Mine Stock Valuation from Aussieontop

Document Sample
Mine Stock Valuation from Aussieontop Powered By Docstoc
					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
    So I spent some poor trader (investor)
    analyst, but verytime analyzing my speculations and learnt from my
    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.
   Excerpt from - "How to Analyze Diamond Stocks" by John
   Kaiser
   …….. 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"
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
Unlike that becomes where gamblers are stuck with the bets they
winnerthe horse race a buyout target for major mining companies.
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




                                    Gold (Au)            Silver (Ag)
          PROJECT A                 Content               Content
Target Size                         25            Mt      0
Grade                              6.90           g/t    0.00      g/t
Metal in the ground                5.55          Moz     0.0       Moz
Metal Price                        650         $US/oz    0.00    $US/oz
$US Value of Metal in the Ground   3,605         $US      0        $US

  TOTAL In Ground Metal Value        3,605 $US Million
        Drilling Target Stage        Conservative                 Optimistic
Confidence Level                       0.1           %            0.5           %

Project Value ($USMillion)             3.6         $USM          18.0         $USM
Fully Diluted Shares (M)               50            M            50            M
           Value per share            0.07       $/share         0.36       $/share

      Drilling Success Stage         Conservative                 Optimistic
Confidence Level                       1.0           %            4.0           %

Project Value ($USMillion)            36.0         $USM          144.2        $USM
Fully Diluted Shares (M)               50            M            50            M
           Value per share            0.72       $/share         2.88       $/share

          Definition Drilling        Conservative                 Optimistic
Confidence Level                       3.0           %            5.0           %

Project Value ($USMillion)            108.1        $USM          180.2        $USM
Fully Diluted Shares (M)               50            M            50            M
           Value per share            2.16       $/share         3.60       $/share

 Resource/Pre-feasibility Stage      Conservative                 Optimistic
Confidence Level                       5.0           %           10.0           %

Project Value ($USMillion)            180.2        $USM          360.5        $USM
Fully Diluted Shares (M)               50            M            50            M
           Value per share            3.60       $/share         7.21       $/share

        FEASIBILITY STAGE


                                  Use the Feasibility study and base your stock price evaluation on the N




                                        Gold (Au)                 Silver (Ag)
             Project B                  Content                    Content
Target Size                             50            Mt            0
Grade                                  6.60           g/t         0.00           g/t
Metal in the ground                    10.61         Moz           0.0          Moz
Metal Price                             650        $US/oz         0.00        $US/oz
$US Value of Metal in the Ground       6,896         $US            0           $US

  TOTAL In Ground Metal Value            6,896 $US Million


         Drilling Target Stage        Conservative                 Optimistic
Confidence Level                        0.5           %            1.0           %

Project Value ($USMillion)             34.5         $USM          69.0         $USM
Fully Diluted Shares (M)                50            M            50            M
           Value per share             0.69       $/share         1.38       $/share

        Drilling Success Stage        Conservative                 Optimistic
Confidence Level                        1.0           %            3.0           %

Project Value ($USMillion)             69.0         $USM          206.9        $USM
Fully Diluted Shares (M)                50            M            50            M
           Value per share             1.38       $/share         4.14       $/share

          Definition Drilling         Conservative                 Optimistic
Confidence Level                        3.0           %            5.0           %

Project Value ($USMillion)             206.9        $USM          344.8        $USM
Fully Diluted Shares (M)                50            M            50            M
           Value per share             4.14       $/share         6.90       $/share

         Pre-feasibility Stage        Conservative                 Optimistic
Confidence Level                        5.0           %           10.0           %

Project Value ($USMillion)             344.8        $USM          689.6        $USM
Fully Diluted Shares (M)                50            M            50            M
           Value per share             6.90       $/share        13.79       $/share

         FEASIBILITY STAGE


                                   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




                                         Gold (Au)                 Silver (Ag)
              Project C                  Content                    Content
Target Size                             25            Mt            0
Grade                                  6.90           g/t         0.00           g/t
Metal in the ground                    5.55          Moz           0.0          Moz
Metal Price                             650        $US/oz         0.00        $US/oz
$US Value of Metal in the Ground       3,605         $US            0           $US

  TOTAL In Ground Metal Value            3,605 $US Million


         Drilling Target Stage        Conservative                 Optimistic
Confidence Level                        0.5           %            1.0           %

Project Value ($USMillion)             34.5         $USM          69.0         $USM
Fully Diluted Shares (M)                50            M            50            M
           Value per share             0.69       $/share         1.38       $/share

        Drilling Success Stage        Conservative                 Optimistic
Confidence Level                        1.0           %            3.0           %

Project Value ($USMillion)             69.0         $USM          206.9        $USM
Fully Diluted Shares (M)                50            M            50            M
           Value per share             1.38       $/share         4.14       $/share

          Definition Drilling         Conservative                 Optimistic
Confidence Level                        3.0           %            5.0           %

Project Value ($USMillion)             206.9        $USM          344.8        $USM
Fully Diluted Shares (M)                50            M            50            M
           Value per share             4.14       $/share         6.90       $/share
        Pre-feasibility Stage   Conservative       Optimistic
Confidence Level                 5.0      %       10.0          %

Project Value ($USMillion)      344.8    $USM     689.6    $USM
Fully Diluted Shares (M)         50       M        50           M
           Value per share      6.90    $/share   13.79   $/share

        FEASIBILITY STAGE
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 43-
continuous 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)          Zinc (Zn)         Lead (Pb)
              Content            Content            Content
              0                  0                  0
             0.00      %       0.00          %     0.00        %
             0.0      Mlb        0           Mlb    0      Mlb
             0.00    $US/lb    0.00      $US/lb    0.00   $US/lb
              0       $US        0           $US    0      $US
                                             Comments




                                             Comments




                                             Comments




                                             Comments




stock price evaluation on the NPV of the project




                  Copper (cu)                  Zinc (Zn)   Lead (Pb)
                    Content                    Content      Content
                    0                          0              0
                  0.00           %           0.00       %    0.00     %
                   0.0          Mlb            0     Mlb      0      Mlb
                  0.00         $US/lb        0.00   $US/lb   0.00   $US/lb
                    0           $US            0     $US      0      $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)                  Zinc (Zn)         Lead (Pb)
                    Content                    Content            Content
                    0                          0                  0
                  0.00           %           0.00          %     0.00        %
                   0.0          Mlb            0           Mlb    0      Mlb
                  0.00         $US/lb        0.00      $US/lb    0.00   $US/lb
                    0           $US            0           $US    0      $US




                                             Comments




                                             Comments




                                             Comments
Comments
                               SUMMARY
                                SHORT TERM                      LONG TERM
Current Price                       0.78                           0.78
Target Price                        1.80                           5.00
Return (%)                         102%                            422%

         Share Structure           Million
# of Shares                          32
Fully diluted Shares                 40
Market Cap (US$ million)            31.2



DUE DILIGENCE
                 RISKS                           High Medium Low


                Country             High            Medium         Low



                                    High            Medium         Low
                Technical



                                Cash on Hand         $M            $3.50
                Financial
                                Cash Burn Rate       $M            $2.20

                                Cash Life span       yrs            1.6

                                    High            Medium         Low
               Management




ASSETS - What do they have?                         Project 1

         Project description
          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                High
               80 - 120 & Very High Risk >120
   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

				
DOCUMENT INFO
Shared By:
Stats:
views:677
posted:3/27/2008
language:English
pages:35