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Conference Proceedings

Mineral Valuation Methodologies Conference - VALMIN 94

Conference Proceedings

Mineral Valuation Methodologies Conference - VALMIN 94

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Broker's Rules of Thumb for Mineral Valuation: A Focus on Gold Equities

Valuation of mining companies and their underlying
assets prepared by brokers' analysts are, by necessity,
approximations. The reliability of the valuations is
entirely proportional to the quality of available data,
the reliability of forecasts and the nature of underlying
commodity price assumptions. The latter is perhaps
the greatest single cause of gross variations in company
and asset earnings estimates and- valuations.
Assumptions are often necessary regarding commodity
price achievement based on commodity hedge positions.
Public disclosure from listed companies provides a sound
base from which to project earnings, cashflows and
balance sheets. The uncommon disclosure of projected
production and cost schedules often reduces the
reliability of future estimates. The application of reserve
and resource estimates is contentious with practitioners
applying differing weightings to importance of resources
in estimating mine lives (and therefore cashflow
streams). Valuation methods applied in equity markets usually
focus on relative value and the identification of pricing
anomalies. The commonest ""rules of thumb"" applied
in the valuation of mining companies (and therefore
their underlying assets) is with the use of year specific
price/earnings (P/E) and price/cashflow (P/CF) ratios,
with low multiples suggesting undervalued assets, high
multiples overvalued situations (but these rules can often
be clouded by market expectations of underlying
commodity price movements). Another simply applied
valuation tool is to examine the examine the value placed
on reserves and resources by the market. Inexpensive gold in the ground (expressed as $ of market
capitalisation per ounce of reserves or resources) might
indicate a buying opportunity, but the market does
discount the value of gold in the ground prior to mine
development and where development risk is perceived.
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  • Published: 1993
  • PDF Size: 1.137 Mb.
  • Unique ID: P199410010

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