RE: Open QuestionTia,
Just like any resource company, there are two ways to value mining stocks, via resources or cash flow (or a combination of both).
My guess is that 90% of oil companies, for example, generate cash flow, so production is a lot more important to valuation, especially if such production is causing material depletion of the company's reserves. Irrespective, in a resource bull market reserves are always a major factor.
In the case of the PM mining business, probably 95% of all the company DO NOT produce metals, as the bull market is in such an early stage that a) not enough significant discoveries have been sufficiently delineated and b) the manipulation of gold and silver prices has kept the badly needed capital out of the sector required to bring the few real discoveries through the long, expensive process of reaching production.
For instance, when stocks like SDRG fall after announcing spectacular results (as they just did for both China and Mexico), it is clear that the industry is still very far away from significant production. In fact, production of both gold and silver is in the process of plummeting as we speak (and the South African power shortage will only exacerbate this trend), which will put tremendous upward pressure on prices in the coming months/years.
As for SDRG, it is unclear if they actually will be producing anything this year, aside from tolling drilled ore or something of the like. They have made an agreement to build a small mill in China, but the timing of that project is uncertain.
Like you said, production is very expensive and risky, and in SDRG's case it is not likely a high priority given the enormous exploration drilling planned this year for Mexico and China as a result of the recent discoveries.
With 35 million of 43-101 Ag equivalent resources and a $39 million market cap, the stock is trading at roughly $1/oz, one of the cheapest valuations around even after the clear "multiple contraction" seen in the junior sector this year. Plus, they have (per the corporate presentation) roughly 20 million ounces in China that would be considered the equivalent classification of 43-101, as well as something like 500-800 million of what the Chinese term something like "potential resources".
Thus, I am focusing more on the valuation (or current lack thereof) of SDRG's resources in the ground, and when capital finally starts to move back into the sector I believe that is where the focus will be, particularly after the company raises its funds shortly, lists on the TSX, and starts aggressively drilling.
Hope this helps.
yoyo