion forum.
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.
About Links
I have listed the best of links for anyone interested in researching Rye Patch Gold Corp. further. If you have a blog or site withRye Patch Gold Corp. specific pages, please send me the link for review and I will include your work in the link section as appropriate.
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