How do you value a junior resource company? You could argue two points - one is that the stock is worth whatever it's trading. Even if a company has 1 million ounces of gold or 100 million pounds of zinc or whatever, if the stock is trading at 10 cents, it's worth 10 cents.
One of the greatest tools the industry created for itself this cycle, was the valuation for "pounds in the ground". Basically, investors can take the market capitalization of a company with a 43-101 compliant resource, and divide that by the number of ounces, pounds, kilos - whatever - to get a value per "pound in the ground".
As an example, if ABC company has 50 million shares out and trades at $1, with 1 million ounces of proven gold in the ground, then it trades at $50 per ounce. You compare that number against its peer group, and if ABC Company is below the average, then all other factors being equal (and they never are) the stock is considered cheap. If it's above the average, it's expensive.
As a real life example, Canaccord Capital did this calculation for a list of copper companies they cover. Their research found the average value per pound in the ground of compliant copper resources was 1.18 cents, with a range of -.30 cents (meaning the company was trading below the value of the cash in the treasury and the copper was free) to 4.48 cents per pound.
A much more simple calculation came out a few years ago that has been widely adopted by investors. I first heard it from one of the best mining entrepreneurs ever, Robert Friedland, when talking about his Oyu Tolgoi deposit in Mongolia. He said the company - Ivanhoe Mines - should get 10% of the value in the ground in his stock. (I don't know if he was the first or not but that's where I heard it first.)
So if the gross metal value of a (43-101 compliant) resource is $1 billion, the market cap of the company should be $100 million.
This is actually easy to calculate, thanks to www.kitco.com - or at www.caseyresearch.com. They have an online calculator in which you just
- Input the grades on the resource from the press release, and it tells you what the value per tonne is.
- Multiply it by the tonnage (you have to do that yourself) in the press release and PRESTO - gross metal value.
- Shift the decimal point over 1 spot to get 10% of the value.
- Divide by the amount of shares outstanding and you get what the price of the stock SHOULD be.
Lets take a real case example. Donner Metals (DON-TSXv) just announced their first resource calculation for a developing zinc project in Quebec:
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