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