How To Evaluate A Mining Stock – Part 1

How To Evaluate A Mining Stock: Rob Kientz of GoldSilverPros.com – Part 1

With the #FederalReserve printing at a hyperinflationary pace, #investors are increasingly turning to precious metals and the #miningstocks.

But while #gold and #silver are easy enough to handle, #investing in the #miners can be like learning a new language. Although fortunately Rob Kientz of GoldSilverPros.com joined me on the show for the first part of our “How To Evaluate A #MiningStock” series to break down how to get started.

So to be prepared before the #mining rally happens, click to watch the video now!

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Interview by #ChrisMarcus of #ArcadiaEconomics on March 31, 2020:

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For the folks that get into the mining stock something that I run into a lot I go to these conferences meet a lot of different companies and I’m often thinking what’s really the first thing to look at when you’re evaluating a mining project if it’s a stock you’ve never heard of before

Where are some places to start to dig it Hello there my friends Chris mark is here with you for our KT economics and in the middle of some fascinating times in the gold and silver market where we’re seeing a surge in demand mints and refineries getting shut down around the globe coronavirus still raging price of

Gold and silver rebounding a little bit so a lot happening and fortunate today to welcome in Rob Keynes again from gold silver proz.com who’s gonna give us some things to think about for the folks that get into the mining stocks something that I run into a lot I go to these

Conferences meet a lot of different companies and you know again having more experience on the bullion side than the mining side I’m often thinking what’s really the first thing to look at when you’re evaluating a mining project if it’s a stock you’ve never heard of before where are some places to start to

Dig into so with that said Rob it’s great to have you on here and hopefully you can walk us through that a little bit yeah so it’s interesting Chris is really hard to find physical right now it’s not available a lot of premium on that if you can find it available and a

Lot of the refiners are shut down so a lot of people are starting to turn to the miners and I think the investment of mining company is going to be really big this time because precisely you know what I’ve been predicting for last few years the physicals run out people have

Bought up the available stocks are not letting it go so if you want to get into the space it’s maybe right now easiest for you to use your brokerage account your retirement count whatever funds you have available to get into mining stocks this starting to become a much more

Popular space for generalist investors we were speaking to people at both the P tech conference in Toronto and the Vancouver resource investment conference and they’re starting to see the general semester get interested again in the metals minor so we’re starting to see the money flow of course the money flows first to the

Big producers the Barretts the Newmont’s fresney open American silver you’re going to see that first but it’s going to start to flow down through the rest of the market as well we want to talk today about how to value to different miners and there’s really a couple of

Different ways to do it there are a couple of Tears the main way to do it if you’re talking about a producer especially a major or a good-sized mid-level producer of precious metals it is to look at the projected net present value which is just an accounting term

For figuring out what is the value of the gold or silver project in the ground over time versus the market cap in the market cap of course as the number of shares in the market times the share price gives you the overall market cap so that’s the way to do it for the

Majors for the juniors there’s a couple of additional ways because they may not be either producing yet or they may have just started production and there are many more of them as well one of those is value per unit of metal which basically means what is the trading

Value of that stock per how much metal they have in their resource so they have 100 million ounces you know they’re trading a certain price for sheree you divide the market cap by how many ounces they have and you do that for every company and you compare that gives you

An apples to apples comparison for different companies even if they have different project sizes for for what they may be worth another way to do is industry comparables so you find and this can be done for any company can be done for majors or minors you basically

Find a group of companies that is in about the same spot about the same size resource about the same whether they’re going to be a developer is not yet built a monument to have the resource or they’re going to be somebody that’s producing you group them like that and

Then you say which ones have you know which ones are trading compared to the peers and you try to find an undervalued one the one that hasn’t gotten the investor money yet as sort of a value investing a value investing approach from precious metals that sees quite

Often kind of follows been grand or warm above its philosophy for investing the market in the precious metals minor another way to do it is to look at and this is not as much evaluation exercise but it’s more of like a liquidity exercise and who can sustain the longest

Is the cash position look for the miners that have no debt and strong cash positions they’re the ones that can weather the storm and will do quite well in a bull market because they’ll have the cash to develop the properties and to end to expand the mining and that’s

Always good for investors the projected NPV versus market cap is the one that probably takes a lot more work and I’m just going to run down and do an intro today for for how that’s done and if you want in future videos we can actually walk through some examples they’re

Basically seven or eight main steps and doing the net present value calculation so the first thing that you do you determine the quality of quantity assets they have in the ground you do this they’re looking at the company reports they have a 43-101 technical report will give much more detail sometimes they

