The previous post listed most US mining companies and their enterprise values divided by the gross value of coal reserves. The question is: can the investor use the gross value of coal reserves as a tool for identifying undervalued coal companies? The answer: "maybe." It is not as clear cut for coal companies as for oil and natural gas firms as well as metal ore mining firms to use a net present value-like valuation approach. The reason is that the profitability of the coal mining operations fluctuates even more widely than other resources firms (Metal Ore Mining Firms, oil and gas firms), and the reserves of coal mining companies typically last 30 or more years (in some cases over 70 years) so the latter years of an NPV type calculation are insignificant to the present value.
Many investment firms, in valuing the Coal firms, do not attempt a NPV-type calculation as reserves but rather used earnings valuations, (p/e, price/cash flow or price/EBITDA) and/or perhaps a few future years with an exit value.
Nevertheless is the gross valuation measure is an interesting measure and can be used in conjunction with earnings measures. Coal companies are resource companies and as such, theoretically, they should be valued on the basis of their resource reserves, dispite the unique situation of coal compared to metal ore and oil and gas.
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