P/B and EV/EBITDA for Mining

Hi Guys,

I'm doing a valuation project for a gold mining company. I need your inputs in using these two multiples.
What are your thoughts on using P/B and EV/EBITDA multiples for valuing a gold mining company in commercial operation?

Can I say using price to book is justified since major expenses of mining companies can be capitalized? Then, this expenditures represent what the company is willing to spend or has spent to unlock the potential of the mining company.

I can't think of justification for using EV/EBITDA other than the normal one that it captures the difference in financial leverage. Especially, mining companies are high investment (capex), financing mix is indeed important.

Any thoughts on this? Thank you very much guys.

 
Best Response

I don't cover metals/mining so take this with a grain of salt, but why not combine different valuation methods to value the stock? I personally would use something involving financials (EV/EBITDA sounds like a good one due to debt mix and non-cash expenses) and then some operating metrics like verified gold reserves + COGS/weight.

I've covered potash miners and calculate margins using cost/ton, but I think for gold it may be cost/oz since that's how it's priced. Could use P/B as well and apply a premium based on how much verified reserves are under the land that is currently stored at book value.

Again, just my hunch. A metals/mining expert would probably have better advice.

 

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