I keep going back to a central theme that not one negative poster can seem to adequately address to my satisfaction. Doesn't mean they couldn't, they simply haven't to date. Exactly what is the fair market value that should be assigned to the companys gold in the ground? If we assume the 43-101 for Basin Gulch is accurate, and even the most cynical seem to agree its viable, then exactly what value should be assigned to those inferred reserves? Notwithstanding the fact that those reserves only account for a small portion of the property having been examined and they account for nothing at Jungo, there are roughly 3 million documented ounces.
Fortunately, we don't really have to guess because there are industry norms and standards developed by persons considered to be much more accredited than myself. Please note the following article which lays out values for different classes of resources. Currently Dutch is being assigned a mere $1-$2 figure per ounce of gold in the ground. I can't help believe this value is exceedingly low, especially based on current prices. The company's current marketable securities value in Shamika accounts for over $3 million in present value so Dutch is receiving little better than just $1 an ounce for reserves accounted for in an actual 43-101 report. I just have a difficult time rationalizing the disconnect between the company's market value and the potential fair market value of their resource bases. Virtually every other gold company you could look at is receeiving a valuation for gold in the ground at a multiple of Dutch. I think the following article is both interesting and of relevance. Note that even the lowest for of reserves like "inferred" are valued at $20 an ounce based on an average of 90 companies.
If this is a fair assessment, then Dutch should in theory be valued at approximately $60 million as we speak or roughly 20 cents a share? Want to go even more conservative, cut that in half and say $10. You'd still arrive at a $30 million market cap of 10 cents a share would you not?
How to Value a Junior Miner’s Gold in the Ground
How to Value a Junior Miner’s Gold in the Ground
February 1, 2010 by Editor · Leave a Comment
At any given time, we know the international spot price for an ounce of refined gold but what about the gold an exploration or mining company has in the ground – how do we value that?
In further edited excerpts from the original article* Louis James and Andrey Dashkov (www.CaseyResearch.com) go on to say:
There are several different ways to value a junior miner’s gold in the ground:
1. Given sufficient data, you can estimate a reasonable net present value (NPV) for a project and deduce what each of the company’s ounces should be worth. To do this, you need to know annual output of the proposed mine, proposed capital expenditures, energy and other costs, and many more things. Unfortuneately, for most deposits held by the junior companies we tend to follow, there’s just not enough data available.
2. Another approach is to compare the value the market is giving a company per ounce of gold in hand against the average value the market gives companies with similar ounces. The most obvious way to define “similar” ounces in the ground is to use the three resource and two mining reserve categories defined by Canada’s National Instrument NI43-101 regulations – the industry standard. These are combine these into three broad groups:
a) Inferred:
The lowest-confidence category, based on just enough drilling to outline the mineralization.
b) Measured & Indicated (M&I):
These higher-confidence categories have been drilled enough to establish their geometry and continuity reasonably well.
c) Proven & Probable (P&P):
These are bankable mining reserves – basically Measure and Indicated resources with established value.
So, what does the market give a company, on average, for an Inferred ounce of gold? M&I? P&P?
To answer this, we combed through every company listed on the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX-V) and pulled out the ones with 43-101-compliant gold resource estimates (or mostly gold) – no silver, copper, etc. Of these, we kept only those with resources that fall almost entirely into only one of our three broad groups: Inferred, M&I, and P&P leaving us with about 90 companies to calculate some averages on and we got these numbers:
• US$20 per ounce Inferred
• US$30 per ounce for M&I
• US$160 per ounce for P&P
Armed with this information, if you didn’t know anything else about an M&I resource (political risk, type of ore, etc.), but you saw that the company that owned it was trading at $10 per ounce, whereas its peers are valued at around $30 an ounce, you can conclude that there must either be something very wrong with the project or the stock is a great speculation.
If there’s nothing wrong with the project, there’s an implied growth potential in the stock price, based on the difference between what the company is getting per ounce and the market average for similar ounces. In this case, it would be:
$20 x # Ounces ÷ # shares.
As a matter of perspective, a few years ago the market was giving a company about $25 per ounce Inferred, $50 for M&I, and about $100 for P&P. Then, when gold ran up over $1,000 before the crash of 2008, these valuations went out the window, and some companies were getting over $100 for merely Inferred ounces – do we have your attention now?
Conversely, just after the crash, there were companies having a hard time getting $10 for M&I. That was clearly a sign that it was time to buy, and we did, with gusto.
It’s also why, when the Mania phase gets underway, we’ll be selling into it as gold approaches the top; we will not be attempting to time the top. It’s far better in this business to be a day early than a day late.
Today, the market is willing to pay more for advanced and producing stories ($160 P&P) but is discounting earlier-stage stories, hence the lower M&I valuation than in previous years ($30). These figures will change again as the market’s appetite for risk changes.
Bottom line
We often get asked what an Inferred, or M&I, or P&P ounce is worth in the ground. The $20, $30, and $160 figures are only rough guides, and you must consider the reasons why some ounces are given more or less by the market, but they’re a good starting point.
*www.stockhouse.com/Columnists/2010/Feb/1/Valuing-a-junior-miner-s-gold-in-the-ground
