By Nancy E. Roth
Over the weekend FCW blew into wintry Toronto with the snow to catch up with friends and colleagues at the 2008 convention of the Prospectors and Developers Association of Canada. We came in a day early, however, lured by a pre-convention short course with the long title "Understanding mineral exploration & resource development: The relationship to company stock prices."
In other words, the course promised to unlock the recondite secrets of the financial wizards who evaluate and rate for their investor clients every conceivable kind of resource exploration and mining project. Here was a rare chance to sit at the feet of the demigods whose prognostications have sealed the fate of many an under-funded uranium junior. How could FCW resist?
Indeed, we emerged from the course impressed at the speakers’ superior intellect, their highly evolved and specialized language and the wide range of techniques they have crafted to advise the walleted ones whether a given exploration and mining project might be worthy of attention, even calculating specific buy and sell price points for listed enterprises.
Equally awe-inspiring were the diverse and contradictory conclusions these evaluation methods spawned.
One speaker outlined six valuation methods for three kinds of properties: development, marginal development and exploration. Each of these valuation schemes had its merits and shortcomings for each category of property.
Another described stock market valuation schemes for early exploration properties without mineral resources; with defined mineral resources but no scoping or feasibility data present; and with defined mineral resources before any feasibility data had become available.
Cash flow valuations were the topic of a particularly scintillating discussion on how analysts (or are they sorcerers?) predict whether a mining project in late-stage development will flourish. Against the background of project and commodities market cycles, they must gin up the project cash flow and then apply cash flow metrics to unveil the internal rate of return, the net profit value, and the initial investment payback period (i.e., the ability of the project to generate cash flow).
The speaker also pointed out the advantages and cautions of each method of analysis. For example, should a valuation focus solely on the project reserves (economically minable portion of the deposit) or on the resource (total amount of the mineral in the deposit)? The answer: it depends on who is doing the analysis and why.
Bankers making financing decisions and consultants preparing NI 43-101 technical reports work only with reserves. Miners may need reserves and resources for mine planning, acquisitions and sales. But for determining their eventual production rate, they use formulae that require the most likely eventual reserves.
All of which serves to warn the rest of us mere mortals that we are doomed to perpetual cluelessness. Even if we were privy to the methods of the analysts who release their various conclusions to the public which we are generally not we would not be able to compare the analytical results fairly in order to judge the merits of a project in question, let alone compare two or more projects.
Therefore, beware the words of the analysts who claim to know the truth about a uranium project. They may seem to enlighten the unwitting, but they may in fact mislead.
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