Category Archives for How to Value a Company

How To Get Into Mining Company Investing (Free DCF Model Download)

Now that you know how to value a gold mine from the previous post, valuing a base metal mine should be easy because the steps are essentially the same.

What makes valuing a base metal mine – that is, copper, lead, nickel or zinc – more complicated than a gold mine or a silver mine is incorporating co-products and by-products. There are combinations of metals that are found in ore together. For example, common metals found together are: copper-gold or lead-silver-zinc. Often times, there will be one metal that is the primary product and the other is a by-product. Sometimes when both metals derive similar economic value (50/50), they are termed co-products. So, the valuation model becomes more complex with base metals because there are more metals to deal with. (Note that just like the gold mine model provided in the previous post, a free base metal mine model is downloadable here too – just  scroll to the bottom. You will find that in this model, gold/silver/copper/lead/nickel/zinc are all listed. Depending on the mine you are valuing, input 0 for metals that are not found in the technical report. Note also that all the numbers found in this model are hypothetical. That is the end of this particularly long note.)

The set of steps in extracting the necessary information from the technical report for a base metal mine is very similar. I won’t repeat them in detail here, so if you haven’t already, then I encourage you to read the previous post on how to value a gold mine (i.e. mine start year, reserves & resources, operating costs, capex, etc). Once you’ve mastered that, all you need to know to value a base metal mine are:

Waste Ore & Strip Ratio

Waste ore applies to a gold mine as well, but where in a gold mine, the operating cash cost is expressed often in gold ounces produced such that you don’t need to break out waste ore and mined ore, this is not the case for a copper mine or a lead mine. Waste ore mined is a separate cost and is expressed as a cost per tonne of waste ore. Waste ore is calculated by multiplying mined ore by the strip ratio, as seen in the snapshot of the valuation model below:

Grade – %

The most noticeable difference between a precious metal mine and a base metal mine valuation is that the grade of copper, lead, nickel, and zinc are in %, not g/t. Typically, a grade above 1% for a primary product is considered average. If the primary product has a grade of <0.50%, then it is an expensive mine that can run into many hiccups.

Pounds (lbs)

Where gold is expressed in ounces, base metals are expressed in pounds (lbs). To calculate contained copper from mined ore, you multiply the mined ore (million tonnes) x grade (%) x 2204.62 (tonne-to-pound conversion). For example, 1.5million tonnes of ore mined x 0.64% copper grade x 2204.62 = 21.2 million pounds of copper.

Concentrate Tonnes & Grade

The primary base metal product will have a concentrate grade. This one is tricky to understand but basically, you reverse engineer from recovered pounds of the primary metal (e.g. copper) to tonnage of the concentrate. For example, copper concentrate produced of 0.1 million tonnes is derived by starting with:

17.9 million pounds of copper/ 2204.62 (pound-to-tonne conversion) / 10.0% copper concentrate grade (given in the technical report).

You need to find the concentrate produced because of smelting costs (more on this topic later).

Recovery rate is applied the same here as a gold mine valuation. Payability is treated the same as a recovery rate – multiply the percentage to the recovered metal(s).

Smelting & Refining Costs

One extra step in a base metal mine is calculating the smelting and refining costs – these costs are given in the technical report. Smelting cost is expressed as $ per tonne and you multiple this to the concentrate tonnes calculated just above. Refining cost is calculated by multiplying the payable metals by the refining cost per pound.

Operating Cost & Capex

These items are the same as a gold mine valuation. Note that operating cost items are expressed as per tonne of mined ore here, not as per ounce of gold produced.

Royalty (%) – NSR/NPI

NSR Royalty – I’ve also included hypothetical royalties in this model. Net Smelter Returns (NSR) royalty is the most common type of royalty on a mine. It is usually not more than 3% and is calculated by multiplying the NSR royalty percentage to the net smelter revenue (revenue minus the smelting & refining cost as defined above).

NPI Royalty – Net Profit Interest (NPI) royalty is less common. It is calculated as NPI royalty percentage multiplied by operating cash flow (revenue – smelting & refining cost – operating cost). It’s never a good sign when there is a high NPI like 10% as it puts a huge burden on the profitability of the mine.