Have an early pre-feasibility or feasibility study those are done when they’re just starting to drill it like out and exploring and figure out what they have and as they get further along in exploration though sometimes issue a 43-101 report which has a lot more data in it but actually estimating how much

It will cost me out of the ground and how much resources they think they have you want to determine the second step is to determine the recovery ratio of the assets into recoverable metals so it depends on the type of deposits where type of deposit really comes into play

If it’s really a let’s say it’s an epidermal deposit it’s relatively thin vein mining how much of waste rock do they have to go through to get to the actual precious metal the more waste rock you sort of have to get through or the deeper than mine is in the ground

And more expensive it is to get to the metal that means that your your ratio of recoverable assets could go down and also depends on the mining they’re using if they’re using you know what type of method how much money do they have to to put into advanced recovery methods such

As heat bleach developing a heat bleach pad using acid to get the metal out of out of the rock that they’re mining after they crush it and what advanced methods do they use what methods do they have to sort of bake the product and dry it out you know

Are they going to be doing the the smelting process on site are they going to be sending their Dory bars which is the door is basically has it’s basically I’m eighteen and ninety percent concentrate but still has some waste material in it they’ll ship it to a

Refiner that were fine out the remaining waste metal that’s an additional cost to the process so it really depends on how big the mine is how quality deposit is there’s a lot of factors that go into that the third step is applying a market price range to the assets consistent

With both the near term and near term and longer term expectation for market prices so you you want to look at what the other miners are trading for and apply a price range to that to those assets consistent with what you see across the mining sector to give you an

Understanding at a point in time right now what that miner could be worth the four-step is valuing the cost of mining relative both the market price and other projects of similar geology so this is the hardest thing for investors to learn because a lot of us aren’t geologist or

Metallurgist but really getting into the details of what type of deposit it is so if you’re doing comparable is like I mentioned earlier and you’re and you’re looking at two gold miners I have about a hundred hundred nine ounces in their deposit and you really want to know

Who’s going to have the lowest cost and the easiest recovery you have to look at the geology you have to look at okay how deep are they going to have to go what type of deposit is it or their other deposits of this type that this mining

Team has been involved with and they know how to get that gold out of that specific deposit how much water are they going to have to use those types of things help you determine the quality of the asset compared to other miners the next step is in probably the most

Important one honestly it goes into evaluating management’s past successes particularly with the same types of formations so you want to invest necessarily see really successful companies those companies that have done it before and not only those management teams have have brought the project through development to production before

But they’ve also done it for the same type of deposit you’re looking at if they’re going to a different area in the world and they’re looking at a different type of deposit they’ve never dealt with before you’re going to want to discount the value in your mind for that company because you

Don’t know they don’t have a proven track record of getting the wore out of the ground in that specific type of deposit one of the things that can mitigate that as a lot of times you’ll see searly successful entrepreneurs adopt some additional personnel and bring expertise for them certain

Geologists or mine operations personnel metallurgists to help them understand how to work this new deposit and they’ll sort of absorb that expertise into their business so that a lot of times can be a mitigating factor if you say them hiring personnel that have specific experience

And a certain type of geology a lot of times that can reduce the risk the next one is assessing the project by using technical studies and one’s own knowledge to determine what the market cap should be so basically what that means is you look at it you want as much

Technical information available for a particular company as you can get and the more technical information you can get and come through and compare to other projects that you’ve looked at before the more comfort you’re going to get as an investor that you understand what the potential pitfalls of that

Project could be the thing about mining is there’s always a problem there’s always a problem to be solved and it’s not only management’s ability to solve the problem but it’s the type of problems you’re going to get involved with even experienced management teams can come up against difficult issues a

Lot of it has to do with geology some of it has to do with access to infrastructure such as water access to electricity and roads some of it has to do with the political jurisdiction which we’ll talk about here more in a moment but there are always difficulty of

Mining it and it’s the track record of management and it’s the type of mining that they’re doing you really want to match the two together does that management team have experience in that specific district that specific type of geological formation have they done it before the next step is really discounting the

Market cap by the time value of money minimum 5% per year this is where you get a net present value and essentially what you’re saying is over time the value of a project reduces by a specific number and that’s a time value money it’s basically a measure of inflation and also risk over

Time if you’re in a relatively safe district like the Americas especially Mexico Canada us maybe also through Australia into that mix those are pretty safe jurisdictions you only discount by about 5% of years so you’re – you discount by 5% you’re three it’s five percent annualized over those two years

