M&M NAV Model and multiples

This is a big info dump but let me know if you have any questions. I previously worked at a financial advisory firm where a decent amount of my work focused on the mining industry

NAV Model

A NAV model is just taking the NPV of each of the mining assets a company has and then making other adjustments to arrive at the equity value of the mining company. These other adjustments typically are things like cash, debt and corporate G&A (i.e. the costs of running the head office of the mining company). The valuation technique for each asset will differ depending on the stage of development of each asset which I discuss below about the different approaches. For earlier stage companies, these other adjustments will usually be pretty minimal and the biggest numbers in the NAV analysis will be the NPV of the mining assets.

A good example of a NAV analysis is TD’s fairness opinion for the Rio Tinto / Turquoise Hill deal which you can see at the bottom of page 44 through page 47 in the link below (also outlines other mining valuation techniques that they did too)

https://www.sec.gov/Archives/edgar/data/1158041/000119312522254419/d306…

Valuation Approaches

• Mining companies with no revenue are typically such because their mining asset(s) are not producing any minerals and thus are not generating revenue. These companies are typically classified as development or exploration stage
• The stages of development for mining companies can be broadly categorized as follows from most mature to earliest stage: Producers (i.e. have at least one mining asset in production, meaning they are extracting minerals out of the ground and thus generating revenue) > Developers (i.e. no assets in production but in the process of building their project or have advanced the technical engineering work to a decently far enough stage) > Exploration companies (i.e. need to do a lot of technical engineering work to validate what they have in the ground)
  • Developers and exploration companies will typically only have one major asset they are focusing on as it is quite expensive to go from exploration stage to development stage to production and if you are focusing on multiple assets, it will be slower/very expensive
  • There are even a broad spectrum of producers where there are senior producers like Barrick who have many producing mines, but there are also junior producers who have 1-2 producing mines
• Earlier stage companies will typically be valued based on the amount of minerals they have in the ground (i.e. commonly called the market approach where you use EV per lbs for base metals or EV per oz for precious metals)
  • You would typically look at public comps or precedent transactions of companies with similar assets to see how the market is valuing these kinds of assets. This is more of an art than a science as it is almost impossible to find an exact copy of the asset you are valuing which is not dissimilar to doing comps/transactions for other industries (i.e. same resource size, similar metal grade, stage of development, location, regulatory issues, etc.)
  • To determine the amount of minerals a company has, you will typically use the work of engineering consulting firms who have made technical studies that estimate the amount of minerals a project has
• A company further in the development cycle will typically have done a technical study called a prefeasibility or feasibility study which are done by engineering consulting firms that are done to prove the economics of a mining project
  • This study will contain a detailed mine plan that outlines how the company plans to extract the minerals, what the costs are, timing, etc.
  • You will typically use this mine plan as a starting point to estimate the future cash flows of the mining project to put into your DCF where at the beginning of the projection period, the asset will have negative free cash flow as the project is being constructed and requires a significant amount of upfront capex to build the project
  • I am over simplifying here, but the cash flows of a mining project will typically be minerals extracted multiplied by the metal price to get to revenue and then deduct any operating costs/taxes/capex to arrive at FCF. You will then discount FCF and sum the present value of the discounted FCF to get the NPV of the project
  • The industry will commonly use 5% for precious metal projects and then 8% for base metal projects. But this will also depend on the stage of development of the company, for example at an earlier stage company (i.e. riskier company) you might see a higher discount rate than those listed above. I do not want to overcomplicate this, but sometimes people might also apply a called P/NAV multiple to the NPV of a project depending on the risks associated with the mining asset, I can explain this further if you’re interested
  • Development stage projects can also be valued using the market approach (like earlier stage companies), however most bankers will likely want to do a DCF if there is a mine plan available and usually will look at multiples as a sense check, but it does depend on how detail you want to do
• Producers will typically be valued in a similar fashion as developers (i.e. DCF for producing mines or development stage projects) where you will plug this into the NAV analysis as discussed earlier. You might also see cash flow or EBITDA multiples, again I imagine most bankers would want to do a DCF but it really will depend on how much detail you want to do