Because a mine’s economics is a set of cash flows in and out during a defined period of time, the best valuation approach to use is the Discounted Cash Flow “DCF”, which the valuation model in this example uses. Adding up all of the discounted cash flows, we will derive the Net Present Value “NPV”.
If you have access to professional databases like Capital IQ or Bloomberg, then you can look up analyst consensus of gold price forecast, but if you don’t, there are free sites that blog about gold price forecasts. The best place to pull analyst consensus is trustablegold.com. I approach valuations on the conservative side, so I’ve assumed a gold price of $1,300 in the mine start year of 2020 then decreasing to $1,100 until the end of the mine life.
REVENUE AND COSTS
Revenue is simply the recovered gold multiplied by the gold price.
The higher the risk the mine has in meeting the forecasts, the higher the discount rate.
NET PRESENT VALUE
The valuation of the mine.
Finally, look at the company’s latest balance sheet and add cash and subtract debt to arrive at what the intrinsic value of the market cap is and compare it to the current stock price.