How to Value a Gold StockBill Matlock of Kitco has provided estimates of cash flow and earnings multiples for large, mid-cap and small gold stocks for 2006, with projections for 2007.......
https://www.kitco.com/ind/Matlack/oct232006.html
As can be seen, smallcap gold stocks in 2007 were projected to trade at 10.4 times 2007 cash flows, and nearly 17 times 2007 net earnings.
This is a considerable drop from observed 2006 multiples, but the reality is that observed 2007 trading multiples are about the same as those of 2006........which is about 15 times cash flow and 30 times net earnings.
Take AGI for example.
It was projected to trade at 11.2 times 2007 cash flow projections.
In actual fact, AGI has cash flowed $0.07 per share for the first half of 2007 and is on track for about $0.20/share in annual 2007 cash flow.
Which means that it is trading closer to 30 times 2007 cash flow, than the 11.2 times projected by Matlock.
T.KGI ( $12/60 m shares ) had cash flows of $0.045/share and nil net earnings in Q1 of 2007, and annualized, those would accrue to about $0.18/share in cash flows for F2007, with net earnings near nil.
Again, KGI trades at well above 60 times annual 2007 cash flows.
Gold stocks trade mostly on their cash flow multiples ( c/f ) rather than net earnings, as few gold stocks have credible net earnings.
There are many factors which determine the c/f trading multiple that investors assign to a gold stock.....reserves ( mine life ), management, balance sheet, growth potential, political stability, cash costs per oz,investor exposure, and asset diversification to mention the more important ones.
It is these variables that the astute investor scrutinizes when he does his DD on a potential investment in this sector.
To be conservative, I normally use 10 times annual cash flow/share to arrive at fair market cap value for my gold stock investments.....but always evaluate the main variables that impact the c/f multiple assigned by investors.
NGG meets and usually exceeds many of these criteria and , upon wider investor exposure, should easily trade at 15 times annual cash flows or higher.
NGG is cash flowing over $600 per oz which means that its annual cash flows will be in the $20 to $25 million range over the next year....with significant additional upside on its Kanon and Copper/moly spin-offs.....elephant discoveries aside.
The value upside here is obvious and all it will take is increased investor exposure.
Which is why I am glad that Sprott continues to buy our shares