Tom,
what I was trying to indicate in that post was the impact of a marginal increase in reserves would be and the importance of using an estimate of mine life when trying to assess valuation.
Let's play with some numbers. There has been a lot of speculation about the size of the playa but for this anlaysis let's assume there is 3 bln tons of dirt. Now I believe a 10,000 ton per day plant is a pretty big opearation so let's assume that is what we get. Now we will have it operate 300 days a year (down time for holidays, repairs etc.). That is 3mln tons of ore a year. Let's be generous and say we get 3 ounces of gold. I won't analyze yet for other metals since we haven't gotten certification. So we produce 9 mln ounces of gold a year with an estimated mine life of 1000 years.
Still with me? For the sake of the analysis I will say that that projects to a value for annual production of a billion dollars. Now there is always risk in getting reserves out of the ground so I will put the market valuation of reserve value at 50% of the value of annual production. That gives a value of $500 million per year of estimated mine life. Now using a 6% interest rate and create a discount curve. The one year factor is .943396226415094 and says the market would value first year reserves at $471,698,113. The 30 year factor is .174110130910634 which gives a value of $87,055,065. The 200 year factor is .000008686142443 which gives a value of $4,343. The 356 year factor is .000000000979743 which gives zero present value. So close to 2/3 of the reserve would be so far away on the production curve that their current value would be zero.
Doubling the reserve without increasing production would produce NO theoretical increase in the value of the deposit. And yes you could increase the production to 100,000 tons per day, if feasible, this would shorten the estimated mine life to where all the reserves have a meaningful value. However that would give you production of 90 mln ounces a year. Considering current global production is 76 mln ounces this might have a mildly depressive impact on gold prices.
Before any one accuses me of using hyped up numbers I used large numbers just to show the impact of large numbers. I have no idea if any of the numbers other than discount factors are accurate. I just wanted to show how the math would work. For those curious, assuming 40 million shares, the per share valuation for gold using these numbers works out to $208.33
Henry |
