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Strategies & Market Trends : Winter in the Great White North
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To: russwinter who wrote (708)5/22/2001 5:25:32 PM
From: tyc:>  Read Replies (1) of 8273
 
Does anyone understand the theory of the "option value" of mining stocks ?

I think it goes something like this;

The value of a mining stock can be likened to a call option where the strike price is cost of producing
the metal. Clearly, if the price of metal falls below the cost of production ( the strike price) the mine
still has market value based on the the probability that metal prices will rise in the future. The higher
the volatility of the metal price, the higher the value of the mine even though currently uneconomic, or
marginally economic..

When metal prices rise, the stock prices that will show the most leverage are those that are closest to
the strike price, i.e. the marginal mines.

More precisely, it is like a whole series of options extending into the future for the life of the mines
reserves. Given the volatility of metal prices, distant production becomes more valuable because of
the possibility of ever higher metal prices.

It seems to me that this is where the hedged miners lose out. Imagine a marginal mine that has
hedged its production very close to the cost of production. Clearly there would be very little
leverage. Their hedging has forfeited the "option value" of their stock by eliminating volatility of metal
prices as it refers to them.

Is this bafflegab or sense ?
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