And then the next year is five percent annualized over the previous three years and there are formulas to help you do that I can you know walk you through how to do that’s not too difficult if you’re going to get into a jurisdiction that has more political risk let’s take South

Africa for example there’s a lot of political risk going on there which a lot of the play demand platinum miners are having to deal with and it’s affecting their supply of product getting to the market that reduces the overall attractiveness to investors of the project because if you’re not able

To work through those political problems or you’re going to have political problems quite often it can disrupt the mine it could reduce the cash flow the company of course that reduces the value of the project yes the metal in the ground hasn’t changed but if it takes

You longer to get out of it that means you’re going to have less return on your investment as the investor so you definitely want to look at that so the the more political risk you have the higher the discount factor you want to use and determine net present value the

Last step is really monitoring share issuance by the company typically pay for my development costs or to pay for it span June or Ruling programs because that dilutes individual share value the initial investment over time let’s say you have a company you’ve gone through all the previous steps you think it’s a

Really good investment but they just issue to me and more shares for private investment for future production well that just discounted the value of each individual shared that you own and everybody else owns in the market let’s say they had you know hunter million shares they had two million more shares

That took a 2% discount off the value of your share the two million divided by a hundred and eight so in the short term the value that share it could be lower you know maybe they take that money and eventually it leads to additional production or additional

Resource that they’re able to put on their balance sheet but in the meantime every time a company dilutes market by issuing shares it reduces the value for investment so you want to look at management teams that don’t see really dilute to try to pay for their mind you

Want them to be able to you want to have a good project and a good management team you you want to have a project we’re just gonna have good cost fundamentals you want it to be in a good district than which you know they’re gonna be able to get their permit to

Mine and near good infrastructure and then you want to make sure that they’re not going to over dilute they’re not going to issue a bunch of shares at just the time you’re getting into the investment which is going to dilute the value of your share and so those are

Basically the main steps in that minor valuation model that some of the other valuation models I mentioned beginning are a little bit easier the comparables approach the problem I find with the comparables approach if you do that only is it doesn’t really give you enough information such that it affects you in

Two instances let’s say that there’s money freshly coming into the sector the companies with the highest quality projects are going to get the bulk of that money and I can tell you the buy side analysts and the professional analysts know this and so if you’re out there’s a retail investor and you’re

You’re basically going up against everybody think of it as a poker game if you don’t know who the Patsy of the table is you’re the Patsy right so you want to be armed with enough information when you’re going to the market you’re sitting at the poker table and you’re

Pete you’re placing your bets you you want to have as much information as possible if you haven’t done the due diligence on the project and really run the numbers that understood the technical aspects of the project and understood who’s managing it whenever new money is coming into the space that

Money may not flow into your investments it may flow into somebody else’s investment because they did their research a little better and that means that their share price is going to go up faster the other way that they can affect you is if there’s a correction in the market Look at the recent stock correction for example the broad stock market sold off over 30% but you and I talked about earlier this week was the fastest in history the faster and the Great Depression this is due to the current of our spheres and the market slowed down

That also hit the metals miners in the weaker hands in the miners market got hit harder in two levels the the juniors got hit harder than the majors because the majors are producing and they have cash flow and the generalist investors that’s what they want especially the funds that need near-term

Return so you saw that hit the the the juniors but you also saw it hit the companies that don’t have his advanced projects or as good of projects hit them harder and their share prices went down more so you know a value investing approaches you never want to lose money

On your investment so you want the best companies you can find whether it’s a junior a minute or a major so that if there is a correction in the market you lose less money and there’s less there’s less space that you have to go to recover your money when when that

Recovery happens that’s just a value investing approach try not to ever lose money try to find the best projects in the space and do that really takes work it really takes doing evaluation of these miners so that’s a pretty good overview of the process now getting into

It can be a little bit complicated I think once you do it once it’s a lot easier so what we can do in future videos really kind of walk people through an example pick an example company we’ll walk through all of these steps and give you a visual example of

How to do it so that you can get a lot more comfortable with this process I think once you go through it once or twice it becomes a lot easier as a retail investor to do it and then you can feel like you’re sitting at the

Poker table with the same tools as the professionals and that way you have a realistic chance of making a good return well Rob I sure appreciate that it’s a great overview you just gave and a lot of steps that people can use to get started and again this is Rob Keynes of

Gold silver proz.com and Rob will look forward to digging into some examples and breaking each of those steps down as this is going to be a series of videos so folks leave any questions or comments in the fields below and we’ll address those in future one so Rob again I thank

You for joining me here today and giving people some tips on how to start looking at them minor and stay tuned folks because we got more coming You