New to resources - how to value?

[modandm]

Hi all,

I am new to ASF and resource stocks but not new to investment or finance in general. I recently passed my cfa level 2 exam so i know a little about financial analysis.

I would like to learn more about how to value resource stocks particularly explorers.

I know there is probabally different methods for diferent resources but in terms of direct cashflow forecast analysis - i.e not comparitive or multiple based approaches. What are somethings commonly used i should learn about?

I have heard about deposit sizes in oz's and about mineral density per tonne and cost per oz to extract and so on but what sort of metrics are commonly used.

Perhaps we could use AZM as a case study? Since I am looking at gold atmo.

Alternatively are thier any posts that cover the basics I could read - (i tried searchwing with no luck) or websites I could read?

cheers all and good to be here

 

[Sean K]

Re: new to resources - how to value ??

The only way to value AZM at the moment is a peer comparison.

Same with most junior IO companies.

Need to find an average price per resource ounce and ton and compare to EV.

Then drill down from there for; grade, depth, infrastructure, country risk, etc.

Difficult.

Can't do a decent DCF till they've done a DFS really....

 

[springhill]

Have a look at Kenna's post, its number 113 on page 6 of the AZM thread, you will see what he is talking about.

 

[doctorj]

There are some books available on the topic. As kennas says, it's very difficult to understand pre-feasibility study, but with some broad assumptions, you can get a feeling whether or not a project is likely to 'work' (ie. with conservative assumptions, do you have a value greater than 0).

I swear by http://www.amazon.co.uk/Australian-Mining-Valuation-Handbook-Management/dp/0731400755 . It's not perfect, but you'll know a truckload more after you finish working through it than where you started.
The most important thing to know is that valuation isn't an exact science. Even in industries where there are established, documented and standardised valuation methodologies two equally skilled valuers can arrive at widely different valuations.

Take the life insurance industry for example - we have MCEV and before that TEV as established valuation methodologies. I'm aware of one business that was valued by two different external valuers and one concluded the business was worth nearly 5 times more than the other.

The other, important things you'll learn through a modelling exercise is what variables the company is more sensitive to (eg. perhaps they're are far more sensitive to grade than the rate of extraction) and where other potential pitfalls might be (such as the availability of power, water, transport infrastructure) that most miss when looking at the headline numbers.