While many parts of this article on NAV will be applicable to various industries, this article is specifically written for the metals & mining industry. This post is written by a metals & mining investment banker.
What is NAV?
If you are considering going into the mining industry or are interested in mining, you have probably heard of the terms NAV, P / NAV, or NAVPS (per share) thrown around. NAV stands for Net Asset Value, and what it sounds like is fairly representative of what it is. In mining, NAV is essentially a DCF of a mine’s cash flows, or the net value of the asset. Of course, it is more difficult in practice than in theory. Most students know what a discounted cash flow (DCF) is and how to calculate Net Present Value (NPV) – if you know both of these concepts, you already understand what drives NAV, and after this article, should have a firm grasp of what it is.
Two Types of NAV
In mining, there are two main types of NAV: Asset NAV (Operating NAV or Mine NAV) and Corporate NAV (Equity NAV or Total NAV).
What is Asset NAV?
Asset NAV is the value of the company’s assets, which in mining is its mines. This is calculated by projecting each mine’s after-tax cash flows, discounting it by an appropriate discount rate (5-10% for precious metals), then summing its cash flows to arrive at a present value (AKA NPV or NAV).
This is a DCF, but the components of it are very different than your typical DCF for a non-mining company and there is no Terminal Value because the life-of-mine is predictable and finite (as you deplete a mine’s reserves, they do not replenish). The result is the gross value of a company’s mines or assets.
What is Corporate NAV?
Corporate NAV adds corporate adjustments to factor in that it takes more than just the miners and equipment to run a mining company (HR, management, payroll, etc.) as well as other adjustments to bring it to a variation of a company’s equity value (similar to adjustments from Enterprise Value to Market Capitalization).
The result is, in theory, the value that the equity holders of the company own. Of course, this value will never align exactly with the actual Market Capitalization of a company (value to equity holders) because intrinsic and extrinsic values rarely align, and the stage of the company (exploration, development, pre-production, early-stage production, mature production) as well as other risks involved affect shareholders’ expected returns. This is why we see companies with Market Capitalizations higher than their Corporate NAV, close to, or lower than.
How to Calculate NAV
Metal Price Assumptions and Reserves & Resources
First you start with the basic assumptions. For metal price assumptions, you estimate the metal price each year for the foreseeable future (usually 5-10 years), and then assume a long-term price of your final year. For simpler models, you would use a long-term price for the entirety of the model. These prices can be estimated using consensus broker estimates (compiled with Bloomberg, FactSet, or manually via broker research reports) or using the equity research department’s estimates at your own bank. The prices will be a major factor in the revenue generated for the model.
Reserves and Resources are a measure of how much of a commodity is in the mine and how likely it is that there is x amount of it. Reserves are Proven and Probable (very likely that there is commercially extractable metal in the ground as tested by drilling samples) and resources are Measured and Indicated (there’s a good chance, but not great, that there’s this much metal in the ground). There’s also Inferred (there could be this much metal in the ground but it’s quite uncertain). Generally, we model with Reserves because these have proven economic value and can be reasonably assumed to exist. For more aggressive valuations, we may add Resources (we almost never use inferred resources unless it is in its very early stages of exploration and Reserves and Resources are not available).
Ore is the tonnage of rock with the desired metal to be extracted (ie. gold) inside of it. We want to model its depletion because once all the ore has been mined, the mine is of no value (in fact, it will be NPV negative due to the mine closure obligations). You will find depletion rate (or amount per year) in technical reports. The beginning balance would be taken from a Reserves and Resources summary (found on the company website or technical report). The depletion amount each year is the mill throughput.
Also note the strip ratios for each year (this is the amount of waste rock that is mined while mining the ore). The total material moved is calculated by multiplying the strip ratio with the ore depleted, then adding the ore depleted. A strip ratio of 10x and a depletion of 4.5 Mtonnes equates to 49.5 Mtonnes of material moved.
Remaining Reserve Grade and Depletion Grade
Grade of ore for gold and silver is measured in g/t (grams of precious metal per metric tonne of ore) and other metals (such as copper and lead) are measured as a percentage of ore tonnage. We want to keep track of the grade of ore depleted each period and how that affects the remaining reserve grade at the end of each period. The grade of ore depleted can be found in technical reports – the remaining reserve grade will have to be calculated. It is the beginning balance of ore multiplied by the beginning grade, minus the depletion amount of ore multiplied by the depletion grade, all divided by the ending balance of ore in the period.
