Every retail investor has to ask themselves at some point, how do I value the company I’m invested in (or considering investing in).  In the junior gold sector, valuation comes in various flavors, depending on the type of company it is.  In this article, I will present valuation methods for the various types of companies in the sector:

  1. Explorer
  2. Successful explorer
  3. Prospect generator
  4. “Second Look” company
  5. Small producer
  6. Royalty company
  7. Intermediate and senior producer

Explorer

For a pure exploration company, valuation is notoriously difficult.  There is no revenue to speak of, or if there is it’s negligible.  Some have bigger prospects than others, but this is a highly subjective factor and doesn’t lend itself well to “putting a number on it.”  Exploration companies take part in the ups and downs of the market, but stock price movement is otherwise defined by things that increase the odds of success, rather than concrete revenue generating metrics.  They should be compared to their peers based on factors such as:

  • Strength of management
  • Location of property
  • Previous results on property
  • Current market cap
  • Political environment

Successful Explorer

I will create a separate classification for explorers that have defined a resource.  For these, there are several ways that can be used to value them relative to their peers:

  • Market cap / ounce.  This is dependent on what the classification of the ounces is, for example inferred has the lowest confidence level, and proven and probable is the highest.  Naturally, proven and probable ounces should get a higher valuation.
  • Market cap / ounce / year of production.  This only applies if a preliminary economic assessment has been completed which outlines what the production would be.

Also, instead of valuing them relative to their peers, you could take the size and grade of the deposit and attempt to compare it to others that are in production.  I have done this often.  Majors usually have a profile of all their mines on their website or in their annual report.  Finding how much of their value is attributed to each mine is difficult, I agree, but going through the exercise has usually been very productive for me.

Prospect Generator

These are companies that have many properties in their portfolio and attempt to joint venture them to others so that they do not incur any exploration expense but take part in the discovery.  As with pure explorers, there is no concrete way to value an exploration property apart from comparisons to its peers.  I would suggest using the list above (under Explorers) to provide a good comparison with other companies in the category.

Small Producer

I have had considerable success with this type of company.  A small producer needs to keep the production going.  Reserves are extremely important.  To value a small producer, the production level is a more important consideration.  A market cap / ounce / year of production is the best place to start, but the production profile is going to have a major impact on the share price.  You should find out what the reserves are, and more importantly, what grade the reserves are (they always mine the good stuff first).  If they can’t keep up production for more than about 3 years, the stock price will suffer.

Royalty Company

There are several of these around.  They make their business from royalty portfolios, and thus they have income are less volatile than your average junior mining stock.  I believe the best way to value these is by comparison to the majors.  Sometimes they have a cost of production, but these should be amenable to PE ratios and other methods of the majors.

Intermediate and Senior Producers

For the majors, there are lots of numbers around.  Annual reports are normally free.  You can order them online and find the ratios that are the most important to you.  PE is one of the most prominent.  It stands for Price-Earnings ratio and represents the multiple of the annual profits that a company has (example:  Profit of $5/share, trading at $25/share, PE = 5.  You would need 5 years of that profit to ‘break even’ if the company paid it all out).

The share price per ounce of production is probably an import ratio, but should be adjusted for political risk, reserve replacement, and production profile (it isn’t usually a straight line).

the Junior Gold blog