David Stein told me that regardless of the side of the risk spectrum that you’re on, while investing in mining stocks, you want to understand how the companies make money and how those companies are valued by institutional investors.
This is just a small clip of the full interview, which is now available on: https://www.baby-investments.com/interviews
One way David values mining stocks is through relative valuation. He told me that it’s really important to benchmark. Essentially, this means that you would compare the value of the company you’re looking into, to a similar company. He told me that it’s important to only compare similar companies to each other, though. So, comparing a base metals mining company to a precious metals mining company might not give you a high-quality result.
The first thing David looks at when he picks mining stocks, specifically producers, is cash flow. He likes using the ratio EV / EBITDA. You can call this the “what-you-pay-to-what-you-get ratio” as well, because EV shows you what you pay for a company, adjusted for cash & debt, and EBITDA shows you how much money the company earns, adjusted for interest, taxes, depreciation & amortisation.
This was very interesting to me because I usually don’t like using the EBITDA as it excludes some very important costs like the ones mentioned above. However, David told me that the EBITDA is actually a preferred metric for the mining industry, especially during relative valuation, as those other costs can be vastly different between the different companies & countries.
David also told me that depreciation doesn’t show you anything real in the mining industry. It is important to exclude it in other industries, but in mining stocks, that shows you nothing, he said.
During the full conversation, David Stein, CEO & founder of Kuya Silver and ex-mining analyst, showed me how to analyse mining stocks. Specifically the stocks of already producing companies and how to pick mining stocks like a pro, which he has been for over 10 years.
We went in-depth on the 6 most-important things to look at when analysing mining stocks. I call them the 6 P’s because I’m slow with remembering stuff, and pretty much anything else.
Those 6 things are:
1. Primary Metrics
– Market cap, Enterprise Value, EBITDA, cash flow, warrants, options, etc
2. Project
– IRR, recovery ate, royalties, strip Ratio, recovery ratio, etc
3. Place
– Jurisdictional risks, political situation,
4. People
– management & key figures within the company
5. Perils
– risks
6. Plans for the future
– production & resource growth plans
David told me how to look at each one of those “P’s” and how that influences the mining company. It was an in-depth conversation, but not a handbook. It was still good, though. I liked it.
TIMESTAMPS:
00:00 Important notice
00:15 Why valuation matters for mining stocks
02:30 How to do relative valuation for mining stocks
04:30 Is EBITDA better than FCF for mining stocks
07:40 The problem with depreciations in mining stocks
09:00 Closing thoughts