Mining Valuation
Near Term Producers Will Win
Grade is king when it comes to mining. The cost of milling a ton of ore has a fairly fixed cost regardless of the grade of ore, so a higher grade will always mean far more profitable.
Valuation strictly on what is in the ground is the most speculative and risky way to value a stock. Where will the price be in months or years when this property is finally developed? How many share dilutions to finally develop this property? How much will the relative capital cost be to develop the property? Being close power and roads, rail and/or shipping can make an enormous difference in capital costs. What is the value of the metals per ton and how much will that change with price? What would the production costs be?
Commodity prices are high now, but the numbers can change quickly. How can any one possibly predict where those commodity prices will be in 2-5 years when this undervalued property will be a producer? The further out possible production is, the more likely that property will lose.
Near term producers will win as they will have the benefit of cashing in on the commodity boom and paying back those capital costs quickly.
Target Price Analysis
- Estimate the sales in the target year
- Estimate the profit margin
- Calculate the earnings and convert to earnings per share
- Compute target prices based on likely P/E ratios
Can You Profit from a Falling US$
by Buying Resource Shares on Non-US Exchanges?
The key to profiting from exchange rate moves when investing in resource stocks isn't to buy the stocks whose prices are denominated in a strong currency, but, instead, to buy the stocks of mining companies whose COSTS are denominated in a WEAK currency. A company that sells gold in US dollars and incurs most of its costs in terms of a currency that is weakening relative to the US$ will get a dual boost to its profit margins in a rising metal price environment.
The bottom-line is that a stock's performance over the long-term will be determined by its actual and/or projected profits, and not by the performance of the currency in which its shares happen to change hands. When traders feel very optimistic about natural resources most resource-oriented shares will surge, even those hampered by having their costs denominated in a strong currency.
Grade is king when it comes to mining. The cost of milling a ton of ore has a fairly fixed cost regardless of the grade of ore, so a higher grade will always mean far more profitable.
Valuation strictly on what is in the ground is the most speculative and risky way to value a stock. Where will the price be in months or years when this property is finally developed? How many share dilutions to finally develop this property? How much will the relative capital cost be to develop the property? Being close power and roads, rail and/or shipping can make an enormous difference in capital costs. What is the value of the metals per ton and how much will that change with price? What would the production costs be?
Commodity prices are high now, but the numbers can change quickly. How can any one possibly predict where those commodity prices will be in 2-5 years when this undervalued property will be a producer? The further out possible production is, the more likely that property will lose.
Near term producers will win as they will have the benefit of cashing in on the commodity boom and paying back those capital costs quickly.
Target Price Analysis
- Estimate the sales in the target year
- Estimate the profit margin
- Calculate the earnings and convert to earnings per share
- Compute target prices based on likely P/E ratios
Can You Profit from a Falling US$
by Buying Resource Shares on Non-US Exchanges?
The key to profiting from exchange rate moves when investing in resource stocks isn't to buy the stocks whose prices are denominated in a strong currency, but, instead, to buy the stocks of mining companies whose COSTS are denominated in a WEAK currency. A company that sells gold in US dollars and incurs most of its costs in terms of a currency that is weakening relative to the US$ will get a dual boost to its profit margins in a rising metal price environment.
The bottom-line is that a stock's performance over the long-term will be determined by its actual and/or projected profits, and not by the performance of the currency in which its shares happen to change hands. When traders feel very optimistic about natural resources most resource-oriented shares will surge, even those hampered by having their costs denominated in a strong currency.
posted by Sleeplesserf at 8:02 PM
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