mines prices markets

Gold mining stocks can be very profitable especially during secular bull markets but this asset class is by nature very volatile. Gold mining stocks have different characteristics from general equities and traditional measures such as P/E ratios don’t do well in assessing the true value of the company. Other factors such as company cost, production rates, and development trends are more important. Bud Conrad at Casey Research has created a model of how to analyze gold mining stocks based on 8 different factors:

Proven and Probable Reserves – Total amount the mine is expected to produce.

Cash Cost per Ounce – The cost per ounce the company expects to pay for labor, equipment, etc to take the reserves out of the ground and to the market place.

Mine Asset Value – The difference of the price of gold today and the production cost per ounce multiplied by total reserves.

Debt – Total debt of the mine. Mines are very expensive and most borrow to start production.

Hedge Liability – An obligation the mine has to deliver gold at a future price that is below the market price.

Mine Asset Value – The Mine Asset value minus Debt and minus Hedge Liability.

Market Cap – The total amount of shares outstanding multiplied by its share price.

The purpose of Bud Conrad’s model is to compare the gold reserves in the ground to the stock price to see whether the price is low enough to be attractive. The table below compares the value of different gold mining companies. The far right column shows the valuation ratio. A ratio of 1.0 indicates that a company’s stock may be expensive compared to its assets and a value of closer to zero indicates a bargain.