📁 Valuation

Perfect valuation is the unattainable ideal. Financial metrics for valuation are designed to model future revenue from past performance. For companies without any revenue and limited data there are few applicable metrics.

Companies and investors share a language to discuss performance and expectations. The cost of extraction, and the reflection of future value of the project in the share price are the most widely used metrics. Variables between projects are accounted for with a discount rate applied to a group of projects so they can be compared against their peers and the broader market.

EV/Resource: This metric weights the Enterprise Value against the estimated value of the Deposit in prevailing commodity prices. If used in a group of similar projects exceptional value could be identified.

P/NAV: This metric takes the Share Price against the Net Asset Value to determine if what the company currently trades for is reflective of the potential for the future revenue from a mine as currently planned.

Both of the metrics are weighted toward future performance and ignore the inherent uncertainties in exploration and development of a mine.

Discount rate: This percentage is applied to a valuation where the possible variables can be weighted to determine a more realistic probability of production.

Context is often underrated in both fundamental and technical analysis. The history of a property, the team, and any number of other factors play an outsize role in challenging forecasts. Discount rates include qualitative considerations as much as possible. Despite advances in financial analysis the subjective weighting necessary to discount rates still depends on a level of intuition acquired through experience.

Metrics biased toward the past and the present are less reliable individually but can still serve a supplementary function. What helps to understand a project's value is relative to perception. What the owner believes a project is worth is likely to overweight their contribution, and what a purchaser feels is a fair value will likely underweight a projects potential. Each value is useful to consider a floor and a ceiling for different projects and more importantly to understand why these perceptions are held.

Appraised value: This metric takes all the expenses related to exploration and adds them to the value of the deposit.

Comparable transaction: This metric searches for other similar projects and their final purchase price to determine what the market would pay.

Total acquisition value: This metric estimates what it would cost to acquire the company at a fair market value.

Valuations are only as reliable as the people involved, including both the companies who provide the data and who makes the decision on how to weight variables. Each metric depends on assumptions that can contradict the final value. From measuring company performance over time effective practices for valuation could be refined into a system appropriate to the class of stocks being analyzed.