Valuation Model

As you can see, valuing a base metal mine is not that much different than valuing a gold mine except for the above differences. You can download the model below. Only input in blue font-colored cells. Start by choosing the primary metal at the top of the model first. This will flow through the rest of the model. And input 0 for metals that don’t apply in the mine you are valuing.

If you liked the post and the free valuation model (whether in the previous Gold post or here), please share the post and subscribe for more resources. Feel free to post your questions below in the comments section.

SEE BELOW TO DOWNLOAD FREE BASE METAL VALUATION MODEL

If you want to learn more on valuing any company, here is a great excel crash course for financial analysis on Udemy:

In GOLD We Trust – How To Value A Gold Mine (Download Valuation Model)

The mining industry is a fascinating space – not only for the fact that almost everything around us comes from mining but also because of the possibility of striking gold with penny stocks that have the potential to turn into a multi-million dollar mine-producing company. But just as much as there is the possibility of blue sky upside, risk is around every bend even after the mining company has started production, which is why it is crucial to know how to value a mine instead of blindly investing in them.

Many investors and economic enthusiasts are obsessed with gold, but it is hard to break into understanding how one would go about valuing a mine because of a lot of technical jargon. But here’s something outsiders don’t know – every mining company starts out as a cookie cutter of another. For example, how you value a mine is essentially the same, mining executives bounce around companies such that they are all familiar names, and even corporate presentations follow a certain template. Knowing this already is a huge advantage when learning how to value a mining company. In other words, mining is seemingly a mysterious industry, but once you are equipped with the minimal essential knowledge of how to value a mine, you pretty much know 80% of what you need to know.

We are going over everyone’s favorite: GOLD. Keep reading and you’ll find that it’s pretty simple, and once you learn these step-by-step guide, you might just become addicted to valuing more. Let’s get started.

(Presumably, you already have a company in mind that you want to value, but if you don’t, the best free resource for finding one amongst a sea of mining companies is 24hgold but you have to pay to view more than 3 searches. Another tool that’s free is simply googling “gold mining feasibility study” and limit search results to the last 6 months.)

Here’s what you need:

  1. Technical Report
  2. Valuation Model – (Scroll to the bottom to download gold mine valuation model for free.)
  3. Company Website

1. Technical Report

Mine Status

Every mine that goes into production has a technical report written by geologists and engineers. This report is called “NI 43-101”. They can be found on the company’s website or in the SEDAR database for a Canadian mining company or on SEC EDGAR for a US mining company. The first page of the technical report will tell you the type of report, which basically means the stage of the mine. These stages are:

  1. PEA (Preliminary Economic Assessment)
  2. Pre-Feasibility Study
  3. Feasibility Study

A PEA is a very early stage report that defines the resources but that is pretty much it. The probability of a mine with a PEA eventually going into production is very low (i.e. just because a mine has a PEA, it does not mean it’s sure to become a mine). The next progression after a PEA is a pre-feasibility study, which has a 10%-30% chance of the mine going into production down the road. It defines the resources with more confidence and discusses the possible economics of the mine (i.e. how much capital costs might go into developing the mine, which is determined by the annual production capacity that makes sense for this particular mine, etc.). The next step after a pre-feasibility study is a feasibility study, which is the most advanced stage of the mine before construction and development begins. It is a more detailed report than the pre-feasibility study with a higher certainty of its assumptions being met. Aside from the majority of the report being a technical assessment, it is essentially a detailed business plan.

By the way, each stage takes years. After a PEA is issued, most likely it will take 2-3 years before a pre-feasibility study and then another 1.5-2 years for a feasibility study. Then anywhere from 1year-never for the permitting process. And finally once you have all the ducks in a row, another 2-3 years for construction and development. In other words, it takes anywhere from 6-10 years before a mine starts producing from the time a PEA is issued. (Note that there is a variance to this time frame depending on many factors. Most notably, a smaller mine in an already mining prolific town where it is easy to get permitting may shave off a couple of years or a big, complicated mine in a politically unstable environment or where there are indigenous protests, may take north of 10 years.)

So, let’s say we settle on a mine that has a feasibility study. As an example, we’ll look at Avnel Gold and its Kalana Gold Project.

