Metals and Mining Valuation
Would anyone be able to share any resources, or point me to where I could learn about the valuation for M/M companies?
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I'll take a stab at this.
Much like regular companies, mining companies are also valued off of multiples. EV/EBITDA isn't what is traditionally used though - instead, it's going to be Price to NAV or Price to Cash Flow. P/CF is more short term oriented, P/NAV is more long term value.
The way you go about calculating NAV is that you want to bridge down to FCF for each mine, and then discount these cash flows to get the PV of each mining asset. This is different than a traditional DCF. There is no "perpetual growth". Mines have a lifespan and run out of ore at some point, so your projection period isn't going to be "5 years and then terminal value", but rather it will just be the life-of-mine (i.e. 15 years). Additionally you do not use WACC for discount rate.
Bridging to revenue is also a bit complex. When you remove rock from the mine, some of it will be waste rock, only some will be usable ore - you use strip ratio to determine this. A S/R of 4 implies that for every ton of ore mined, you also have 4 tons of waste rock. Higher strip ratio is bad because you incur higher costs for processing, mining, removal, etc. Then, only a part of this ore is actual metal - a grade of 2 g of gold per ton implies every ton of ore contains 2 grams of gold. Not all of this gold will be recoverable though - you might only get a recovery of 80%, which forms yet another line item on your revenue build.
Couple more steps, and eventually you can finish up your revenue build. Bridge to FCF, then discount using standard mining discount rates (i.e. 5-7% for precious metals, 7-10% for base metals). That gives you the PV of the mine. Add up all the PVs, subtract net debt to get to your equity value. That's your Net Asset Value, aka NAV. These mines and companies are rarely ever traded at 1x NAV. With more junior miners or development stage mines, the multiple could be 0.6x NAV to account for the risk. Some mining companies transact at a premium to NAV because cash flows are frequently reinvested, meaning in a way growth IS perpetual.
Some key KPIs looked at are Total Cash Costs, All-in Sustaining Cost (AISC), etc. You can search these up to get a better understanding. It basically is like looking at COGS to get a feel for the unit economics of each mine. Miners are price takers - everyone sells a homogenous product for the same price, so it all comes down to how much your costs are. Lower AISC isn't necessarily better- if you are super bullish on the sector, lower margin producers have higher operating leverage and could be a better play.
So in summary, get comfortable with NAV. Here's a good source:
https://sellsidehandbook.com/2017/07/20/net-asset-value-mining/
Edit: As Rabbit mentioned, EV/Resource is a multiple used for more early stage companies oftentimes.
Wow. Thank you fellow intern! Do you have a background in mining coverage or engineering?
SMH if you had a question about mining you could have called me instead of posting a question on WSO, which gets answered by me of all people somehow.
Great overview
Very well said.
Will add one more metric which is really EV / "pounds in the ground". Modeling out NAV works when there is a tech report or economic study of some kind, which gives you comfort as to the inputs of a cash flow based valuation - production, grades, unit costs, capex etc.
EV / lbs in the ground is for earlier stage assets, explorecos, or anything typically pre-study. All it really is is EV per unit of contained metal - EV / oz gold or EV / lb copper based on comps and precedents. There is some math behind getting to "contained metal" which isn't rocket science but important as no asset only has pure gold or pure copper. Where there is gold, there may be silver, copper, nickel etc. so you do what is called a metal equivalent calc. Think of it as normalizing EBITDA on your comps.
seems pretty similar to O&G!
Are there any credit specific multiples to know specifically for mining?
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