How much is a gold miner’s gold worth?
Here’s how to get a good reading on the value of a gold firm’s reserves, says a U.S. advisory as it assesses a group of Canadian junior stocks.
We can see in an instant how much an ounce of gold is worth.
But does that mean gold in the ground is worth the same?
No. It just doesn’t work that way, as investors who own gold stocks often learn to their frustration.
With all the variables that come into play — from the quality of the deposit to the costs of getting it out of the earth — gold producers can’t just mirror the price of gold.
That’s true even of the big producers, but it’s most emphatically so with the juniors that can result in a big payoff — or a big disappointment.
So how can you tell what any gold miner’s gold may be worth? And what its stock will eventually be worth as a result?
It takes a bit of legwork, and one U.S. advisory has done that for us. Doug Casey’s International Speculator has its offices in Arizona, but keeps its attention riveted on the TSX and the Venture exchanges, where junior mining stocks post their scores.
The advisory builds assessments on how the market values different firms based on the value of their resources.
We’ll see how those assessments work and how they affect five of the advisory’s favourite gold stocks.
Comparing ounces
The surest way to assess a gold producer’s worth, this advisory believes, is to compare the value the market gives to different reserves. That is, what value the market gives a company per ounce of gold compared to what it gives companies with ounces of the same quality.
You start with the standard in the gold industry — Canada’s National Instrument N1 43-101, which defines the value of reserves. The words “N1 43-101 compliant” pop up constantly in mining reports.
The advisory combines these into three broad groups, as the market tends to do.
Inferred is “the lowest-confidence category, based on just enough drilling to outline the mineralization.”
Measured & Indicated (M&I) means the higher-confidence categories that “have been drilled enough to establish their geometry and continuity reasonably well.”
Proven & Probable (P&P) are “the bankable mining reserves — basically Measured and Indicated Resources with established value.”
A great speculation
Armed with these three benchmarks, the advisory combed the two Toronto exchanges, pulling out N143-101 compliant gold resources that fell clearly into one of the categories. They came up with 90 companies and, with a few judgment calls here and there, the following average values:
Inferred — US$20 per ounce.
M&I — US$35 per ounce.
P&P — US$140 per ounce.
Armed with this information, the advisory adds, even if you knew nothing else about an M&I resource “but you saw that the company that owned it was trading at $10 an ounce, whereas its peers are valued at $35 an ounce, you can conclude that there must either be something 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.”
Double-digit potential
Comparing these values with those of a few years ago, the advisory notes that the market is willing to pay more for advanced and producing stories, but it is discounting earlier-stage stories, giving lower valuations for Inferred and M&I reserves than in previous years.
“These figures will change as the market’s appetite for risk changes.”
In the meantime, the advisory applies these valuations to its portfolio of gold stocks. Using a stock’s market cap and the value of its gold underground based on the average values above, it arrives at an implied growth potential for each one.
Here are the reviews on five stocks with double-digit growth potential.
Andina Minerals (TSX/V-ADM) recently upgraded a significant portion of its reserves. Its implied growth potential is a robust 129 per cent. “The implied growth suggests a double is possible on ADM in the short term,” says the advisory, “unless there’s something wrong with the deposit. We don’t think there is, so we see ADM as a good bet.”
The shares have been moving up, and stand at $1.83.
Brett Resources (TSX/V-BBR) is a little trickier, with a growth potential of 19.7 per cent based on 5 million ounces of Implied reserves at its Hammond Reef project. But the advisory thinks many of those reserves will be upgraded to M&I, which would make the stock undervalued.
It has moved up briskly of late, and trades at $1.35.
Exeter Resources (TSX-XRC) looks like it could easily double in price based on its growth potential of 110 per cent. But many of the Inferred reserves at its flagship project in Chile are low-grade. Still, the company is drilling deeper into the higher-grade core of this massive project. “We see a lot of value being added over the next year.”
Also moving up lately, this stock is trading at $5.85.
Inter-Citic Minerals (TSX-ICI) has half Implied and half M&I reserves at its Dachang gold project in China. It looks reasonably valued with an implied growth of 20 per cent. But the advisory thinks drilling will turn up more gold in the next estimate. Dachang is not an easy project, however, so it understands the market’s reluctance to value it more highly.
This stock has been hovering around $0.80.
International Tower Hill (TSX-ITH) is adding ounces according to a recent N1 43-101 compliant resource upgrade at its flagship Livengood project in Alaska. The market recognized its growth and it enjoyed a terrific increase in share price. “Even so,” says the advisory, “given all the production advantages Livengood has, the company remains undervalued.”
After moving up steeply, the stock sits at $6.40.
“Well what are we waiting for? There’s gold in them thar hills!” said Bugs Bunny to Yosemite Sam. He said nothing, however, about proven and probable reserves.
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