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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Saturday, February 28, 2009

UPDATED Emerging Gold Producers Ranked -- Cash Flow Multiple Model

ERRATA: According to Miningmarketwatch. net, Metanor's cash cost per ounce is C$475, not $US. I have corrected the table and narrative on Metanor Resources to reflect this change. (March 1, 2009).


One of the quantitative techniques I use to evaluate emerging gold producers is the ratio of projected future cash flow price (10x cash flow assumption) to current price.

This technique provides a standard quantitative comparison of company valuation that serves as a starting point for my assessment of whether or not to invest in an emerging junior gold producer. Even though it is standard, the cash flow multiplier method is more a relative value tool than an absolute value tool. The 10x cash flow assumption is a subjective assessment of value even though many analysts use it as a standard multiplier for assessing gold producers.

Finally, there is also considerable uncertainty in this method because many simplifying (some might say heroic) and forward looking assumptions are made about the number of ounces to be produced in the future, production costs, and the price of gold. That said, notwithstanding the price of gold, companies that have a track record of delivering results have less uncertainty than other companies.

The inputs into the calculation are ounces of gold produced, cash cost per ounce of production, projected price of gold, current share price, number of shares issued (diluted), general and administrative expenses, debt service expenses, and hedge book on forward sales of gold (if any). Expenses related to exploration are not included in this calculation because they are investments in future growth.

The following is my analysis of 22 emerging gold producers using a cash flow multiple ratio for CY2009 and CY2010 based on closing share prices on February 27, 2009. The higher the projected cash flow multiple, the more undervalued the stock is relative to other companies.

Three companies (Apollo Gold, Kinbauri, Timmins Gold) on the list appear to have experienced setbacks to production or have become silent on production progress recently. They remain on the list because they are interesting companies for other reasons, but the cash flow multiple analysis is not applicable (NA).

The list for CY2009 breaks down into four tiers as follows:



1) MDN Inc……………9.4
Metanor Res………...5.3
New Guinea Gold......4.8

4) Gold-Ore………........4.3
5) Castle Gold……........4.1


6) Richmont Mines........3.2
7) La Mancha…............3.2
8) Capital Gold..............2.8
9) ATW Ventures..........2.3

10) Jinshan Gold……....2.1


11) New Gold.................1.8
12) Western Goldfields....1.5

13) Gold Resource..........1.5
14) Jaguar Mining...........1.5
15) Alamos Gold……….1.2
16) Aurizon Mines..........1.2

17) Alexis Minerals........1.2


18) San Gold....................0.5

19) Minefinders................0.4

20) Timmins Gold...........(NA)

21) Apollo Gold..............(NA)

22) Kinbauri…................(NA)

The list for CY2010 breaks down into four tiers as follows:




1) MDN Inc…………..11.4
2) Metanor Res………...9.6
3) Gold-Ore………........7.1

4) Castle Gold……........6.5
5) New Guinea Gold......6.0


6) ATW Ventures..........4.9
7) Richmont Mines........4.4
8) La Mancha….............4.3
9) Capital Gold..............3.9
10) Jinshan Gold............3.6
11) Gold Resource.........3.4


12) Jaguar Mining...........2.4
13) New Gold…….........1.8
14) Western Goldfields...1.7
15) Alexis Minerals........1.7
16) Alamos Gold………1.6

17) Aurizon Mines.........1.3

18) San Gold.................1.1


19) Minefinders................0.9

20) Timmins Gold...........(NA)

21) Apollo Gold..............(NA)

22) Kinbauri…................(NA)



The company that is most undervalued using the cash flow multiple method is MDN Inc., a Montreal-based company involved in a joint venture with Barrick at the very high grade Tulawaka mine in Tanzania, Africa. MDN Inc. receives 30% of the revenue from the Tulawaka mine. Barrick is the operator at Tulawaka, so MDN Inc. is in effect a passive partner. But MDN Inc. also owns other properties in Tanzania with geological formations that are similar to Tulawaka. MDN Inc., a conservative company, is building a strong cash reserve position right now and engaging in minimal exploration or acquisition activities. This conservative approach in an era of global financial calamity and a rising price of gold might be why MDN Inc. is so undervalued. Some investors may also be concerned with political risk in Tanzania—particularly with regard to rumors last year of higher royalty fees proposed by the national government.

Metanor Resources (OTC: MEAOF; TSX.V: MTO)

Metanor Resources—headquartered in Val d’or (Valley of Gold), Quebec—remains in the top tier of emerging producers using the cash flow multiple method for both 2009 and 2010. They were also at the top of the cash flow multiple list published in June of last year. As new producers in 2008, this means Metanor Resources has delivered on producing gold and plans to expand production in 2009 and 2010 at minimal cost—a testament to strong management. Management has deep ties to the local communities which is a major plus for any industry—but especially for mining companies. Average cash cost per ounce is an estimated US$370, but should decline as higher grade ore is processed in 2010 with the re-opening of the high-grade Bachelor Lake underground mine. Metanor also benefits greatly from having their properties in low energy cost and mining friendly Quebec. Political risk is extremely low in Quebec.

Gold-Ore Resources (OTC: GREXF; TSX.V: GOZ)

Gold-Ore Resources is headquartered in Vancouver and is actively mining and producing gold at Sweden’s Bjorkdal mine. The company also owns other exploration properties. Gold is produced at Bjorkdal primarily from an open-pit mine. The company plans on improving grades and increasing ore processed from an under-ground operation in 2009 increasing production from 2008 to 2009. Average cash cost per ounce is “high-average” at an estimated $550, but expected to decline as higher grade ore is processed at a higher rate in 2009 and 2010. Sweden is a mining friendly jurisdiction with low political risk.

