Valuation of Metals and Mining Companies

Hey everyone,

I just thought that I'd share a great resource for information on the basics of valuing metal and mining companies. The pdf doesn't cover everything by all means but it is a quick beginning step for one to build out their model. It also has links to about 10-15 other PDFs that cover the topic. I wish the best to all of you!

Valuation of Metals and Mining Companies

Regards,

TexasTim

 

This is sick, thanks for sharing.

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That's cool. I have a question, though. If someone wanted to g into Metals/Mining, or O&G for IB, would they have to have knowledge about commodities?

backwardation/contango for futures contracts, etc? Or, just understand the dirvers of the company and industry, etc?

Many thanks.

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RGE, you're right that it might be old. It is a shame that the primer list was taken down. Mhurricane, I'll put you in my perspective and that is to learn everything that you can that is applicable in an efficient manner. This whole guide is a concise source of information for you to learn quickly and use as a tool for whatever project comes your way.

I'm new to the game and probably not qualified to give you an answer, but I think it is essential for you to create a scenario analysis in your model for future prices. You can base the scenario off of current trends, historical data, and research reports. Globaldata and most other research reports will include different prices of the commodities into their projections.

There is life and death. I'm going to bust my ass to make an impact 'til the latter comes.
 

Mhurricane, for Metals & Mining IB, it is very much about understanding industry drivers and project evaluation (i.e. how mines work).

It's useful to stay on top of the commodities market, but more important to know the trends at the corporate level in the industry (e.g. how are miners allocating capital, what commodities are they targeting and why, what geographies are they entering / exiting)

There is little need to know about things like futures contracts etc. Long term commodity prices form a fundamental part of mining companies' investment decision, and your clients will have their own, very strong views on how commodity prices are going to move.

 

Interesting primer and it's pretty valuable for someone trying to learn a little bit about the metals and mining space.

There are a couple of items however that aren't really done in practice. Real option value isn't something generally used, nor is WACC, at least in the precious metals space. P/E also isn't something that anyone really looks at either. The US banks like to use some of that stuff and most of the corporates just laugh at them for it. Generally for valuation you're going to use NAV, P/CF for the senior guys and TEV/EBITDA for some of the bulks. The rest of the stuff is fairly irrelevant in IB.

 

I assume by metals and mining, you're talking about building a life-of-mine model? Typically financial models in the M&M space aren't too much different than standard DCFs with different drivers.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 
Best Response

Can't send you anything unfortunately, but I can give you the basic schematics:

-Run a tab with reserves by commodity and grades, then project out production numbers until you have fully depleted the company's reserves -Drop in a price deck for each commodity; thereafter, assume only inflation affects pricing -Typically you model in freight costs to get to your realized net revenue per ton -Drive cash costs off of production tonnage (i.e. create a cash cost per ton forecast) -Examine the company's historical DD&A per ton average to get an idea of how capital intensive the industry is. Typically you'd drive Capex by production tonnage and build out a DD&A schedule that depreciates that spending over 7-10 years -Make sure you account for any royalties and severance taxes on the top line -Do some diligence on tax rates, typically commodities companies have rates far below the standard federal rates

Finally, use this forecast to drive your DCF / LBO / other valuation techniques.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
 

Completely agree with NorthSider's post - great overview of a typical mine DCF model

I'd also add a few things, depending on how detailed you want to get: - Best practice is deplete the ore body as opposed to the actual mineral, since it's more accurate to project out the head grade per year as opposed to assuming a flat grade across all years (i.e. the grade they disclose for their reserves) - Not sure how detailed you want to get, but typically you'll produce most if not all of the Proven and Probable reserves, and then a % of the resources (M&I and inferred). For example, you might only model out 25-50% of M&I and 5-10% of inferred resource. Obviously there is less certainty that the resources can be actually converted to reserves and economically mined - When it comes to discount rates (in real terms), the industry standards are ~8-10% for base metals mines and 5-8% for precious metals. Obviously this will vary based on geographic/political risk (i.e. South Africa is riskier than Canada) as well as what stage the mine is (a mine with no feasibility study would warrant a higher discount rate than a producing, cash flow generative mine). - A lot of mines will produce small quantities of secondary metals/by-products, which can add value and help drive down costs (these are known as by-product credits). For example, if a copper mine also produces a bit of gold, the gold revenue is typically netted off the cash cost to get a "net cash cost".

Here's a pretty good, albeit comprehensive, document outlining valuation of mining companies: http://www.basinvest.ch/upload/pdf/Valuation_of_Metals_and_Mining_Compa…

Also, most mining project technical reports will have an economic section as well as a financial forecast - might give you a better idea of what line items are required in a typical DCF

 

The more the better, right? Your phrasing sounds like: "what's the bare minimum i can get away with?"

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

@Oreo Not actually. I want to know AS MUCH AS POSSIBLE but only that knowledge which is relevant. Like for e,,g I can read about the history of how the Romans made use of copper and iron but thats not really useful. So in the same way what kind of operational knowledge do I need to know about the industry's technical side.

@matayo We are talking about something with around an year or two of experience. But as I said more importantly, I want to know what areas to read up on rather than putting a limit on how much should I know. I would be more than happy to know as much as someone with 5 years experience (not realistic but still) as long as that is relevant to the industry in general.

 
ar169:

@Oreo Not actually. I want to know AS MUCH AS POSSIBLE but only that knowledge which is relevant. Like for e,,g I can read about the history of how the Romans made use of copper and iron but thats not really useful. So in the same way what kind of operational knowledge do I need to know about the industry's technical side.

If you can't assess whether having knowledge of certain / which aspects of the production purpose would be valuable to know from an analysis point of view.... maybe you shouldn't be an analyst.
"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

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