What to Extract from a Technical Report

As I said before, there is a lot of technical jargon to understand in mining. And a technical report can be hundreds of pages long. But from my many years of valuing mining companies, you just need to extract the necessary info to value a mine. (Of course, the more of a technical expert you are, the more you can understand the viability of the mine, but most of us aren’t going back to school to get a geology or engineering degree, I don’t think.) So, what to extract from a technical report:

  1. Mine Start Year

A feasibility is usually optimistic about the permitting process, the length of time for construction and development phase and the pre-production phase. So, I would add 1-2 years to the mine start year that the feasibility study lays out. If the company has already made significant plans to develop the mine after the feasibility study has been issued, you can often find in their annual or quarterly reports or press releases when they expect production to start. *Note that before full capacity production, the company tests the processing and optimizes the plant. This phase is pre-production and the very first gold produced is called a “gold pour”. We are looking for the year in which “commercial production” starts.

In the Kalana Mine feasibility study, the anticipated commercial production start year is July 2018.

It is highly unlikely for a mine to start producing on time. So, I am going to tack on 1.5 years and say that full capacity commercial production starts in January 2020.

2. Reserves & Resources

By the time a feasibility study is written on a mine, the resources are reported with a high degree of certainty. These are called Proven & Probable Reserves. Each category of reserves or resources tells you the degree of certainty that the stated minerals are indeed there and mineable. If you’re trying to value a mine that only has a PEA, you may only see Inferred Resources. This is kind of a stick your finger in the air and guess how much mineral might be contained in the ore. Well, maybe a little more certain than that. The general rule-of-thumb in converting each category of stated reserves & resources into mineable minerals is:

What this means is, looking at Avnel Gold’s Kalana Mine example, its feasibility study has proven & probable reserves of 1.96 million ounces (or “oz”):

In my valuation model, I’m going to cap the number of ounces produced by the mine at 90% of 1.96 million ounces or 90% of 21.7 million tonnes which is 19.5Mt. Note the grade of 2.8g/t of gold (“Au”) in the table. We’re going to use this number below.

Note that “Tonnes” is the ore (or the actual raw rock) that is mined and processed, “Grade” is how much gold is contained in the ore, and the “Ounces” is the resulting number of gold in ounces. The formula is very simple. It helps us figure out the production rate (discussed in the next section):

*Note: tonnes, not tons. And Troy ounces, not imperial ounces.

3. Annual Production Run Rate

Under the Economic Analysis section, the feasibility study will lay out the plant throughput. The plant throughput is how much ore (the raw rock) is mined and processed to extract the gold. This is where the “grade” calculation from above is used. In the Kalana Mine feasibility study, the plant throughput rate is 1.5 million tonnes per annum:

Putting together the reserves estimate from above and the annual throughput rate, we model in our valuation 1.5Mtpa per year until we reach a cap of 19.5Mt. That is for 13 years (19.5 / 1.5).

And to convert the 1.5Mt of ore processed each year, using the formula stated above, we multiply it by the grade of 2.8g/t from the reserves table above. That will give us 4.2 million grams. Gold is expressed in troy ounces, so 4.2 million grams is then divided by 31.1035 to result in 135k ounces.

Plopping this into our valuation model with the start year of 2020, this is what it looks like so far:

4. Gold Recovery

Once gold is extracted through the plant at the gold grade, the gold gets further processed to become refined. The Kalana Mine feasibility study states that the Life of Mine (LOM) gold recovery rate is 92.7%, which is extremely optimistic. But for the purpose of this valuation, we will use this number (and because we can always change this assumption later). We simply multiply this to the gold produced to get the refined, recovered gold of 125.2k ounces per year.

5. Operating Costs

The main categories of operating costs are (1) mining, (2) processing, and (3) G&A.

(1) Mining cost consists of all costs associated with excavating the ore (e.g. mine equipment operator cost, fuel cost, maintenance cost, explosives cost, etc.). Expressed as US$ per ounce of gold produced.

(2) Processing cost includes costs associated with the plant, where the ore is processed into gold (e.g. equipment maintenance, plant labor including plant engineers, water treatment, lease, power and utilities, etc.). Expressed as US$ per tonne processed.

