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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.
Last update June 29, 2011: updated text to match the Junior Silver Producer Valuation Line Estimate (v3.0)
The Silver Explorer-Producer Valuation chart has been updated to reflect stock prices and metal prices at the market close on 2012-Feb-07. 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 Silver Equivalent. Silver producers are typically denoted by a * following their trading symbol.
The Junior Silver Producer Valuation Line Estimate (v3.0) in the chart below is derived from the market valuations assigned to Agnico-Eagle and Kinross Gold (with gold equivalent ounces converted to silver equivalent ounces on the basis of closing market spot market metal prices). The positioning of other silver producers on the chart is driven by metrics based on NI43-101 resources and reserve disclosures and closing market prices. Agnico-Eagle and Kinross both have more than 90% of their in situ metal value from gold and silver, are widely followed and are therefore believed to provide a reasonable market driven estimate of future precious metal prices. The implicit assumption is that the market is applying an equal premium to in situ gold ounces as it is to in situ silver ounces. Based on the early 2011 moves in silver pricing relative to gold, I believe this is a reasonable working model at present.
All things being equal, junior silver producers should be compared to the Silver Producer Valuation Line Estimate. The junior silver explorers are expected to to appear to the left of equivalent silver 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 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.
Base Metal Discount -- gold and silver in situ resource are awarded a market premium. Base metals such as lead and zinc are not. Therefore the base metal contributions to the Market Capitalization per ounce of Silver Equivalent should be discounted.
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. Is mineralization still open at depth and on strike?
Risk Premium associated mine development execution.
Dilution Factor associated with anticipated future private placements required to raise capital for mine development.
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 Silver Explorer-Producer Valuation chart is based on 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. Given the precious metals market as of June 2011, I believe it is reasonable to treat silver as a precious metal like gold.
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Reasonable rates and excellent value.
The location of some companies on the Silver Explorer-Producer Valuation chart do not match expectations. Impact Silver (IPT appears over valued based on current available information. A January 2010 check of the IPT web site confirms that the GoldMinerPulse Metal Value Report is consistent with the most recent NI 43-101 disclosures, investors obviously see something beyond the NI 43-101 disclosures. And there is much about Impact Silver that is interesting. Consider the following quote from a January 10, 2010 brochore:
Operating in prolific silver districts,all 100% owned, totaling 472 km2 including: 272 km2 Royal Mines of Zacualpan, 200 km2 Mamatla Silver; with over 70 targets located within trucking distance of production facilities.
The valuation of Great Panther (GPR) and Alexco (AXR) is also puzzling and in the case of AXR especially so since AXR has effectively hedged 25% of its future silver production at US$3 per ounce.
Prior to its acquision of Acquiline Resources, Pan American (PAA) would have fallen slightly to the right of the Junior Silver Producer Valuation Line as would have been expected. However, the Navidad project is not in production (and the area may still be under a mining ban), which means that Pan American needs to be considered combination of producer/explorer since Navidad accounts for nearly 50% of its in ground metal valuation.
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