Castle Gold (OTC: CSGLF; TSX.V: CSG)

Castle Gold was created in the second half of 2007 with the merger of Aurogin Resources and Morgain Minerals. They have two producing gold mines—one in Mexico (El Castillo—100% interest) and one in Guatamala (El Sastre—50% interest). They have “low-average” costs per ounce (estimated at $US370). Castle Gold’s Q408 production was almost 7,000 ounces and is working hard to expand to 50,000 per year as soon as possible. So far, management has done a good job bringing Castle Gold into production. Management appears willing to consider merger or being acquired based on recent presentation. Castle Gold has recently had a nice run-up in stock price over the past 6 weeks, yet remains undervalued compared to most of its peers. Mexico is a relatively friendly jurisdiction for mining, but increasing U.S. news reports of drug violence may increase investor concern for political risk.

New Guinea Gold (OTC: NGUGF; TSX.V: NGG)

New Guinea Gold is a new producer in 2008 and new to the list of companies that I follow. New Guinea Gold is a low cost (less than US$300 per ounce) producer in gold rich—and remote—regions of Papua-new Guinea. A big plus for New Guinea Gold is that the company is run by a former Esso/Exxon manager and owns the complete Esso data base of drill results and properties in Papua-New Guinea. New Guinea Gold had some problems meeting production targets in 2008, but that is normal for companies just entering the production phase. This is a very ambitious management with plans to ramp up production sharply in 2011. Political risk may be a consideration for investors—especially as it relates to physical security, community relations, and political stability (see Fraser Institute Policy Index included in the Survey of Mining Companies 2007-2008.).

The cash flow multiple approach is not the only tool I use to assess emerging junior gold producers, but it is my primary tool of assessment.

I assess companies based on qualitative factors like political risk, currency exchange risk, property rights risk, remote site risk, single mine risk, operational risk, and management competence risk.

I also use other quantitative tools to assess emerging junior gold miners. Some junior gold miners are aggressively developing their resource base by drilling to expand their “measured, indicated & inferred” resources (Canadian standard) or their “proven and probable” reserves (U.S. standards). The cash flow multiple approach is not useful for assessing the value of these type of companies.

For example, San Gold is a case where the cash flow multiple method is inadequate when it comes to valuing emerging gold producers. San Gold has reported significant drill results in their Hinge deposit over the past year. These drill results have helped to hold the share price of San Gold up during this time period. These drill results do not enhance their production plans for 2009, but do indicate a growing resource for future production. Minefinders, ATW Ventures, Western Goldfields, Jinshan Gold, Alexis Minerals are similar to San Gold in this regard.

The rising price of gold in 2009 has given ballast to many emerging junior gold producers as shown in the previous post on the Gold Stock Strategist Index
©. If the price of gold rises over $1,000 and stays above that level, the tier one companies on this list—especially those with higher cash costs per ounce—should end sharply up in share price for the year.

Gold Stock Strategist


Full disclosure: I own shares in several of the companies listed above. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their own investment decisions. Do your own due diligence.


Anonymous said...

Gold-Ores avg Cost estimate from Feb 2008 was 538 USD using a USD to Swedish krona rate of 8.00. Now the rate is 9,31 (incidentally a hundredth of the gold price).

Hence the new estimate is approximately (538/8*9,31)=462 usd per oz.


Anonymous said...

You may want to recalculate the numbers on MTO as the 2 recent pp's will seriously dilute the company's float. In addition, it appears that the company's cash costs have soared from their original projections as per recent financials. I suspect these adjustments will drop them down the list a few notches.

Anonymous said...

I agree - cash cost for MTO look to be $687.67 per ounce!

$3,480.974 Cash Costs / 5,062 ounces sold

That is a BIG jump from the $370 quoted. What accounts for the difference? That will be an important item to dig out, imho.

Second if MTO is going to run a bulk sample from Bachelor Lake, should those revenues be development costs charged to the balance sheet and not included in the Cash Flow calculations?

I see that Alexis has cash costs of $536/oz in 4Q2008 with a 5-year estimate of $581/oz. Alexis looks like it will have Operating Income of $9.8 Million to $17.7 Million depending on POG and cash costs.

At the run rate of 800 tpd and diluted head grades (per PES) it looks like MTO produces 38,000 ounces this year from Barry. That looks like it would give MTO Ops cash flow of 5.2 to 11 MM

Note that since your earlier note - AMC plans a $3.5 to $4.5 MM upgrade to their Aubrel Mill which will shave $10/ounce from cash costs.

Another thing to take a look at is the difference in approach between "businessmen" and engineers. Businessmen proceed with a mine based on resources and "we know" the gold is there while engineers drill off a deposit and expend energy mining "known" RESERVES. Can't tell you how many 'seat of the pants' operations I have seen fail, especially when one is dealing with Mother Nature. She is quite adept at hiding her treasures or throwing spanners in the works.

Without drilled off RESERVES one is guessing as to where to mine next. Peggy Kent can tell you a thing or two about mining open pit "known" but not well drilled off resources in the Val d'Or area. Maybe the MTO businessmen will get lucky with their deposit? But with the resource being described as having a "nugget effect" it sounds like it has an additional level of risk.

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