Craig Stanley is Vice President of Research for Pinetree Capital (TSX: T.PNP, Stock Forum), a merchant banking firm focused on investing in early stage micro and small cap resource companies. Although Pinetree became well known for uranium back when there was a boom in that commodity in 2006, the company is focused on small-cap mining in general. Its biggest positions currently are in gold and other precious metal related equities and that’s what they’re focused on for the longer term. They still have uranium companies in their portfolio, though, and Pinetree CEO Sheldon Inwentash also runs Mega Uranium (TSX: T.MGA, Stock Forum).

“Some of our big wins we’ve had recently that still have a lot of potential – one is Colossus Minerals (TSX: T.CSI, Stock Forum),” said Stanley. He calls the company’s drill results “ridiculously high grade, the highest grades in the world I’ve ever seen for gold, silver, platinum and palladium.” Another one of Pinetree’s big winners Stanley mentioned is Continental Gold (TSX: T.CNL, Stock Forum) in Colombia.

For Stanley, these companies are examples of great management, with great assets that were open to Pinetree getting in at a very early stage. For Pinetree, however, it’s also about getting the right people in to hold the stock – ones that will be long-term holders.

“It’s a mixture of management and assets. We’ll invest in a company even if it has bad management with good assets if maybe there’s something we can do there,” Stanley added.

As far as the asset goes, Stanley asserts that his company looks for both open ‘pittable’ and underground mining potential. As well, he is not particular in regards to geography either – Pinetree will invest in riskier countries throughout the world.

“Sheldon (Pinetree’s CEO) just wants leverage to gold, that’s his big thing. Sometimes he’ll invest (in a company) even if it doesn’t work at this gold price, will it work at $2000 gold? And if he can get it for cheap then that will make sense,” Stanley stated.

As far as how to value a gold producer, Stanley believes investors should look to a company’s net asset value (NAV) as opposed to price multiples such as P/E, P/CF and P/B. A company’s NAV is calculated by summing up the discounted cash flows (DCF) produced from its mine(s), adding cash and subtracting any debt.   

NAV calculations take into consideration a company’s debt position, as well as the cash flows over an entire mine’s life (and thus the size of a mine’s reserves/resources along with the metallurgical recoveries), and the initial and sustaining capital required to build and operate a mine.

Shares of senior gold producers trade well above NAV, even up to 2.5 times. The reason being is due to the non mean-reverting price performance of gold, where the supply-demand factors that affect base metals are different than that for gold (base metals are consumed as opposed to gold, which is stored).