Notes on Precious Metals Analysis
Precious Metals has always had a place in our diversified portfolios. The following are some notes I am accumulating regarding valuing Precious Metals companies
I. Focus on low cost producers.
A. quality of the ore body (higher the grade, less it costs). How much gold per ton ?
B. deeper the mine, greater the costs.
II. How can production be grown ? How many mines ? Where are the new mines ?
III. Balance Sheet Metrics
A. Low debt ratios
B. Cash flow is important. Don’t forget Free Cash Flow after Capital Expenditures.
C. Any derivative contracts ? If so, identify and weigh the factors.
D. Price to Cash Flow
E. Price To Net Asset Value ( Qty. X cost to produce) – according to a recent Merrill report, the historical P/NAV multiple has been 1 to 3 times.
F. Focus on the commodity. One identifiable asset.
IV. What is the proper portfolio allocation. This is just a guide, but we have been using 5 %, yet based on type of portfolio ( i.e. aggressive vs. conservative ) , the allocation may vary.
V. How much does it cost to take the gold out of the ground. What is the quantity of the gold in inventory as well as the reserves. Can you determine the value of the land on the books? Keep in mind that land is reported at historical cost, not fair value. This could be a difficult or impossible number to determine. Keep in mind the following during valuation of gold companies.
A. What is the specific companies sensitivity to currency movements.
B. What is the Gross Margin ( Realized gold price minus the total cash costs.)?
C. Review gold hedging techniques, or lack of such.
D. What is the gold production?
E. What is the total cash cost?
F. What is the total production cost?
G. What is the total breakeven cost?
H. What is the Realized gold price?
I. What is the Recoverable reserves?
J. What is the total resources, measured in units.
VI. An interesting Calculation we read in Grants Interest Rate Observer (Sept. 12, 2003). Please click on this link to see our worksheet. We will not be responsible for any errors.
Using Newmont Mining (NEM) as an example (in millions, except per-unit data)
|Price Per Ounce||$382|
|Cash Costs Per Ounce||– 203|
|Net Value Per Ounce||$ 179|
|Est. Reserves (mm oz.)||X 101.8|
|Net Debt||– 1,529|
|Gold Equity Value||$16,719|
|Gold Value Per Share||$40.97|
|NEM Market Cap||$16,255|
|Price Per Share||$39.76|
|Share Price Discount||3%|