I cannot compete with Taylor Dart at Seeking Alpha with his analysis of the sector. While I find him maddening to say the least, he looks at things in depth and has an angle I often disagree with – but respect and find great value in as well and has me challenging my evaluations of stocks. Often though, I find he doesn’t see the forest for the trees and gets hung up on some details that personally I think miss the bigger picture.
I bring his analysis up not in any way to disparage him – quite the opposite. I have gone toe to toe with him in his comments, probably to his chagrin, but I am challenging his thesis. From a purely scientific standpoint (and math), I wanted to probe and question – to see if he can perhaps see my point of view from the retail investor side. This analysis here is not to say, “I’d recommend FSM at $2.25”, but rather to show a deeper long term hold value to the investor. What numbers jumped out at me to look at?
I’m going to stick with a handful of names here that I know well – some better than others. I wrote an analysis a few months back on FSM and AG regarding their share dilution. My point was that often you see a company dilute, then people fear share price will go down, and hard selling happens. However, if the dilution created great value, you can see where the value of the company goes up over time, and the share price recovers. For example, assume a billion dollar market cap company has 100m shares, valued at $10 each. The company creates 100m shares, but the revenues/profits are still the same. The EQUITY in the company remains unchanged. In this case, the shares instantly are worth $5. You want to assume that the revenues/profits/equity would at LEAST double with the move. So if the mkt cap was still $1b, and there are 200m shares, the doubling of revenue, profits, and equity would potentially have the paper value back at $10, but the sell off leading it to $5 now has an upside of $5 the market hasn’t realized. This is a DRASTIC example, but a math example here of some value investing that many aren’t seeing in the retail side.
What has happened to us within the mining sector is we are seeing 1800 ways of dilution to happen to a lot of these companies with no clear value proposition on the other side of it. God – I hate that phrase – as every half-wit uses it now to describe Bitcoin, but the phrase here works. You have an explorer that dilutes to fund a drilling program. What you WANT on the other side of it is a clearer understanding of the asset, perhaps adding oz in the ground and thus pad the asset value. With a developer, you are hoping that when you are a producer, you are minting money. But for acquisitions – you hope the dilution gets you more than the parts combined. Often, this can happen with reducing back office expenses. Maybe each company has 10 geos, and the new company with them combined only has 12. This is an example of how these can bring a lot of value with M&A.
At the heart of this, I’m looking at a value of a company based on equity. For those of you who didn’t have 18 accounting classes, here’s the general gist of things…
Assets = Liabilities + owner’s equity.
For example, let’s say your house is worth market of $500,000. However, you have a mortgage on it for $250k. Your “owner’s equity” is $250k. So if you sold that house, you pocket $250k.
If we are looking at a company, a valuation of a company can be valued a lot of different ways. It’s kind of an art form. It may be valued on just the equity like above, but usually companies are cash flow generators, and with this, can be valued on earnings and future earnings. This isn’t to get into the nuances of the art forms of company valuation – but just to look at the analysis of what a company is being valued at versus how it is trading.
For example, FSM has “owner’s equity” listed at $1,375,148,000. Or, roughly, $1.4B
Likewise, they have a market cap of about $800m.
In a sense, if you sold the house (FSM) for spare parts, you would have $1.4b – but the market is only valuing it at $800m. Meaning, the stock is trading at a 43% to the spare parts value. To be fair, one could then say the ASSET in that equation (gold mines) are overvalued. Consider they may have valued something at $300m when gold was $2100, but now gold is only $1650, so the mine is worth less than then. That’s possible. But it would then stand to reason that if gold were to get back up to $2100, the asset value would then recover. In ADDITION to that, you would see supreme free cash flows and operating margins.
What I wanted to do here was to do an analysis of some of my favorite miners to hold, as well as a few others I like but do not hold (yet) to see what kind of discount to equity is out there. I’ll then use the shares outstanding to calculate a net asset value.
For example, if FSM has $1,375,148,000 in equity – and has 291,529,000 shares outstanding, it would stand to reason the value would be $4.71 per share. All of this info is easy to find on Yahoo finance. It’s also relatively easy to do a spreadsheet and then pop in values for these things with the stock functions.
Price to Free Cash flow…
I am also looking for low ratios here, which would indicate the stock is undervalued relative to its peers. In the item below, it shows that P/CF might be more valuable than P/E ratio. Or, rather, it might be nice as another metric to look at.
What you see from the above is this…
(note, I am not a financial advisor or licensed in anything related to this industry. I have taken accounting and finance classes as part of my MBA and am exploring ratios and observations based on math and this is serving as my mindset as to how I am looking at this. You need to discuss your investments with a licensed financial advisor and this analysis is for entertainment/education purposes only).
