INTRODUCTION
And then a little bit later in the day Hi Bill, With regards to my previous post especially learning # 8.
KEEPING IT SIMPLE
The Gambler's Analogy
INTRODUCTION
I decided to construct this spreadsheet for selfish reasons. I want to develp a disciplined approach to my speculation in Junior mining stocks so that I make consistent decisions based on thorough analysis rather than emotional trading from gut feel. The following is an earlier post on Bill's Blog (31 Aug 2007) that provides a background on some of my Hi Bill, I only started investing, or should I say speculating just over 18 months ago. mining industry and have developed an I have expertise in the interest in junior mining stocks recently. I hold a similar view to people like Jim Rogers and Don Coxe that we are in the early stages of a long term commodities boom and that there is money to be made in the Juniors if you was quite successful I know mining and found Ipick the right ones. at speculating and selecting a reasonable number of winners. The only problem was that I was not making much money out of these picks. I was poor at the execution. As Dr Alexander Elder would say, I am a good analyst, but verytime analyzing my speculations and learnt from my So I spent some poor trader (investor) mistakes. In the first 6 months I was lucky with a 10.5% gain, but in the second six months have had a gain of over 46% in my portfolio. These are the things that I learnt from others and through my own navel gazing. 1. I lost a bunch of trades when I acted on a hot tip and bought them in a panic so that I would not miss out on the expected rise. I skipped my due diligence stage stage and paid the price. (eg purchase of Yukon Zinc at $0.80 on rumour and selling at $0.23) 2. I tried to get into too many “good things” and spread myself too thin. I have done better by concentrating on my most prospective selections. 3. I do best when I concentrate on companies that already have something concrete rather than just prospectivity or nearology. Eg decent drill results or are following up on old drill results in historical mining areas. 4. I do worst when speculating on greenfields exploration or nearology.
5. I missed good gains by becoming impatient even though my homework and due diligence was very solid. (eg after PDAC in 2006 I bought LBE.V at $0.60 SWC.V at <$2.00 and UUU.V at <$3.00. I became impatient and sold LBE and SWC to chase other stocks. I sold LBE.V at $0.82 for small gains before it continued to up over $4.00 and sold SWC.V at $3.30 as it continued on its way to +$6.00. Conversely I kept UUU which was in the $8.00 range before the merge with SXR and sold it for $15 when RSI’s were very high and 6. Use an investment strategy for these stocks rather than a Trading strategy (See my previous post). 7. You must do your due diligence and then create a trading (investment) plan for your potential trade (investment) including entry criteria and exit criteria. 8. From Dr Alexander Elder – you must write down your trading (investing) plan for every trade (investment) and critically evaluate every trade (investment) and learn from it. And then a little bit later in the day Hi Bill, With regards to my previous post especially learning # 8. I want to keep learning and improving. I therefore want to create a one page spreadsheet template to help evaluate junior mining stocks for investing. This template will include the basic knowledge about the company share structure etc, a checklist to ensure the required due diligence is completed, stock valuation, entry criteria, Once this template is created I hope to share it with the Cara community. It could then be used to evaluate the junior mining stocks that we often discuss. The template will help readers evaluate a stock they are interested in and share the results with the community. The results will provide a basis for discussion, comparison to other stocks and learning from each other.
