At any given time,
there's a single international spot price for an ounce of refined gold. Gold
is priced in U.S. dollars. But what about the gold an exploration or mining
company has in the ground - how do we value that?
data, you can estimate a reasonable net present value (NPV) for a project and
deduce what each of the company's ounces should be worth. To do this,
you need to know annual output of the proposed mine, proposed capital expenditures,
energy and other costs, and many more things. For most deposits held by the
junior companies we tend to follow, there's just not enough data available.
is to compare the value the market is giving a company per ounce of gold in
hand against the average value the market gives companies with similar
The most obvious
way to define "similar" ounces in the ground is to use the three
resource and two mining reserve categories defined by Canada's National
Instrument NI43-101 regulations - the industry standard. We combine these
into three broad groups, as we believe the market tends to do as well:
- Inferred: the lowest-confidence category, based on just enough drilling
to outline the mineralization.
- Measured & Indicated (M&I): these higher-confidence categories have been
drilled enough to establish their geometry and continuity reasonably
- Proven & Probable (P&P): These are bankable mining reserves -
basically Measure and Indicated resources with established value.
So, what does the
market give a company, on average, for an Inferred ounce of gold? M&I?
To answer this,
we combed through every company listed on the Toronto Stock Exchange (TSX)
and the TSX Venture Exchange (TSX-V) and pulled out the ones with 43-101-compliant
gold resource estimates (or mostly gold) - no silver, copper, etc. Of these,
we kept only those with resources that fall almost entirely into only one of
our three broad groups: Inferred, M&I, and P&P. In other words, we
did not include companies with half Inferred and half M&I resources
(though we did include companies with mostly P&P reserves, because most
are producers - or soon will be - and are regarded that way). That left us
with about 90 companies to calculate some averages on.
That's not a
large sampling universe, and we had to make some judgment calls when it came
to defining what companies should fall in each category, but it's what we
have. So take these averages with a large grain of rock salt, but here they
- US$20 per ounce Inferred
- US$30 per ounce for M&I
- US$160 per ounce for P&P
Armed with this
information, if you didn't know anything else about an M&I resource
(political risk, type of ore, etc.), but you saw that the company that owned
it was trading at $10 per ounce, whereas its peers are valued at around $30
an ounce, you can conclude that there must either be something very wrong
with the project or the stock is a great speculation. If there's nothing
wrong with the project, there's an implied growth potential in the
stock price, based on the difference between what the company is getting per
ounce and the market average for similar ounces. In this case, it would be:
$20 x # Ounces
÷ # shares.
As a matter of
perspective, a few years ago the market was giving a company about $25 per
ounce Inferred, $50 for M&I, and about $100 for P&P. Then, when gold
ran up over $1,000 before the crash of 2008, these valuations went out the
window, and some companies were getting over $100 for merely Inferred ounces
- do we have your attention now?
after the crash, there were companies having a hard time getting $10 for
M&I. That was clearly a sign that it was time to buy, and we did, with
It's also why,
when the Mania phase gets underway, we'll be selling into it as gold approaches
the top; we will not be attempting to time the top. It's far better in this
business to be a day early than a day late.
Today, the market
is willing to pay more for advanced and producing stories ($160 P&P) but
is discounting earlier-stage stories, hence the lower M&I valuation than
in previous years ($30). These figures will change again as the market's
appetite for risk changes.
Now let's compare
these numbers to those of a few sample gold companies. This table includes
the market capitalizations (share price x # shares) of our sample gold
companies expressed in USD (because that's what gold is priced in), not the
usual CAD. The second column has the value of each company's resources, as
per the average numbers given above (i.e., [# Inf. ounces x $20] + [# M&I
ounces x $30] +[# P&P ounces x $160]). The
implied growth is a simple ratio of these two numbers, expressed as a
Value of Gold
Gabriel Resources (GBU.T)
Gold Resources (CLH.V)
Gabriel and Coral
Gold look pretty cheap, Luiri slightly expensive, but
in most cases there are good reasons for this. For example, these averages by
confidence category ignore the typically greater cost of extracting gold from
low-grade sulfide ore, as compared to high-grade oxide ore.
We don't follow
the companies in the table above -- they are just examples -- but here's our
take on their implied growth ratios:
- LGL: Luiri's flagship Luiri
Hill project, located in Zambia's Central Province, has only 800,000
ounces in total resource, 82% of which fall within the least reliable
the current resource estimate is based on lower-grade material, the company's
gold looks fairly valued. However, LGL is working to define more high-grade
areas of mineralization both within and outside the resource boundaries, and
not without success. For example, drilling from the Matala
deposit, lying in the heart of Luiri Hill, has
delivered high-grade intercepts from the central shallow zones, like the
recently published 21.1 g/t Au over 5.6 m (starting from 56 m), including
41.1 g/t Au over 2.8 m (starting from 56 m of the same hole #114).
Conclusion: The company looks a bit expensive at
the moment, probably because the market sees Luiri's
upside potential coming from the new high-grade ounces being added in forthcoming
resource estimates. If the marker were underestimating how much gold Luiri might be adding, it could still be a good
speculation, but you'd have to be pretty sure of your calculations projecting
that greater value to be added soon.
- GBU: Gabriel Resources appears undervalued when using average ounce
prices, plus there is a lot of upside outlined in the economic study on
the company's Rosia Montana project in
Romania, released last March. The study suggests excellent project
economics, including low cash cost (US$335/oz), after-tax NPV of almost
1 billion USD at 5% discount, and after-tax IRR of 20.4%, all at an
uber-conservative US$750/oz base case gold
the company was sued by environmentalists in September 2007 and suffered
regulatory setbacks. GBU shares tanked, and this is why the company's gold is
still selling at a discount; there is high political risk. Gabriel's share
price has soared recently on words of support from the government officials,
but it's still perceived - rightly - as high-risk. If Rosia
Montana gets permitted to go into production, GBU shares should make very
Conclusion: The government of Romania has made
supportive noises about Rosia Montana before, to no
avail, and the company doesn't appear screamingly cheap right now, so the
risk-to-reward ratio looks too high to us.
- CLH: The company is focused on the Robertson
project located on the Cortez Trend in Nevada. Coral Gold has recently
revised the project's resource estimate at $850/oz gold (which looks
fairly conservative, given the recent price action) to 3.4 million
ounces, all Inferred. Our guidelines suggest that these ounces should be
worth about US$68 million. Mind you, this gold is contained within what
CLH believes to be well-known Carlin-type mineralization in a
mining-friendly jurisdiction. Why does the market value these ounces way
think it's a metallurgy issue. Lacking sufficient metallurgical data from all
Robertson targets, CLH used numbers from a deposit called 39A to stand in for
the whole project. The problem is that 39A is one of the deeper Robertson
deposits, and large-scale heap leach operation, the preferred scenario for
Robertson, showed high strip ratio, which would probably result in high
capital expenditures and operating costs.
Conclusion: Robertson ounces are cheap due to
valid concerns over the project's economics. If the company can fix these
problems, its resources could be revalued upward dramatically.
We often get
asked what an Inferred, or M&I, or P&P ounce is worth in the ground.
The $20, $30, and $160 figures are only rough guides, and you must consider
the reasons why some ounces are given more or less by the market, but they're
a good starting point.