(3) G&A cost is comprised of salaries in corporate office, HR, security, environmental costs, land patent tax, etc. Expressed as US$ per ounce of gold produced.

The feasibility study details out the operating costs and also group them which is convenient for the valuation model.

Important to note is that in mining, operating costs are stated as cost per ounce of gold produced. This is for 2 primary reasons: (1) to be able to compare among other gold companies in the industry, and (2) since the gold price is an important economic indicator for the economy in general and for mining specifically, one can easily assess the viability of a mine by netting the gold price by the operating cost, which are both stated in per ounce.

In the Kalana feasibility study, these costs are estimated to be:

– Mining cost: US$380.3/oz

– Processing cost*: $17.68/tonne

– G&A cost: US$74/oz

*Watch out for processing cost expressed as tonne thus calculation is a bit different than the other. See valuation model.

Sometimes, mines have a royalty obligation, which is common when a land owner sells the property to a mining company. The most common type of royalty is Net Smelter Royalty (“NSR”), which is a percentage of recovered gold. At this mine, there is a 3.0% NSR royalty. So we have to account for that.

The government could also collect a royalty – in this case, there is a 0.6% stamp duty on gold sales.

6. Capital Costs (aka Capex)

Are you still with me? We don’t have much to go. Stay with me. It’ll be so worth it. You’ll know how to value any gold mine!

Capital costs are categorized into (1) initial capex and (2) sustaining capex. They are what they sound like. Initial capex consists of construction and development of the mine. All the costs before the plant is producing gold. Sustaining capex is cost associated with maintaining or upgrading all the equipment and assets throughout the life of the mine.

Kalana Mine’s total initial capex (aka pre-production capital cost) is $196.3m.

The total sustaining capex is $123m. Of this total, $13.9m is mine closure cost.

Also provided in the feasibility is a schedule of how the costs are allocated throughout the mine period. However, many companies spread out the initial capex for the sake of the economic valuation. For example, mining fleets are expected to be purchased close to the end of the mine period, which makes no sense but helps the mine be valued higher. So, a rule of thumb is to use the total life-of-mine capex estimates and allocate accordingly:

– Initial capex: 35% in Year -2 (i.e. 2 years before production), 50% in Year -1, and 15% in Year 1. So, if the mine start year assumption is 2020, $196.3m is allocated as such: $68.7m in 2018, $98.2m in 2019, and $29.4m in 2020.

– Sustaining capex: $13.9m mine closure cost will be assumed in the last year, so backing this out, the remaining $109.1m sustaining capex will be allocated among the 13 year mine period, which is $8.4m per year.

This way of calculating is obviously a much simplified version. However, when the discounted cash flow goes out 20+ years, the sustaining capex smooths out to be similar and as for initial capex, having the cost be borne upfront is a more conservative approach so any upside beyond the valuation from this approach is a nice present.

You did it. We have finally reached the end of all the info you need from the technical report to value a gold mine. Out of the ~350 page report, you just need the above 6 data. Not so bad, right?

2. Valuation Model

As you read through the above, we’ve already been going through how to take the info that you extract from the report and put them into the valuation model. So, you should already be somewhat familiar with the flow of the valuation model so far.

A typical microcap mining company (~$100m) has one mine that they are working on (either to bring it to production or they are producing it. But we’re not interested in the already-producing ones because there’s less upside). In other words, they are a single-asset company. As such, the value of the mine minus any liabilities is equal to the value of the company, otherwise known as Net Asset Value (“NAV”).

Because a mine’s economics is a set of cash flows in and out during a defined period of time, the best valuation approach to use is the Discounted Cash Flow (“DCF”), which the valuation model in this example uses. Adding up all of the discounted cash flows, we will derive the Net Present Value (“NPV”).

VALUATION DATE

First, at the top of the model, enter the valuation date that you want to calculate the NPV on. It could be a future date if you want to know what the valuation will be at a future date.

If you are using the model in 2018 or 2019, then you can change the years by changing where “2017” currently is.

If you’ve noticed by now, all of the LIGHT BLUE font means you can change the assumptions and input it directly. Black font cells are formulas so if you enter a value, it’ll mess up the whole model. Only input in the blue font cells.