Mill Recovery, Contained Metal, Payability, and Payable Metal
After ore is mined, it is sent to the mills to further extract the metal inside. The mill recovery is the percentage of metal that is recovered during the process, and can be found in the technical report. A recovery of 94% implies that 6% of the metal is lost during the milling process.
The contained metal production is therefore the mill throughput*depletion grade*mill recovery. This is what makes it through the mill. This is generally measured in koz for precious metals (ie. gold and silver) and mmlbs for other metals (ie. copper and lead).
Just because metal makes it through the mill, does not mean a buyer can immediately be found. Sometimes, right after the mill process, some metal cannot be sold and is thus stored in stockpiles (this is in an untreated and unrefined stage). Payability is the percentage that can immediately be sold to a buyer. A payability of 96% implies that 4% cannot be sold immediately and is thus sent to storage (ie. stockpiles).
Payable metal is the metal that makes it through the payability and mill recovery stage, and is thus contained metal*payability. Metrics are in koz and mmlbs like contained metal.
Treatment, Refining, and Transportation Costs
These costs are measured in $/oz (troy ounces) for precious metals (ie. gold and silver) and $/lb for other metals (ie. copper and lead). After the mill, the metal must undergo this final process so it is in its most refined stage. Payable metal multiplied by the cost per unit gets you to total treatment, refining, and transportation costs. Treatment costs include smelting process (heat used to melt metal to extract it from ore). Refining costs include electro-refining (output is pure enough to be sold). Transportation costs include moving ore from the mill after it’s been processed to the smelters (which means very high diesel costs).
Mining costs are direct costs involved in taking the ore (rock with desired metals inside) out of the ground. Major costs include drilling, blasting, loading and hauling, and other (trucks, roads, etc.). Measured in $/tonne of material moved (which was calculated earlier).
Processing costs are overhead / costs of operating. These include plant infrastructure (employees, equipment, utilities, etc.) and mine site G&A (mine management, mine administration, government relations employees, camp support, etc.). These are measured in $/tonne ore.
Mill costs are associated with the milling process. These are calculated in $/tonne ore.
First we calculate revenue per metal, which is calculated by multiplying payable metal with the metal price per unit. (Recall that contained metal includes metal that cannot be sold immediately and is thus stored in stockpiles, this is important so we don’t overstate revenues in earlier years, which will incorrectly drive valuations higher due to time value of money).
Gross revenue is the sum of the revenues from the various metals.
After subtracting treatment, refining, and transportation costs, we arrive at net revenue (AKA net smelter return, but that term has two meanings, and we use the second one below).
Net Smelter Return AKA Royalties
Net smelter return AKA royalties is the amount that is given as royalty payments, which can be measured as a percentage of production or net revenue. Governments, JVs, and other entities may impose a royalty on a mine’s revenues. These can vary, but are generally 1-10% depending on the geo-political situation.
After we subtract operating costs (mentioned above) and royalty payments, we arrive at EBITDA.
Depreciation, Reclamation Accrual, Severance, and CAPEX
For depreciation, we need a PP&E schedule. Each period should begin with an opening PP&E balance, followed by adding the CAPEX for the year, then subtracting the depreciation, and finally the sum is the end of period balance. The initial opening balance can be estimated with the most recent balance sheet figure for PP&E. The CAPEX can be found in the technical report. The depreciation should be based on the CAPEX and beginning balance of PP&E, as well as the mill throughput for the year as a fraction of the remaining ore. Depreciation is tax deductible, which affects cash flows, thus we need to include this in our models.
Reclamation costs are obligations to be paid for closure of the mine. Actual reclamation costs are modelled in as cash outflows when they occur. However, these costs are tax deductible and can be deducted when the mine starts producing – thus we have to account for this. Normally the PV of the reclamation is given in the technical report. Turn this into a FV at the date of actual cash outflows – this nominal amount will be the beginning balance which will be straight line depreciated until the closure of mine and actual cash outflows begin.
When the mine closes, severance may be paid to employees. Find the number of employees in the technical report and multiply by a severance amount per employee (also found in the technical report). If this isn’t available, asking management may provide the most reasonable estimate.
