Metals & Mining Interview Question?

Can someone help answer these questions for M&M group?

Why is CAPM bad to use for gold?
Why P/NAV is better than most ratios?
EV/Resources vs. EV/Reserves? Explain.
What would you look at for valuing a mine? (Price of commodity, political risk, geo risk, etc)

 
Best Response
  • CAPM is bad as gold has a negative / very low beta (historically anyways, less evident recently)

  • This is specific to mining, NOT metals .NAV is a DCF which has an end date. i.e. a normal DCF has terminal value, and as mines (and oil and gas assets) have finite lives this isn't appropriate. Often mining models will go out 20-30 years. You can use a standard DCF for the metals businesses (think steel, refineries) more often than not

  • Reserves are defined as resources having economic certainty (i.e. greater than 90%) and are categorized as proven and probable. Resources are defined as less certain but not likely than not (i think the definition is 50-90%) and are categorized, in order of most likely to least likely, as measured, indicated and inferred. Often times inferred resources are excluded in multiples. As such, apples to apples you would place a higher value on reserves than resources. FYI You would use EV instead of P as these are available to pay equity and debt holders. Again this doesn't apply to metals businesses

  • The usual things. Top-down approach usually is taken, starting with production (which depends on processing throughput, grade and recoveries). If the mine isn't built, you would look at total development capex. The price of commodity is a primary driver as it is pure margin - your costs won't really change with changes in throughput. Operating costs are huge as well (C1 cash costs and all-in sustaining cost are the prevailing metrics). Taxes and political risk is a huge consideration if you consideration the locations of a lot of the assets

 
goldmanstanley99:

do you have any further advice on any specific multiples or key things to know to prep for an interview.

FYI: BIWS has a pretty good natural resources interview guide. But some basic things that might come up in an interview with a mining group:

  • Know the main company groupings (diversifieds, gold, copper, coal etc) and some of the major players in each

  • Know the basics of the mining lifecycle: exploration, development, production and some basics about reserves and resources (e.g. the order of most economic/certain: proven, probable, measured, indicated, inferred etc)

  • Know the basic multiples (EV/Reserves, EV/Resources, P/NAV, P/CF) and which makes the most sense for assets/companies at different stages (e.g. it wouldnt make sense to use P/CF on an exploration company since there is no cash flow)

  • What factors might drive discount rate in a NAV/DCF mine model (geopolitical risk, stage of asset, etc)?

  • What are the pros/cons of using a DCF/NAV for a mining company? what are the pros/cons of using trading comps for a mining company?

  • Where do you see commodity prices going? (gold, copper etc)

 

EV/Resources makes sense if you're trying to understand growth potential. Typically a mining company will do a definitive feasibility study and develop a mine plan based on the reserves that are proven/probable using the exploration and geological work that has been done. But this is just to raise the initial debt capital to get the mine going, it says nothing about future discoveries or ability to expand the mine in future phases. Banks don't consider the resources because they're only interested in getting their money back - upside is capped. As an equity holder however with a mid to long term investment horizon you have full exposure to upside so also have to consider the option value of scale expansion from further discoveries or converting resources into reserves. Debt holders don't care about size of the resource. Bear in mind geology is a science but can also be very imprecise, different geologists can have opposing views of whether a resource can actually be economically mined or not, in particular the inputs that go into computing the C1 cost. So be careful when you use reserves in your valuation or even when you read a JORC or NI43-101 as this is in large part opinion and can be subjectively biased. Independence of the geologist / mine engineer is critical.

Political risk, reliability of and access to infrastructure (logistics, energy, water), sourcing and training of local skills, are all huge considerations in developing markets such as Africa. In the more tricky jurisdictions, most banks will take out political risk insurance to deal with issues like government expropriation, war or political violence, where as an equity holder these risks are not able to be mitigated. These sorts of risks should also be factored into your valuation, I'm not an equities guy but I suppose it would be reflected in your WACC. For example, sovereign ratings are often rating ceilings for banks so the minimum cost of debt for a single-asset mining company could never exceed the yield on the bonds of the country in which they operate.

 

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