PRODUCTION

We’ve gone through the inputs and the calculation of gold production above, so we’ll skip this part. One important note is that in a DCF model for a mining company, there is no Terminal Value that catches the cash flows of an infinite period of time beyond a defined time period (for example, 5 years of defined time period and a terminal value for infinite period). The reason is that each mine has a maximum number of contained gold, so it won’t go forever.

GOLD PRICE

If you have access to professional databases like Capital IQ or Bloomberg, then you can look up analyst consensus of gold price forecast, but if you don’t, there are free sites that blog about gold price forecasts. The best place to pull analyst consensus is trustablegold.com. I approach valuations on the conservative side, so I’ve assumed a gold price of $1,300 in the mine start year of 2020 then decreasing to $1,100 until the end of the mine life.

REVENUE AND COSTS

Revenue is simply the recovered gold multiplied by the gold price.

We’ve covered the costs above, both operating costs and capex, so I won’t repeat it here.

The corporate tax rate is different for each mine depending on the country the mine is located in. For this mine, 30% was used. You can quickly look up the corporate tax rate like on KPMG’s table of country tax rates. (Note that there would be allowable tax deductions but these are not incorporated in the model.)

DISCOUNT FACTOR

The higher the risk the mine has in meeting the forecasts, the higher the discount rate. The industry standard is typically in the range of 8% – 12%, with the median being 9%. An example of a 12% discount rate would be for a mine that has political risk, mine development risk, production risk such as uncertainty that the mining method they anticipate will work or if the forecasts in the feasibility study are too ambitious and therefore meeting the forecast is unlikely.

Here, we’ve settled on the industry median of 9%.

NET PRESENT VALUE

We’ve now arrived at the valuation of the mine of $147.4 million. That wasn’t too bad, was it?

Finally, look at the company’s latest balance sheet and add cash and subtract debt to arrive at what the intrinsic value of the market cap is and compare it to the current stock price.

3. Company Website

Now that you know how to value a mine, the next step, which is just as important, is to assess the company qualitatively. This means reading the bios of the Management team and the Board of Directors to see if they have experience in successfully building a mine and using discipline in terms of costs. You can also skim through their press releases to see if they had run into any hiccups in the past related to the mine or any old assets. Or maybe they keep refinancing debt without being able to pay it down. Maybe their accounts payable is growing. Anything fishy or off that catches your eye. Having a keen eye on risk analysis is key.

Interested in valuing copper or lead or nickel or zinc? How to Value a Mining Company, Part II: Base Metals, is posted. Download the base metal valuation model there!

Download gold mining valuation model below.

How To Value A Podcast

If Joe Rogan of The Joe Rogan Experience, one of the top 20 podcasters, wanted to one day scale up by bringing on additional producers and podcast personalities to host multiple new shows, how much equity should he give away to investors for their investment? Or perhaps Dan Carlin wanted to turn his Hardcore History podcast into a company that published history textbooks. How much should he value his podcast if he decided to propose this business plan to venture capitalists? Basically the question is, how much is a podcast worth? How do you value a podcast and is it considered a company with a robust enough business model to value it?

While listening to the episode of Startup (the first show produced by Gimlet Media) on valuing their startup company at $10 million during their seed funding, I was curious to find out if podcasts could in fact be valued the same way as ordinary businesses. An investor might need to know the valuation of a potential podcast company. Or a podcast producer might need to know the value of their podcast if they’re looking for funding, exit, or if they want to see how their podcast stacks up against others. Or a prospective podcaster might want to know if it’s worth venturing into the world of podcasting.

In order to answer the question of how much a podcast is worth, I looked at three podcasts that provide enough financial data to work with. First, Gimlet Media, whose show, Startup, discussed some of their numbers and their valuation on their show and in the media. The other two podcasts I used are Smart Passive Income (SPI) and Entrepreneurs on Fire (EOFire) as they have consistently produced monthly income reports since the inception of their respective shows.

