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Digging For Outliers In The Gold Mining Field

 April 13, 2010 10:16 AM


When analyzing gold mining companies, an important metric that investors should consider is the company's proven and probable gold reserves. This metric roughly quantifies the total amount of economically minable gold located beneath the firm's properties. The reserve figure is a key driver of a gold miner's future earnings power, representing potential future earnings which are realized over time, as gold miners convert below-ground ore reserves into tangible gold output. Given this direct link between reserves and future earnings, we analyzed the reserves figures for the 17 gold miners in our coverage universe in order to better calibrate our valuations. Our analysis also seeks to identify outliers--mining companies that the market may be undervaluing or overvaluing relative to their peers.

Our analysis was a two-step process. First, we recorded the total proven and probable gold reserves for each of the mining companies we cover. However, this step was complicated by the fact that gold mining companies also frequently own reserves of various byproduct metals such as silver, zinc, or copper, which may not be captured in the headline gold reserves figures. In order to compare reserves on an apples-to-apples basis, we translated the various byproduct metal reserves into gold-equivalent figures, relying on current spot prices for the various metals to inform our assumptions.

The second component of our analysis was calculating the enterprise value for the mining companies and then dividing each firm's enterprise value by its reserve gold-equivalent ounces (GEO). The resulting ratio shows how much the market thinks each miner's reserve gold ounces are worth on an ounce-to-ounce basis. The results are summarized in the table below.

As we can see from the table, the market assigns a wide range of values to the reserves of different gold miners. Using this data, we can partition the gold miners in our coverage universe into three broad groups. The first would be the "discount" bucket (companies whose enterprise values are less than $150 per GEO), including DRDGold (DROOY), Gold Fields (GFI), Harmony Gold (HMY), and Yamana Gold (AUY).


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