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Deepen Your Due Diligence in Mining Stocks

Jon Brown Jon Brown, Stockhouse
0 Comments| September 4, 2019

Despite its ebbs and flows, mining stocks have always been popular among investors and there are still unique ways to enter this market.

A good first step to researching any promising company is to read over their recent news and technical reports. From there, an investor can do their own analysis and there are a number of ways to calculate the value of each project and commodity.

Some metrics gaining popularity:

  • Price to Cash Flow
  • Price to Net Asset Value
  • Total Acquisition Cost
  • EV/Resource

Price-to-cash-flow ratio (P/CF)

It serves as an indicator for investors on how much cash a company ha generated in relation to the price of its stock. The ratio measures the value of a company’s stock compared to its operating cash flow per share. Since cash flow is a figure that can’t be manipulated as easily as earnings number could be, some investors consider this a superior valuation indicator than comparing price to earnings. A company with a lower price-to-cash-flow ratio could be undervalued.

The formula reads as follows: P/CF = Price per Share / Cash From Operations per Share

It is possible to discern which companies have stocks with low price/cash flow ratios for 2020 compared to others in this market. A common average ratio for junior gold miners is 7.2x.

The following video goes into even greater detail on calculating the price to cash flow ratio.


Price to Net Asset Value (P/NAV)

A “sum-of-all-parts” approach to valuation, this metric is important because it assess each individual mining asset value independently, as well as adding these assets together.

The net asset value can be found by calculating the net present value and discounted cash of all future cash flow, then adding any other cash and subtracting any debt. Since technical reports often include a detailed life of mine plan, this model can also serve as a forecast until the end of the life of the mine.

This formula reads:

P/NAV = Market Capitalization / [NPV of all mining assets – net debt]

Any corporate adjustments, including overhead or debt, are worked out at the end.

(Image via Western Atlas Resources Inc. corporate presentation.)

Total Acquisition Cost (TAC)

This metric targets early-stage projects and considers the cost to acquire the asset, as well as the initial building and operating projects.

Calculating on a per-ounce basis, the TAC would take a stock’s market cap of $100 and value of ounces produced (For example, $100 million with $1 million oz = $100 per oz. asset). The cost of building the mine would be divided by the number of ounces ($200) and the average all-and-sustaining cost to operate the project ($900) would be deduced. All in, this valuation example sees a TAC of $1,200.

As a formula, it works out as: TAC = [Cost to Acquire + Cost to Build + Cost to Operate] / Total Ounces


EV/Resource ($/ounce)

Also commonly used for early-stage development projects, this valuation is calculated by adding the total resources a project has under the surface divided by the enterprise value of the business. The $/oz metric is useful where there is a lack of detailed information on a project and not enough for a DCF analysis.

This is the most basic of metrics covered and excludes a project’s capital cost to build the mine, and doesn’t take into account the operating cost to extract the metal.

This formula is: EV/Resource = Enterprise Value / Total Ounces or Pounds of Metal Resource

Investors can often find mining and resource assets a challenge to compare and understand the value. While any mining expert will tell you the exact value of a resource is never completely certain given geologic uncertainty and exploration, there are ways to learn how to expect a reasonable return on an investment with greater confidence.

FULL DISCLOSURE: Western Atlas Resources Inc. is a client of Stockhouse Publishing.

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