Tuesday, April 3, 2007

Mining Notes Explained

The previous post listed a number of public mining companies and the gross value of their ore reserves (defined as reserves of ore, both measured and inferred times the price of ore) divided by the enterprise value (defined as market capitalization - debt).

The basic idea is that mining companies should be valued based on the ore they own in the ground. There are numerous caveats to this statement, but observing the resources of a mining company is a great first step to determining the future discounted cash flow of the mining company.

Mining companies are not required to publish a Net Present Value in their financial statements, unlike Oil and Natural Gas firms in their Standardized Measure (see my other blog www.oilandnaturalgasreserves.blogspot.com for more information on the Standardized Measure). A good starting point for the investor is to see if the Mining Company's value of ore is low (undervalued) in comparison to its market capitalization.

I mentioned caveats to using the gross value of ore reserves and the caveats are:
1. Gross Value does not include costs, lifting and managerial costs
2. Gross Value assumes fixed ore prices, which may or may not be accurate (I've attempted to make the price assumptions conservative)
3. Discount rate (time value) of the reserves is included
4. Future (undiscovered) ore reserves are not
5. Inferred resources are counted the same as Measured (proven) while Measured should have a higher value
6. Political risks are not included

The list is not yet exhaustive, listing every available public miner -- for example, a few large mining companies such as BHP and Rio Tinto are not listed -- but gives a good feel for the metal mining universe -- in addition I will update the list in the future (as time allows).

Note that "comps" such as in the previous post are generally difficult to find -- although very useful for the investor -- as they are time consuming to construct, and most investment banks will not find it in their advantage to compile comps of their clients -- as they recieve fees for banking services so do not benefit if the investment bank identifies the most undervalued companies in the publicly available universe.

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