Some Fundamental analysis

A way to value the worth of a company's assets

How do you value a junior resource company? You could argue two points – one is that the stock is worth whatever it’s trading. Even if a company has 1 million ounces of gold or 100 million pounds of zinc or whatever, if the stock is trading at 10 cents, it’s worth 10 cents.

One of the greatest tools the industry created for itself this cycle, was the valuation for “pounds in the ground”. Basically, investors can take the market capitalization of a company with a 43-101 compliant resource, and divide that by the number of ounces, pounds, kilos – whatever – to get a value per “pound in the ground”.

As an example, if ABC company has 50 million shares out and trades at $1, with 1 million ounces of proven gold in the ground, then it trades at $50 per ounce. You compare that number against its peer group, and if ABC Company is below the average, then all other factors being equal (and they never are) the stock is considered cheap. If it’s above the average, it’s expensive.

As a real life example, Canaccord Capital did this calculation for a list of copper companies they cover. Their research found the average value per pound in the ground of compliant copper resources was 1.18 cents, with a range of -.30 cents (meaning the company was trading below the value of the cash in the treasury and the copper was free) to 4.48 cents per pound.

A much more simple calculation came out a few years ago that has been widely adopted by investors. I first heard it from one of the best mining entrepreneurs ever, Robert Friedland, when talking about his Oyu Tolgoi deposit in Mongolia. He said the company – Ivanhoe Mines - should get 10% of the value in the ground in his stock. (I don’t know if he was the first or not but that’s where I heard it first.)

So if the gross metal value of a (43-101 compliant) resource is $1 billion, the market cap of the company should be $100 million.

This is actually easy to calculate, thanks to www.kitco.com – or at www.caseyresearch.com . They have an online calculator in which you just

1. input the grades on the resource from the press release, and it tells you what the value per tonne is.

2. Multiply it by the tonnage (you have to do that yourself) in the press release and PRESTO – gross metal value.

3. Shift the decimal point over 1 spot to get 10% of the value.

4. Divide by the amount of shares outstanding and you get what the price of the stock SHOULD be.

Lets take a real case example. Donner Metals (DON-TSXv) just announced their first resource calculation for a developing zinc project in Quebec. Here’s what the press release said:

DONNER METALS LTD.-INITIAL BRACEMAC-MCLEOD NI43-101 INDICATED RESOURCE: 3,648,000 TONNES AT 11.09% ZINC, 1.55% COPPER, 31.34 G/T SILVER AND 0.48 G/T GOLD.

Then I go here - www.kitco.com/pop_windows/kitcorockcalc.html - and insert those values into the chart, and I get a value of $201.05/tonne.

Multiply that by the 3,648,000 tonnes and you get a gross metal value, according to Kitco, of roughly $733,440,000. So Donner should have a Kitco-calculated market cap of $73,344,400. But they only own 35% of the deposit, so that, again according to Kitco, values them at $25,670,400. Divide that by the 44 million shares out, and you get 58 cents.

So by the 10% rule and the Kitco calculation, the stock should trade at 55 cents. But it’s 12 cents, and in this market I would suggest 55 cents is a little aggressive. However, the 10% rule does give investors a benchmark to decide in their own mind what value is.

The message is – you can do your own research, quite easily, to determine whether a company’s stock price is under-, fairly-, or over-valued. Use the free internet tools available to you and use your own judgment.

Gord Zelko, Publisher

Source

Fundamental & Technical analysis in the Stock Market are two different things but it will be great if they showing the same signal (buy or sell).