KEEPING IT SIMPLE
During my experience in the mining industry I had several years of experience in Business Development of a large mining company analysing many deposits, mines and companies as potential purchases or as potential takeover targets. One of my biggest learnings was to keep the analysis as simple as possible. The ideal situation was to value an operating mine based on the projected cashflows discounted back into todays dollars as per the traditional NPV calculation. This was fairly straight forward and the analyst would have his own set of assumptions When analysing undeveloped deposits, there was a great deal of temptation to analyse the property using the same method and making a great many assumptions on cost structure but I contend that this approach to undeveloped deposits prior to a feasibility is fraught with dangeroperating mine you already know what the production figures and For an and will lead to huge errors. costs are and so it is reasnably easy to project these costs into the future for you cashflow model. For an undeveloped deposit however, you have no idea of the mining conditions such as wall stability, blasting characteristics, strip ratio and digging rates for an open pit or ground conditions in an underground mine as an example. Then on top of these estimations are labour requirements, milling costs, environmental costs, taxes etc etc etc. Since there is no information available for all these parameters for the deposit, you can use an estimate for a similar mine if you have that data, but this is only an estimate and will involve some error. Having provided estimates for all this data may give you a warm fuzzy feeling, but it is a false sense of security. All of the errors Even in an operating mine, mine management struggle to forecast the following year's budget accurately with all the latest information at their fingertips. Estimating capex and opex for an udeveloped mine with an undefined deposit will lead to many errors that compound leading to overestimating or underestimating the real situation. It would be extremely rare that the errors cancel each other out. For analysing Junior resource stocks, I therefore recommend keeping it as simple as possible and use a method that values the stock based on the potential size of the deposit. This is done by estimating a size for the target and determining the amount of potential metal in the ground for the target. Then, based on the stage of development and confidence, the value of the project is estimated based on a percentage of the value of the metal in the ground being target. The more information and more developed the target, the higher the percentage that is used. This is a
The Gambler's Analogy
In the past, I had heard of speculation in Junior mining stocks being analogous to betting on a horse race. I attempted to use this analogy but did not think I had addressed it as well as I could. I therefore searched the internet and came accross an article from John Kaiser that explains the analogy brilliantly. I have taken an excerpt from the article below. I urge you to read it several times. …….. What is the notion of "Speculative Value?" Isn't that an oxymoron? Many people assume successful investing in exploration juniors involves, luck, guesswork, momentum trading or inside information. Most are unaware that an elegant valuation logic underlies mineral play explortion and is acessible to the average investor. While esoteric talk about risk-reward causes eyes to glaze over, most investors intuitively understand the gambling concept that a bet is fair if the payout delivered by success matches the probability that success will be achieved. A horse with 5:1 odds of winning should pay 5:1 if it wins. A good bet would be a ringer with 5:1 odds but will pay 10:1, and a poor bet would be a dog with 10:1 Like gambling, speculation involves making a financial bet on an uncertain outcome. But unlike gambling which merely reshuffles the ownership of existing wealth; mineral play speculation creates new wealth through major discoveries like Hemlo, Eskay Creek, Ekati, Voisey's Bay, Pierina, Snap Lake, Veladero and Bulyanhulu. The investment community hates to hear gambling compared to mineral speculation, but investors are play speculation as a superior form of Getting people to see mineral far better off when they appreciate the gambling is not easy, so consider this trip to the horse racing track. Tip sheets prepared for gamblers by professional handicappers who lay out the success odds for various horses based on their history, lineup, the jockey and expected track conditions. Doesn't this sound a lot like research reports about a mineral project's geology, its exploration history, the management team, and the market outlook? Our gambler reviews the report, listens to the chatter from the shills, and homes in on a horse that handicappers say is a longshot at 10:1 but which the shills suggest is a ringer with 2:1 odds. The gambler figures the shills are exagerating but after some "due diligence"
Excerpt from - "How to Analyze Diamond Stocks" by John Kaiser
As the betting window opens the board shows 10:1 for our gambler's pick and our gambler places his bet. But as word circulates that this horse is a ringer other gamblers jump in with a similar bet. Before long, and much to our gambler's dismay, the board shows the odds improving to 5:1. Oh well, the horse is no longer a "good" bet, but is still a "fair" bet. But soon, thanks to the touts, the horse's ringer status becomes the worst kept secret. The failure odds plummet to 2:1, and our gambler is tearing his hair out because now he is stuck with a potential payout of only 2:1 even though he remains The payout has dropped because the race track pari-mutuel betting formula adjusts the payouts according to how and what gamblers have bet. It is a zero sum game less the leakage to the track operators. When the betting window closes, the posted payouts reflect the expectations of the gambling audience, not the underlying odds that remain unchanged. Once the race starts excitement surges as gamblers cheer the horses on which they have placed their bets. Our diligent gambler who did his homework stops fretting as his horse pulls ahead of the pack, but his mood sours as the horse starts Change the words around a bit and you have your typical gold or diamond play stock promotion. But there is an important difference. Had our gambler been speculating on a publickly traded exploration junior rather than betting on a horse race , he need not have been stuck with the outcome. An exploration play is like a horse race in that it starts out with a certain optimism that changes in response to exploration progress reports. The play either ends in a bust sometimes euphemistically dubbed a "technical success" or as a winnerthe horse race a buyout target for major mining companies. Unlike that becomes where gamblers are stuck with the bets they placed regardless how actual and perceived odds change, exploration play speculators can "withdraw" their bets almost anytime before and during the "race" by simply selling the stock. Now here is the key to the rational speculation model: when a junior price goes up, the market is saying that the odds of turning that drill target into a major discovery are improving. A race track gambler can only watch as the "odds" change while he awaits the race's outcome, but the mineral play speculator can collect profits or cut losses before the
While searching the net for the above analogy I was also fortunate enough to come across some more of John Kaiser's work. He provides an excellent lesson on how to value an exploration company - "Rational Speculation Model 3 Step Application to Mineral Plays". It is a very well thought out method. I have preferred to keep it simple in the earlier stages for reasons described above. Once the project has a resource and the company has started to provide details on other aspects about mining methonds, metallurgical recovery, power supply etc, then you can then switch over to a Discounted Cashflow (DCF) method such as John's to calculate the projects NPV and value the project on an NPV Basis. At first you will have to make assumptions about just about everything using your knowledge you have gathered from similar projects. Then you can update the information in your model as you gather more data. When
http://tinyurl.com/2h2me5
GOOD LUCK!!!!!
