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Last update June 22, 2011: updating valuation strategies based on recent valuation blogs.
A general observation about the nature of mining, which typically involves extracting, lifting, transporting, milling and processing tonnes of ore, suggests that mining costs are determined, to a first order approximation, by the total number of tonnes to be handled and not by the metal content of each tonne. That is, the costs of extracting, lifting, transporting, milling and processing for a tonne of ore does not change whether the tonne contains a small amount of metal (low grade ore) or a large amount of metal (high grade ore). Therefore, high grade ore, or ore that has a higher metal value per tonne, is necessarily more valuable. High grade deposits have more robust economics, are less sensitive to changes in resource prices and typically may be developed with lower CapEx spending. Of course, dilution factors (not all ore can be mined) and metallurgical factors (not all metal in the ore can be extracted) do come into play and cause variances between deposits.
The Gold Explorer-Producer Valuation chart has been updated to reflect stock prices and metal prices at the market close on 2012-Nov-23. This page is typically updated 1 to 2 hours after the close of trading in North American markets.
All companies in the chart are represented by their TSX or TSXV trading symbol. The lower left hand corner of each box on the chart marks the company's Average Ore Value per tonne versus Market Capitalization per ounce of Gold Equivalent. Gold producers are typically denoted by a * following their trading symbol.
All things being equal, gold producers are expected to appear on the Gold Producer Valuation Line and gold explorers are expected to appear on the left hand side of the Explorer-Producer Gap. The Explorer-Producer Gap is the gap indicated by the heavy green arrows, to the left of the valuation line, in the Gold Explorer-Producer Valuation charts. The junior gold explorers are expected to to appear to the left of equivalent gold producers with a large enough gap to fully reflect the dollar values associated with:
Capital Expenditures required to move an ore deposit from a simple exploration project to fully developed operating gold mine.
Discount Factor is used to account for:
Expected reduction in metal counts as resources move from Inferred (or Measured + Indicated) to Proven + Probable reserves. This includes lose of resources that fall outside of the mining plan as well as the potential reduction of resource grades and tonnage estimates as the additional data becomes available in the process of moving resources to reserves. This factor is also used to account for the anticpated metal losses due to recovery factors of less than 100%. In short, the Inferred resources and Measured + Indicated are adjusted to account for the probable resource losses in the transition to reserves.
Dilution factors to account for the capital the company is expected to raise to support mine development. This factor may come in the form of assigned a percentage of the deposit to joint venture partner in return for being carried to production or it could come in the form of private placements and any number of other options.
Royalty obligations.
Other like factors that may affected the metal recovery from a given deposit.
Exploration potential may be appropriate depending on the circumstances of the deposit. For example, in a coarse gold greenstone deposit, the ultimate resource size can not be economically defined to NI43-101 standards and it may be appropriate to apply a multipler to increase the defined resource to reflect the expected future increase in resource as the mine is developed. A prime example if the Goldcorp Red Lake mine:
Risk Premium associated mine development execution.
The Capital Expendicture estimates, discount factor and risk premium are inputs to the Fair Market Value Calcuation formulas. The valuation formulas are evolving and the most recent version of the valuation formulas is introduced and used in Caldera Resources Report (released May 20, 2011).
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.
Gold Key:
AEM
| AND
| AUQ
| G
| K
| RIO
| YRI
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.
The Gold Producer Valuation Line is set based on Agnico-Eagle Mines Limited and Kinross Gold Corporation. The resulting closing market prices driven valuation line on 2012-Nov-23, in y = mx + b format, has the following parameters:
Slope (m): 0.68
y axis intercept (b): -29.7
Note, the two market data points used to derive the above line parameters were:
Agnico-Eagle Mines Limited x value (Market Capitalization per ounce of Gold Equivalent): 244.71
Agnico-Eagle Mines Limited y value (Average Ore Value): 135.91
Kinross Gold Corporation x value (Market Capitalization per ounce of Gold Equivalent): 104.95
Kinross Gold Corporation y value (Average Ore Value): 41.33
Since the closing market prices are always used, the valuation line traces the market. Based on the 2012-Nov-23 line, a $100 increase in average ore value is translated in to a $ 67.7 increase in market capitalization per ounce of gold. While this valuation line results in conservative valuations for gold companies with low grade ore, it is clearly going to fail as the ore value increase. Therefore, usage of this model should be limited to companies with average ore value lower than that of Agnico-Eagle. For companies with a higher average ore value should be valued with the High Grade Version presented below.
This version of the valuation line is based on Agnico-Eagle Mines Limited and is fixed with a slope. The resulting closing market prices driven valuation line on 2012-Nov-23, in y = mx + b format, has the following parameters:
Slope (m): 2
y axis intercept (b): -353.5
Note:
Agnico-Eagle Mines Limited x value (Market Capitalization per ounce of Gold Equivalent): 244.71
Agnico-Eagle Mines Limited y value (Average Ore Value): 135.91
In this model, a US$100 increase in average ore value is translated into a US$50 increase in Market Capitalization per ounce of Gold Equivalent. Obviously as the average ore value approaches the spot price of gold, the valuation line breaks downs. That is, as average ore value per tonne approaches the spot price of gold, the slope of valuation line should go to infinity. Although there are few data points this High Grade model is believe to be reasonable for companies with average ore values less than 66% of the spot price of gold.