A CAPEX schedule needs to be made to flow into the depreciation / PP&E schedule, and to reflect cash outflows each year. Development CAPEX is usually done pre-production, Sustaining CAPEX is done during production, and Expansion CAPEX is sometimes done after production (to extend life of mine). Largest component is development capex which happens pre-production (includes roads, drilling, tunnels, infrastructure, railroads etc.) and is everything to do with exploring / developing. Sustaining capex is the maintenance and repair to carry on operations.
From EBITDA, subtract reclamation accrual (not actual reclamation costs) and depreciation to arrive at pre-tax income.
Multiply the pre-tax income by (1-Tax Rate) to arrive at the after-tax income. Wherever the mine is domiciled (not where the company is headquartered), use that tax rate. This varies greatly from region to region, depending on government policy in the region. Information can be found in the technical report.
Free Cash Flow
From after-tax income, add back the depreciation and reclamation accrual as these are non-cash expenses that were included above to incorporate real tax implications. Subtract the CAPEX (development, expansion, and sustaining) in the appropriate periods in which they were incurred. Also subtract real reclamation costs and severance after the mine life has ended. This will get you to free cash flow.
The base for precious metals is 5% and is adjusted upward to 10% depending on political risk (difficulty to produce in geography is already incorporated into costs for calculating NAV). We rarely see discount rates higher than these. You wouldn’t use standard WACC because cost of equity doesn’t make sense for mining companies (beta is often zero or negative, depending on the type of metal).
NPV / Asset NAV
Discount the free cash flow in each period by the appropriate discount rate, and sum those cash flows to arrive at your NPV. This is your asset / mine NAV, as it is essentially a DCF of your mine.
Equity / Corporate NAV
Corporate Adjustments include adding cash and equivalents, adding proceeds from in-the-money securities, adding non-cash working capital (excl. ST debt), subtracting Corporate G&A, and subtracting debt (Short Term and Long Term). The sum of this results in the total financial assets, which can be positive or negative. Summing this with your asset NAV gets you to corporate NAV.
Corporate G&A can be reasonably estimated by taking the most recent Corporate G&A in the financial statements and calculating an NPV based on multiplying by 20 – 30 years (considering life-of-mines, stage of company, management capabilities, etc.) and using a discount rate based on your Total Asset NAV discount rate (you may have used different discount rates for different assets). Corporate G&A makes up everything at the corporate-level (ex. C-Suite compensation, HQ management and overhead, etc.).
Sometimes, we will allocate the corporate G&A to each mine to see how the free cash flows look. If that’s the case, allocate it based on total payable production of each mine. There may be other ways, but I have found this is best practice.
TCC (total cash costs) are operating costs + treatment, refining, and transportation costs + royalties.
AISC (all-in sustaining costs) are TCC + Sustaining CAPEX.
All-In Costs are AISC + all other costs
These are done per period and are based on $ / unit of payable production (unless otherwise specified).
Co-product means that it is done excluding revenues from by-product metals and by-product means that by-product metal revenues are used to net (reduce) costs of primary metal. By-product costs will therefore be lower than co-product costs (something to note when comparing to other mines / companies).
NAV Metrics / Multiples
We take the corporate NAV and divide by fully diluted shares outstanding. That’s why we added ITM securities earlier (for comparability). This gives you the theoretical dollar value of your company per share.
P / NAV
We find this by taking the fully diluted market capitalization and dividing by the corporate NAV (or share price divided by NAVPS). This will not always be close to 1x (which would imply that the market is pricing the company based on their NAV).
In theory, if the discount rate and costs fully incorporated geo-political risk and other factors, it should. However, we rarely see discount rates above the ones listed above, which implies that much of investor sentiment on risks, growth, and other factors are reflected in varying P / NAVs. This means that not all risk is reflected in the NAV, which is why we have varying P/NAVs.
The higher the P / NAV, the greater dollar value of NAV per share you are paying. However, it’s probably for a good reason (Canadian assets tend to be safer than African or Turkish assets).
There’s a lot of information here, so the best way to absorb the material is to practice modelling a few assets / companies. You may encounter many different situations that aren’t perfectly explained here / fit perfectly with the template I’ve provided – please note that this is a very basic template, and companies, technical reports, and a variety of other factors will vary. If you’re stumped on something and can’t find the answer in this article, you can likely find it in the metals & mining section. If you are still stumped, ask us below.
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