Julian Baring, the well known City ‘gold bug’, used to value mining stocks
by taking, as a rough guide, 10% of the value as calculated in the previous
paragraph as being the correct value for the company in question.
Gold mining rule of thumb
Curiously enough, this rough and ready guide seems to hold good today.
Figures calculated by the Mining Business Digest in 2000, based on data for
corporate acquisitions in the gold sector, reckoned that those at the earliest
stages of exploration, with some inferred resources, would be valued at most at
around 3.5% of the underlying metal value in the ground. An average for those
with more tangible metal assets to develop would fetch around 11% of underlying
value while those in the early stages of production could see a value of
anything from 15% to 25% of the value of the underlying ounces of metal in the
ground. It is not a hard and fast rule, however, and those mining base metals
are valued at correspondingly lower rates.
There is some more data confirming this gold mining rule of thumb.
According to figures compiled by Galahad Gold and sourced from broker reports
and the publication Gold Stock Analyst, the average value placed on ‘ounces in
the ground’ in 2005 was $120 for second tier companies about to start
production, $50 an ounce for those with resources that had been measured and/or
indicated, and $32 an ounce for those with simply inferred resources. This
compares with an average gold price for 2005 of $444, making the respective
percentages 27%, 11.2%, and 7.2% – not too far from those quoted earlier.
10% of $227.36 is $22.74 per share value per Baring’s rough guide.
MMG’s zinc is a base metal, so some would say the value should be lower than for gold miners, but with its zinc project at a very late stage compared to most preproduction miners, and profit margins likely much higher than most gold miners (let’s say conservatively .35/lb. production costs, what Skorpion sold zinc for in 2003, for $1.9482/lb. refined zinc -- equivalent to $112.68 production costs for $627.20/oz gold, which would be very high margins for a gold miner), MMG should arguably get a higher value than gold miners.
To give you an idea of the upside once MMG gets to production, here are the numbers for HudBay:
3.11 billion lbs. x $1.9482/lb. = $6,058,902,000 of proven zinc resources
$6,058,902,000 / 124,796,513 basic shares outstanding = $48.55 worth of zinc per share
HBM closed at 19.28 CAD today, or about $17.16 USD per share
$17.16 / $48.55 = 35.35% of the value of their proven zinc
Baring used to say about valuing mining shares, “"Buy up to 10% of the in situ value of a deposit using current metal prices, hold up to 40% and sell above 40% taking no prisoners!!!!". Since HudBay is in production, and has other metal byproducts to help give them very high profit margins, we believe it is still undervalued, even as it approaches the 40% level for its proven zinc, as we expect zinc to move higher and HudBay’s profitability to go even higher.
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