The Data

  • At the end of 2015, Gimlet raised $6 million at a $30 million valuation. They forecasted $7 million revenue for 2016.
  • EOFire generated an average of $3 million annual revenue in the last 3 years with an average of ~72% net profit margin. I then used the discounted cash flow method and forecasted a normalized level of revenue and profit similar to historical average levels with slow growth. I assumed a 35% corporate tax rate and a 10% discount rate*.
  • SPI generated an average of $1.4 million annual revenue in the last 3 years with an average of ~74% net profit margin. I also used the discounted cash flow method here and forecasted a normalized level of revenue and profit similar to historical average levels with slow growth. I assumed a 35% corporate tax rate and a 10% discount rate*.

*Discount rate of 10% was derived using the industry standard discount rate for Advertising, Broadcasting and Entertainment as podcasting is not an established enough industry to garner a discount rate yet. Advertising has an industry discount rate of 6.6%, Broadcasting has an industry discount rate of 6.2% and entertainment has 7.9% (Source: Damodoran). An average of 7% discount rate + a company-specific risk factor of 300 bps was added as long-term success of a profitable podcasting company is too early to tell.

The Valuation

The average implied revenue multiple that I got from the valuation was 5.0x.

What does this mean? The multiples are certainly a lot higher than revenue multiples of cash flowing companies in general. The average industry revenue multiple for Advertising is 1.7x, Broadcasting is 2.9x, and Entertainment is 2.9x (Source: Damodoran). I suppose since podcasting is a whole new vertical compared to these traditional industries, it could be comparable to startups. Looking at startup valuations then, the revenue multiples range anywhere from <1.0x to 10.0x. In particular, digital media companies are valued between 1.1x and 5.9x (Source: Fortune).

Could 5.0x become the industry standard valuation multiple for podcasting (for the time being)?

How do Podcasts Make Money?

The value of a podcast depends on the types of income streams the podcast employs and the stability of revenue generated by each income stream. Advertising/sponsorship is the income stream that most podcasts rely on, but selling products and services catered to a niche audience is where a podcast makes the big bucks.

The possibility of coming up with a new income stream is endless. Some income streams require more creativity and don’t necessarily depend on the number of downloads (assuming they have a pretty legitimate level of audience already). And then there are other income streams where once you implement, you don’t need to keep innovating and are more predictable cash flows for the. The most common income streams and their characteristics are:

Income Stream Description Avg  Revenue Predictability Depends on Download #s Creativity
Sponsorship/

Advertisement

Pre-roll: ~15 seconds at the beginning of the episode

Mid-roll: ~30 – 60 seconds in the middle of the episode

~$20-$40 CPM (Cost per Mille); i.e. fee per 1000 impressions (or downloads) High High Low
Affiliate Income Clickable link on the website that directs to a 3rd party’s website with products and services to purchase Wide range, e.g. $0.25 – $50 per purchase of 3rd party product using the affiliate referral link Low Mid Low
Membership Special privileges beyond free podcast listening ~$5-10/month High Low High
Products & Services Introduce new products (physical or digital) or services (webinars, online courses, in-person courses) catered to the audience Varies depending on product/service

e.g. eBook could be $10 to purchase or an in-person course could be $1000 to attend

Low Low High

Download #s isn’t Everything

The good news is that you can rake in millions of dollars if you have close to or more than a million downloads per month. The bad news is that you have to get to a point where you’re drawing in close to or more than a million downloads per month. But, I won’t leave you with a bad taste. Here’s another good news: it’s that the number of downloads isn’t everything when it comes to generating revenue.

For instance, EOFire’s Revenue/Download was $3.53/download with ~850k downloads in the beginning of 2015. Put another way, every download was worth $3.53. Comparably, Gimlet had almost ten times the download numbers in a given month but was only able to sell $1 per download. Breaking out the income streams makes it clear that EOFire’s profitable success per download is because ~60% of their revenue is generated from additional products and services.  SPI’s revenue per download is pretty healthy as well with $2.33, with ~20% of their income coming from products & services. Gimlet on the other hand isn’t leveraging their audience enough. Of course, it’s a different story because Gimlet’s network of podcast shows is more journalistic and story-telling vs SPI and EOFire, which are geared towards a niche audience of entrepreneurs. But I still think there is a lot of opportunity there for Gimlet to introduce products and services to their audience (i.e. not just to their “customers,” that is, advertisers/sponsors, selling production/editorial services).

Podcasters: How much are you generating in revenue per download? What income streams have you employed and what new income streams can you add in order to scale up?