GOOD LUCK!!!!!
This is by far the period of highest risk. The company may have some leases but essentially at this stage you are taking a bet on Management. You are betting that Management know what they are doing and have faith that they can either discover a new deposit or develop a previously unloved prospect into a mine. While this is by far the highest risk area to invest, it also has the greatest rewards if you get lucky. Some investors follow successful management and invest in this stage hoping that they can repeat their previous good performance. You often see management being successful over and over again. You should also realise, however, that quite often management will have their fingers in a number of different companies at once. They are hedging their bets and if one of them is successful, they will divert all their energy and resources to that project while the others get very little attantion as they are put on the backburner and only revitalised if the intial success crashes and burns or until they are successful in the first one and then are looking for the next big thing.
This worksheet covers the period from target identification through drilling resource. At this stage the company may have some geochemical anomali geochemistry and rockchip sampling. These have all been put together an results and maybe some follow up driling. From this information the comp the size of a potential ore body. If they have not published anything, this is management about the potential size of the deposit. Quite often managem say in the public arena but are quite happy to talk to an eager investor over
DRILLING TARGET STAGE
At this stage the company may have some geochemical or geophysical anom with rockchip sampling and maybe even some trenching. There may even b These have all been put together and drill tagets established. From all this i provided an estimate of the size of target they are chasing. If they have not to call and talk to management about the potential size of the target deposit. about what they can publish in the public arena but are quite happy to talk to give you their thoughts.
Estimate the size of the target by either estimating tonnes and grade or just terms of metal content and enter these parameters in the spreadsheet below price at this stage. The spreadsheet has also been set up to show the poten and the project progresses to the next stages. DRILLING SUCCESS STAGE
At this stage, positive drill results have been achieved and there is a little mo there is actual proof that there is some metal in the ground. But success is questions to be answered through further drilling and studies. Will there be mine? Will it be in high enough concentrations to be economic? What are t such as ore hardness or recovery rates? Will there any permiting issues? W costs be?
Again , it is best to keep the analysis simple and estimate a project value ba ground metal content. Now you actually have some positive drill results the the probability of success can be increased using the corresponding table b estimate about the size of the target by using the drilling information to eithe modify them.
DEFINITION DRILLING STAGE
A couple of successful drill holes does not make a mine. An enormous amo the size and grade of the deposit. First the company will drill step out holes some stage the company will also turn its attention to infill drilling to establi out holes that is required to establish a 43-101 compliant resource. The com while still conducting definition drilling. The value of the deposit will chang drilling upgrade or decrease the potential amount of metal in the ground
As more information is obtained, update the Target size model with the best probability of success in the corresponding Valuation table below.
PREFEASIBILITY - RESOURCE STAGE
Once you have a 43-101 compiant resource the confidence is very good. A m confidence, followed by indicated and then inferred. Use these resource fig Please note that this is may not be the final size of the deposit. Definition an The company will calculate a resource to provide investors and themselves right track and to justify further expenditure. There is quite a lot of work inv 101 resource statement and results are coming in on a continuous basis. Th off data at a certain point and calculate the resource once a year. Usually th allows time for the resource to be calculated and be published with their end
The resource is a solid number and therefore should be used in your model. this stage below reflects the increased confidence and corresponding valua still conducting definition drilling you may want to calculate 2 valuations for stage and one for potential additional resources using the Definition Drilling valuations.
