My final words, I promise !
Here's an extract from a 2002 Mineweb interview with Pierre Lassonde. Although it's old it's just as appropriate today. I repeat it now because of its mention of the "option value of reserves". The report he refers to attempts to describe how the market arrives at price/value, rather than to estimate what the market price should be. ( It is the "option value of reserves" that is forfeited when reserves are forward sold... hedged... and also it's what prompts my interest in IMG)
MININGWEB: What metrics do you think precious metal investors should be focusing on to discriminate in their stock picking?
PIERRE LASSONDE: This industry has a number of metrics that are reported and comparing numbers from one company to the next is not always easy. In my opinion, the most important "metric" is management – look at management's track record and it will tell you a great deal about the likely future of the company.
In addition, I think "Total Cash Costs" and "Total Production Costs" numbers are extremely important, along with the amount of "Cash Flow Generated by Operations", as reported on the company's cash flow statement. Other key metrics include reserves and mineralized material not in reserves, not only in aggregate, but also considering where the reserves are located from a geo-political perspective.
More recently, increasing focus is being placed on calculating the "option value" attributable to a company's reserves. This metric, which is not quite as easy to calculate as those described above, is essentially the value of a long-dated call on higher gold prices owned by the company as a result of having ounces in the ground that can be brought into production. I encourage all readers to review this approach to valuing gold mining equities because it is able to provide one of the most accurate valuation models and best explains the "valuation gap" between traditional discounted cash-flow analysis of gold assets and the premium at which these generally trade. One of the most insightful articles in this regard was authored by Barry Cooper from CIBC World Markets and is titled "Eureka! A Better Valuation Method" (February 1, 2002).
One final metric that I encourage investors to look at is liquidity. You want to invest in a stock that is liquid and marketable so that you can get in and out of the stock when you want to without having a material impact on it's price. As you know, Tim, Newmont is the most liquid of all gold stocks.
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