• Part I: Introduction
• Part II: Multiples
• Part III: Credit

Once an appropriate price assumptions deck has been selected, analysts use a combination of these metrics to determine the value of a business.

P/E (Price/Earnings)

The price to earnings ratio looks at the price the investors are paying per share for each dollar of earnings. It can be calculated by taking the fully diluted market capitalization and dividing it by the after-tax income (or share price divided by EPS). To calculate after-tax income, take the revenue and subtract royalties and operating costs (namely – treatment, refining, and transportation) to reach EBITDA. Then subtract depreciation and reclamation accrual to get to pre-tax income. For depreciation, a PP&E schedule is required. 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. Depreciation needs to be incorporated in models as it is tax deductible and thus affects cash flows. Reclamation costs are obligations to be paid for the closure of the mine. These costs are also tax deductible and thus need to be accounted for. Finally, multiply the pre-tax number by (1-tax rate) to get the after-tax income.

The price to earnings ratio is the most widely used and misused multiple. Its easy application makes it attractive, but the problem with the P/E ratio is that it is an inconsistent estimate of value where critical elements such as risk, growth, and cash flows are ignored.

EV/EBITDA

Only senior gold producers and large diversified miners can issue corporate level debt, so enterprise value is not necessarily a meaningful figure for junior and intermediate miners. Junior and intermediate miners can sometimes tap into high yield debt markets if they have sufficient size and if debt capital markets are open to them, but usually they will need to issue equity. Thus, EV/EBITDA is primarily used for large, stable and diversified miners such as BHP Billiton, Rio Tinto, Glencore and Vale as these companies have well diversified operations that make cash flows relatively predictable. If one mine goes under, it will not have an outsized effect on EBITDA because there are several mines across several commodities being extracted concurrently.

To calculate the enterprise value, 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 also known as asset/mine NAV.

P/CFPS (Price/Cash Flow Per Share)

Price/Cash Flow is a popular metric for most diversified miners. It tells us the price investors are paying per share for the business relative to how much cash flow the company is generating per share. It is important as it tells investors the amount of cash the business is generating instead of earnings. Usually Price/Cash Flow is looked at from a one year out and two years out basis. An advantage of the P/CF ratio is that it will heavily consider the country risk for the miner, as assets in developed nations are more likely to see work stoppages due to labor shortages, strikes and other unforeseen production delays.

However, this multiple may run into issue when comparing companies with significantly different capital structures. Companies with high leverage will have higher interest expense and therefore a higher P/CFPS, which can distort the actual operational performance of the business.

P/NAV (Price/Net Asset Value)

This can be calculated by taking the market capitalization and dividing it by the corporate NAV (or share price divided by NAVPS). This tells us the firms’ market equity value relevant to its net asset value. The corporate NAV represents the net present value of all future cash flows of all producing assets net of corporate adjustments. Corporate adjustments include adding cash and cash equivalents, adjusting for working capital requirements, and subtracting net debt. If P/NAV is 1x, it implies that the market is pricing the company based on their NAV. However, we see varying P/NAV’s, which means that the discount rates and costs do not fully incorporate the macroeconomic and geo-political risks associated with different assets.