FEASIBILITY STAGE
The resource only provides an estimation of the size and grade of the depos economic orebody. Technical and economic information is applied to the re resource can be mined profitably. If it can be shown that the orebody can b converted to a reserve.
The Feasibility Study contains all the information the company requires to m finances for development and construction of a mine. You will not get any b NPV generated from the Feasiblity Study as the value for this project. You m company owns outside of the Reserve area to determine if the company has You can then value these areas using the above methods to come up with a
Assumptions # of Fully Diluted Shares 50 million
PROJECT A
Target Size Grade Metal in the ground Metal Price $US Value of Metal in the Ground
Gold (Au) Content
25 6.90 5.55 650 3,605 Mt g/t Moz $US/oz $US
Silver (Ag) Content
0 0.00 0.0 0.00 0 g/t Moz $US/oz $US
TOTAL In Ground Metal Value
3,605 $US Million
Drilling Target Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
Conservative
0.1 3.6 50 % $USM M
Optimistic
0.5 18.0 50 % $USM M
Value per share Drilling Success Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
0.07
$/share
0.36
$/share
Conservative
1.0 36.0 50 % $USM M
Optimistic
4.0 144.2 50 % $USM M
Value per share Definition Drilling
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
0.72
$/share
2.88
$/share
Conservative
3.0 108.1 50 % $USM M
Optimistic
5.0 180.2 50 % $USM M
Value per share Resource/Pre-feasibility Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
2.16
$/share
3.60
$/share
Conservative
5.0 180.2 50 % $USM M
Optimistic
10.0 360.5 50 % $USM M
Value per share FEASIBILITY STAGE
3.60
$/share
7.21
$/share
Use the Feasibility study and base your stock price evaluation on the N
Project B
Gold (Au) Content
Silver (Ag) Content
Target Size Grade Metal in the ground Metal Price $US Value of Metal in the Ground
50 6.60 10.61 650 6,896
Mt g/t Moz $US/oz $US
0 0.00 0.0 0.00 0 g/t Moz $US/oz $US
TOTAL In Ground Metal Value
6,896 $US Million
Drilling Target Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
Conservative
0.5 34.5 50 % $USM M
Optimistic
1.0 69.0 50 % $USM M
Value per share Drilling Success Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
0.69
$/share
1.38
$/share
Conservative
1.0 69.0 50 % $USM M
Optimistic
3.0 206.9 50 % $USM M
Value per share Definition Drilling
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
1.38
$/share
4.14
$/share
Conservative
3.0 206.9 50 % $USM M
Optimistic
5.0 344.8 50 % $USM M
Value per share Pre-feasibility Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
4.14
$/share
6.90
$/share
Conservative
5.0 344.8 50 % $USM M
Optimistic
10.0 689.6 50 % $USM M
Value per share FEASIBILITY STAGE
6.90
$/share
13.79
$/share
Use the Feasibility study and base your stock price evaluation on the N
Use the Feasibility study and base your stock price evaluation on the N
Project C
Target Size Grade Metal in the ground Metal Price $US Value of Metal in the Ground
Gold (Au) Content
25 6.90 5.55 650 3,605 Mt g/t Moz $US/oz $US
Silver (Ag) Content
0 0.00 0.0 0.00 0 g/t Moz $US/oz $US
TOTAL In Ground Metal Value
3,605 $US Million
Drilling Target Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
Conservative
0.5 34.5 50 % $USM M
Optimistic
1.0 69.0 50 % $USM M
Value per share Drilling Success Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
0.69
$/share
1.38
$/share
Conservative
1.0 69.0 50 % $USM M
Optimistic
3.0 206.9 50 % $USM M
Value per share Definition Drilling
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
1.38
$/share
4.14
$/share
Conservative
3.0 206.9 50 % $USM M
Optimistic
5.0 344.8 50 % $USM M
Value per share
4.14
$/share
6.90
$/share
Pre-feasibility Stage
Confidence Level Project Value ($USMillion) Fully Diluted Shares (M)
Conservative
5.0 344.8 50 % $USM M
Optimistic
10.0 689.6 50 % $USM M
Value per share FEASIBILITY STAGE
6.90
$/share
13.79
$/share
ation through drilling a discovery hole and drilling out a geochemical anomalies which have been followed up with been put together and drill tagets established. Inital drill nformation the company may have provided an estimate of shed anything, this is a good time to call and talk to Quite often management are restricted about what they can n eager investor over the phone and give you their thoughts.
