# How to Value in ground resource assets



## Datsun Disguise (14 June 2008)

Hi All,

How do we accurately (!) define the value of a mining / resource companies assets? I thought this thread would be a good place for ideas and methods to be placed to assist everyone in evaluating that 'hot new announcement'.

I've started this because one of my shares is targeting gas with a total target of 1.2TCF - I know this is double the annual consumption of gas in Australia so is a sizeable target - but what the hell is it worth? I have no idea.

My contribution is a rule of thumb calc for Oil reserves. Underground it's worth about $20 a barrel. 

So now over to the collective intelligence how can we put an asset value on in ground resources for gas, gold, coal, silver, nickel, urnaium etc? Any resource is welcome.

If people are good enough to contribute I'll figure out some way to keep all this info in one place. Over to the ASF'ers.


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## steven1234 (15 June 2008)

Here's a start.  

You must consider all the factors that would add to the cost of selling the resource to the market, such as:

mining costs (how deep is the resource, what method will be used to mine), 
distance to port or market, 
engery costs to seperate the resource,
the price of the resource on the world market (inc AUD$ fluctuations)
costs to establish infrastructure required

No matter how big your resource is, if you can't get produce econimically, your resource is worth nothing.

Is the resource inferred, JORC compliant or measured?


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## cuttlefish (15 June 2008)

Agreed - the ultimate measure is NPV when mined - thus all the factors that affect the likelihood of the ore body actually being mined need to be considered, and then the resultant profits from mining it.  This is the only truly accurate way to assess value.

* ore grade  (key factor of course)
* ore type/quality  (e.g. for base metals oxides vs sulphides vs laterites etc.  or for coal carbon, sulphur, moisture etc.)
* ore body size, shape and depth
* metallurgy
* risk factors (e.g. political risk, native title, weather, location, labour costs, environmental etc.)
* quality, experience and motivation of management (big factor)
* commodity price sensitivity (operating margin, price volatility).


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## Datsun Disguise (15 June 2008)

Hey Stevo & CF,

Thanks for your comments, regarding ore  grades it sounds like there might be too many variables to accurately estimate the value. Stevo, I also agree with you that being able to use all of the actuals in order to come to an asset value is the best way (ie value of product - cost to extract and provide to market = cashflow)

But, I suppose what I am really asking is what kind of values can we put on a resource based on contained metals or proved / probable / potential reserves?

ie company ABC has just announced a JORC resource of  12,000 tonnes with 5g/t au for a total of 60,000g or about 1800 ounces. Obviously it is not worth $870 / ounce underground. So as far as an asset goes what value per ounce could we give it? $150/ounce? - do we moderate it up or down depending on location / country risk etc? Answer is yes, but by how much?

I'm sure most of us are aware of the impact of the costs / risks associated with digging stuff up, and the impact on the $ profit made - but what are the rules of thumb in making the initial estimate? The market must have ways to estimate this stuff - and ASFers are a part of that market - so we must hold some kind of knowledge about these things. This is the place to share it.

I'm still itching for a way to value in ground gas....


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## doogie_goes_off (15 June 2008)

A good way to value a resource I have found is rate the necessary variables to downgrade the value appropriately or if tossing up between two stocks I'd say it gets easier if they are looking at the same commodity because you can throw away demand variables, which if you were looking at gas you would expect to have already considered ie: there is long term demand for gas.

Then the rating begins - grade (high or low), for gas maybe flow rates? (not a gas person), level of resource in ground ie: Target/Inferred/ Indicated/Measured OR Reserves (gas is different i think), magnitude of startup cost (high/low based on things like energy cost, infrastructure distance, extractability of product), distance to market/port, chance of pure risk preventing production initially and on an ongoing basis eg: labour strikes and revolutions in the "3rd world", quality of ongoing activity ie:exploration and upside to expand the actual resources you are rating etc.

Anyway a rule of thumb I use is downgrade the value by 50% if production costs are similar to market and if you can find big negatives like native title not being secured or court case over royalty or massive starup cost knock 10% of the 50% IGV, then see what you end up with. 

To continue the process to the logical end point (a share valuation) project this over a mine/well life that's realistic and divide by this number. This is a probable EBITDA each year and now take 30% off for tax and that's what's available for dividend, divide by number of shares and give 20% to the greedy directors, there's your approx dividend and now look at the mine life and project that dividend, could you have 6c over 5years? that's 30c over the fundamental value of the assets of the company then the share price is X+30c if the market cares about a 5yr case, also it may be better valued if nearer production ie: good management/backing/capitalisation. 

One Rule: Never take a recource on face value, that's pure speculation.


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## Datsun Disguise (17 June 2008)

Thanks Doogie - are you saying that you'd add 5 years worth of projected dividends due to a new discovery onto the current share price to get an indication of value? I haven't heard this before - is this an alternative to the old P/E rule?


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