- There are a few value picks of companies that have a lower market cap than equity – look at the MC/Eq ratio below 1. This means the company is worth more as spare parts. These are Fortuna, Eldorado, Alexco, and USAS. With FSM and eldorado (EGO), you can see low price to cash flows. This is also showing them as floating under the radar – but both Alexco and USAS had negative operating cash and demonstrated how they are losing money – so I tossed them out of consideration at this time. They could also be thought of as turnaround stories, so if that’s your thing – this is an opportunity IF you believe in management to turn around operations. On THIS metric, this shows that if you sold FSM and EGO for spare parts, the share price is worth $4.72 and $19.04, respectively. A high level of equity can demonstrate that perhaps they are sitting on a lot of cash, or perhaps they have assets like mines that are valuable – but may require massive capex to develop and therefore the asset value is being discounted by the market. These companies might consider selling some of their resources to then use to develop other resources. However – a company like EGO to me has a ton of gold in the ground, and it’s a way to perhaps buy gold and get revenue on this gold over time. One could argue that the high ratios here (lower equity relative to assets) could demonstrate a high debt load – but this debt could be being used to develop mines. So I’m looking here mostly for LIQUIDATION value, relative to market cap. A very low ratio is telling me there’s potentially a lot of value there with being overlooked
- Using the Price to Cash flow ratio, you are looking for a low number (not negative) to find value. This analysis looked at the P/CF ratios of the above companies. I tossed out the negative numbers from the averages here, as I don’t count them as peers at the moment. The avg P/CF ratio was 8.44. I found value here in Wesdome, Eldorado, Barrick, and FSM. You can see AG (First Majestic), Aya, and Endeavor (EXK) stand out here for the wrong reasons. Seeing Aya there surprised me.
- Using P/E ratio (I tossed out AG) for the stupid high number – you can see value here with PAAS, WPM, Barrick, Yamana, and Sandstorm. I had interest in WPM for awhile, but the P/E ratio was at like 80, and I didn’t want to chase it there.
- Agnico appears to be slightly overvalued yet – having a high MC/Eq ratio, but the P/E ratio is also higher than most, and the Price to CF is elevated to avg. I love them, but looking at these numbers had me just hit the sell button for a 9.5% loss.
- I am not an investor in Yamana and Eldorado – but am looking to add to these when I can. I had Aya on my “to buy” list, and am reconsidering it at this time.
To conclude, using these measures only, you can see…
- Using MC/equity, FSM and Eldorado are high scorers. You could see an average of 1.68 here, and those lower than that number may have value – but those under 1 have spare parts worth more than the market cap. Aya, Endeavor, and AEM demonstrate low amounts of equity relative to MC, showing these companies may have decent amounts of leverage – but there’s no value in liquidation. I want to look at other metrics to see if there is value with them.
- Using P/E ratio, you can see perhaps an average of 25, skewed a bit higher with Hecla. Big winners here are PAAS, WPM, Barrick, Yamana, and Sandstorm. These are showing the earnings relative to stock price. Those having a number below the avg may be flying under the radar. Those higher than it may be over-priced. You have AG, Hecla as overpriced relative to their positive earnings. But you have Eldorado, Aya, Alexco, and USAS as losing money. Hmm…makes me want to dive deeper at Eldorado. FSM had a 24.73, perhaps coming in at industry avg. So there may be value in PAAS, WPM, GOLD, Yamana, and SAND related to P/E ratio.
- Newmont is on here, but doesn’t stand out as undervalued in any way. The P/E ratio is almost double the avg. It’s telling me the share price has held up well to the mining stock smack downs. Because of this, I just dumped my newly purchased NEM from a month ago for a 7% loss. I am thinking some of these other items may have some higher torque.
November 2, 2022 at 1:52 am
Nate, I love your analysis. In addition, please consider jurisdiction risks also, EGO for example. If and when gold crosses $2500, we will hear a lot of proposals for nationalization or wind-fall taxes. It happened in 1970s.
Good luck with your investments.
November 2, 2022 at 5:26 pm
Yeah – I use the top 100 list a lot to refer to best jurisdictions. That can be a little misleading – such as KORE in california is probably far worse than Peru right now.
I wrote about nationalization here. Might try a search on my site. I don’t think it might happen as much as we think it will. And you’re right, jurisdiction risk here is a big deal. Problem is – I think it’s so much easier for a government to tax something higher or add a streaming tax than to nationalize.