or geophysical anomalies which have been followed up g. There may even be some historical drill results available. shed. From all this information the company may have ng. If they have not published anything, this is a good time of the target deposit. Quite often management are restricted quite happy to talk to an eager investor over the phone and
es and grade or just go straight to an overall target size in e spreadsheet below to get an estimate of the target share up to show the potential share price if success is achieved
and there is a little more confidence in the stock because und. But success is not guarenteed. There are still many tudies. Will there be enough metal in the ground to justify a conomic? What are the metallurgical properties of the ore permiting issues? What will the capital costs and operating
te a project value based on a percentage of the estimated in sitive drill results the probability of success increases and orresponding table below. It is also a chance to update our g information to either validate our initial assumptions or to
e. An enormous amount of drilling is required to "define" ll drill step out holes to define the size of the deposit. At nfill drilling to establish continuity of grade between the step nt resource. The company may decide to begin infill drilling e deposit will change depending whether these stages of tal in the ground
model with the best information available and increase the able below.
nce is very good. A measured resource is the highest se these resource figures to update the Target size model. deposit. Definition and infill drilling may still be ongoing. ors and themselves with confidence that they are on the uite a lot of work involved in calculating a fully compliant 43continuous basis. Therefore companies will generally cut ce a year. Usually this cut off point will be at a time that blished with their end of year report.
used in your model. The valuation model corresponding to corresponding valuation. Please note that if the company is ulate 2 valuations for the project, one for the resource in this he Definition Drilling Stage Valuation and then combine the
d grade of the deposit but at this stage it still may not be an n is applied to the resource information to determine if the at the orebody can be mined profitably, it can then tbe
mpany requires to make the project "Bankable" and raise You will not get any better numbers than these, so use the r this project. You may then want to look at anything the e if the company has any other prospective exploration. ds to come up with a total value for the stock.
Copper (cu) Content
0 0.00 0.0 0.00 0 % Mlb $US/lb $US
Zinc (Zn) Content
0 0.00 0 0.00 0 % Mlb $US/lb $US
Lead (Pb) Content
0 0.00 0 0.00 0 % Mlb $US/lb $US
Comments
Comments
Comments
Comments
stock price evaluation on the NPV of the project
Copper (cu) Content
Zinc (Zn) Content
Lead (Pb) Content
0 0.00 0.0 0.00 0 % Mlb $US/lb $US
0 0.00 0 0.00 0 % Mlb $US/lb $US
0 0.00 0 0.00 0 % Mlb $US/lb $US
Comments
Comments
Comments
Comments
stock price evaluation on the NPV of the project
stock price evaluation on the NPV of the project
Copper (cu) Content
0 0.00 0.0 0.00 0 % Mlb $US/lb $US
Zinc (Zn) Content
0 0.00 0 0.00 0 % Mlb $US/lb $US
Lead (Pb) Content
0 0.00 0 0.00 0 % Mlb $US/lb $US
Comments
Comments
Comments
Comments
SUMMARY
SHORT TERM Current Price Target Price Return (%) LONG TERM
0.78 1.80 102% Million 32 40 31.2
0.78 5.00 422%
Share Structure
# of Shares Fully diluted Shares Market Cap (US$ million)
DUE DILIGENCE
RISKS
Country High
High Medium Low
Medium Low
Technical
High
Medium
Low
Cash on Hand Financial Cash Burn Rate Cash Life span Management High
$M $M yrs Medium
$3.50 $2.20 1.6 Low
ASSETS - What do they have?
Project description
Project 1
Reserves
Resources
Drill Results
Management (Experience,Track Record)
Additional Upside
ENTRY STRATEGY
EXIT STRATEGY
NOTES
What Worked Well?
What Didn't Work so Well?
Lesssons Learned 1 2 3
HINTS
Check link below - Low 1 - 40, Medium 40 - 80 80 - 120 & Very High Risk >120 High
http://en.wikipedia.org/wiki/Corruption_Perception_Index Is the project straight forward or does it involve risks such as mining under a glacier or on the side of a volcano or are their metallurgical recovery challenges etc etc
The company should have enough cash on hand to fund it's programs for at least the next year. If it doesn't then it will probably have to dlute its stock to raise more funds.
Type the name of each Executive and "fraud" into a Google search to determine if management have been involved in fraud previously
Project 2
ATEGY
TEGY
S