In part two, we are attempting to try to estimate the values of assets that a mining company already has in the ground. Sounds simple? The math is simple but as asset values and the prices of assets change, one must be flexible, alert and quick to change. For example, the market prices of gold, copper, zinc, silver and other commodities change minute to minute.

One will often find large variations of the asset value of a company, but if an analyst can find a value of the gold assets per share or the copper assets per share or zinc or phosphate or others, it’s a start. The idea is to get an idea of what is the value of some of the assets.

There are no standard measures that apply to every mining stock as every deposit is different; but there are several that can give you a useful indication of a possible value of what a company already has in the “ground” in a mineral(s).

If a company has more than one commodity such as copper with gold deposit, so much the better. You are looking for value in the ground, before you invest, unless of course you are investing in a pure exploration that has not yet had any drill results. This type of analysis is focusing solely on what a mining company already has “in the ground” and trying to put a valuation on it.

Unlike other analysis, it is not based on what a company is exploring for; it is based upon what a company already has in exploration results. It is a judgment on what is already there, not on the very important expectation of what the future drill results may attain. It is merely the present.

                                   Let’s look at the “mechanics” of the asset value analysis.

Number 1- How much of a mineral does a company have in the ground based upon its exploration and already finished lab results? Gold, Zinc, Copper and other minerals as well.

Number 2-What is the value that you are going to put on the assets in the ground? This can be very tricky as the valuation numbers have changed to lower levels over the last ten years in many cases.

Gold ounces in the ground can be valued today from as low as $7 to as much as $130 or more in a takeover. For this example, we are going to use $10 per ounce in the ground. Naturally it depends on where the mineral deposits are. Are they deep deposits or near surface? Is there open pit potential? How many ounces in total? Is there Infrastructure in the area? Recognize that there are so many things to consider, but those are for another article.

Number3-We will use a simple example and use gold as the asset value mineral, again, any mineral can be used in this type of analysis. For this example, let’s say that we have a company “North Canada Mines” that has now 1,000,000 ounces of gold in the ground having spent the last two years engaged in successful drilling. For this example, we will say that the company has 10,000,000 shares outstanding.

Therefore, the company has one tenth of an ounce of gold per share-each share represents one tenth of an ounce of gold per share.

We can suggest that at today’s $1300 an ounce gold, we can use a suggested value of  $10 in ground ounce of gold value. (Ten million shares outstanding owning one million ounces of gold) BUT we have to keep in mind that we must decide as to what value we will give to that “ounce of gold in their ground.” Again, we have decided upon a $10 per ounce gold value. 

Next comes the math. $10 per gold per ounce times one million ounces equals $10,000,000 in value. Then we divide by the number of outstanding shares of North Canada Mines of 10,000,000 shares. It would give a value of $1 per share. That would be your asset value per share up to this point. So at least we have some sort of a starting point for determining value here.

Does that asset value of $1 per share bring the stock to a price of $1 per share? Not at all, it is merely an indication. It is simply a tool that aids in a very difficult type of analysis-that is determining the value of a mining company at an early stage.

In “Part Three” we will have examples of how we used it successfully in the past and will suggest a few stocks that in our value analysis could be quite undervalued.