Putting a value on a mining claim can be tough because so much is unknown. How much gold is really in the ground? Will it be economic? What are the positives and negatives that can adjust the valuation?
However, there are some good methods for dealing with these uncertainties. Valuing a gold mining claim is very similar to valuing a startup business or a raw land property or even a rare collectible.
In each of these cases, the asset is not producing revenue that might put a real value on the property.
There are four relevant valuation methods that we can use:
1) The Comparables Method: compare the sales prices of similar assets and adjust for factors that are known to add or subtract from valuation. This method is used in real estate most often. Your home appraisal will look at the recent sales prices of comparable homes in your neighborhood and then adjust the price based on specific attributes of your home.
The problem with using this method for mining claims is that there is no centralized database of mining claim sales. However, there are two sources of public information about mining property sales: 1) securities filings for publicly traded mining companies; and 2) eBay listings of completed sales.
Public companies will release the terms of purchases (or sales) of mining properties. Most of these are larger properties but the per claim cost can be calculated. A $300,000 purchase of a property that consists of 100 claims averages to $3,000 per claim. Most junior mining companies are listed on the Canadian stock exchanges like the TSX or CSE and they post their information on the Sedar database here: https://www.sedar.com/homepage_en.htm.
The Ebay completed sales listings will show the actual price paid for various claims. I keep tabs on this market and will release a report on the prices paid on Ebay for mining claims in a separate post.
Just as in real estate – location can have a significant effect on price. I notice that my Nevada claims sell for 2-5x the price of comparable claims in California. The reason? Nevada is known as a mining and business friendly state and California is known has a high tax, high regulation state. For unpatented mining claims, California charges property taxes and Nevada doesn’t.
2) Industry Specific Metrics: Some industries have well known metrics for valuation – especially when cash flow and other more common measures don’t apply. Banks use book value, money management firms are valued at assets under management, internet companies might be valued at users, etc. Two metrics that come to mind are $ per acre values for raw land and $ per gold ounce for drilled out resources.
There used to be a common $500 per acre value put on this land. However, recently this number might be closer to $1,000 or even $2,000. But what about unpatented claims which don’t give fee title to the land, but just the mineral rights? There are no real metrics here since mineral deposits can vary widely from claim to claim.
However, there are some valuation metrics based on the amount of minerals likely to found on a property. Acquisitions of drilled out gold resources will often be sold for $100 to $200 per ounce. This can be adjusted based on the rigor of the estimate.
Any in-ground estimate of gold resources – whether formal or informal – should be based on actual intercepts with the gold bearing rocks. Or in the case of placer deposits – gold bearing gravels. These drill holes or samples should be reasonably closely spaced.
3) Discounted Cash Flow: The mainstay of the business valuation is the discounted cash flow method – it is how Wall Street analysts and Private Equity buyers value companies. It states that a business (or asset) is worth the sum total of the cash flows generated by that business – discounting the value of future cash flows – since money in the future is worth less than money today. If a business requires some investment upfront – then these are treated as negative cash flows. The term for discounted cash flow value is ‘Net Present Value’. It is used so often that Microsoft Excel has a build in function ‘NPV’ used to calculate this value.
For a mining property, we could estimate the startup costs of a hypothetical mine followed by the annual profits for the life of the mine. We could plug these values into our Excel spreadsheet and get a value.
Just knowing the net present value of a mine once it was put into production can give you an important upper limit. For instance, if you think a small mining property could generate a series of cash flows with a NPV (net present value) of $1 million – this would put an upper limit on what you should be willing to pay.
If the odds of getting this mine into production are 50% – then you should adjust the value accordingly. The more advanced a property is the more likely the NPV will actually be realized – and the less of a discount you will need.
The exploration industry is mostly about ‘de-risking’ properties by drilling, geological and engineering studies. The end result of these de-risking efforts is a bankable feasibility study which will contain a discounted cash flow valuation.
For smaller mines these sorts of studies might be over-kill, but you should do some simplified version of this basic analysis.
4) Duplication / Replication Cost: What would it cost you to find and stake an unpatented mining claim of similar quality? That is the replication or duplication cost and should be very close to the value you are willing to pay. The trick with this method is to include all costs – including research, false starts, learning curve, etc. However, even if we take theses intangible costs into account, we often arrive at a lower number than the other methods.
The Replication Method is the most realistic method in my opinion.
A key question you should ask when buying or evaluating a mining property is: What are the seller’s costs? What have they put into the property? How difficult would it be for me to find something similar and stake it? What are their staking and land costs? What is the value of the geological reports, assays or other information that comes with the property? How much would it cost to replicate the exploration or production data?
One of the valuable items a mining claim could have is a good drill hole that was never followed up. For instance, if there was a drill hole that was 1,000 feet in depth and had a good economic intercept – let’s sale 100 feet of 0.0292 oz/ton (1 g/t). The cost of reverse circulation drilling is about $50 per foot all-in. The cost of replicating this drill hole will be about $50,000. But usually you have have to drill 5-10 holes to get one good ‘discovery’ hole. A more realistic replication value for this drill hole might be $250,000.
The obvious opportunity would be to do some drilling around this hole and potentially make a discovery. Any significant discount from the replication value would represent a good bargain.
Underground workings can also be a good source of value for a mining claim. Before diamond core drilling the old timers would sink exploratory shafts. These have a lower value to a potential buyer than underground workings used for production. If the workings intersect un-mined ore – then this is even more valuable.
Sometimes the value of the underground workings is informational. For instance, getting a chance to see the underground environment can show faulting, stratigraphy and give an idea of vein orientation and additional prospects. The underground workings are like a massive drilling program.
Underground working are also a sign that there was something in the district worth the incredible effort and cost of sinking a shaft and developing the underground workings. It can cost $1,500 per foot to drive an underground tunnel. I know properties with miles of underground workings representing an immense original investment.
Of course, if the property has been mined out then the underground workings are not worth much. They might even be a liability.
On the low end of the scale are simple prospect pits. These are often over-looked sources of value. I have found high grade ore in these pits that intersect larger structures. Sometimes the old timers found good ore, but it just wasn’t high grade enough for them to follow up. No one else has either. These are discoveries waiting to be made. The value of a series of prospect pits is like an early stage exploration program that has been done for you.
Finally, information can be another source of replication value. I recently acquired some claims that had an extensive 118 page report (a Phd thesis). The author of the report had access to all the underground workings and did extensive mapping and sampling. The cost of this report would have been $50,000 or higher.
Even more impressive data packages are available. Buying a claim with good historical reports and information packages can be a great way to get started.
Conclusion: Combining all four valuation methods can give you a good idea of the value of your claim. Learning about how to adjust your valuation based on positive and negative factors will keep you comparing apples-to-apples. Use the Comparable Method to get an idea where the market is right now. Use the Discounted Cash Flow Method to figure out what the real economics of the mine is if it gets into production. Use the $ per Acre and $ Per Ounce Method to keep your valuation within industry standards. Finally, spot opportunities using the Replication Value Method and knowing the costs of existing workings and information packages.