This article about how to calculate the mineral deposit value is a great resource for investors in individual mining stocks. However, when you are investing in mining stocks through an ETF like COPX, CU, KOL, XLE, XOP, IEO, FCG, URA, NLR, NUCL, SOIL, REMX, GDX, GDXJ, RING, GLDX, PLTM, SIL, SLVP and SILJ I recommend you to read this article too.
When the preliminary feasibility study of a mineral project has not been completed yet, but you do want to estimate the mineral deposit value, you can calculate the potential value of a mining project by the back-of-the-envelope calculation described in this article.
Before you can calculate the potential mineral deposit value, you first need to gather some specific data regarding the ore body and the individual drill results.
This required data can be found in the mining company's press releases in which they announce their drill results. Make sure that this data is announced according to he guidelines of National Instrument 43-101 (i.e. approved by a Qualified Person) or similar international reporting standard.
The required data for calculating the potential mineral deposit value is explained in the table below.
|Grade||The concentration of a mineral in the ore body (i.e. % or g/t)||2% copper and 1.5 gram per tonne gold|
|Strike Length||The length in which the mineralization is found in the ore body (horizontally)||500 meters|
|Depth||The depth in which the mineralization is found in the ore body (vertically)||200 meters|
|Width||The width in which the mineralization is found in a drill hole||100 meters|
|Specific Gravity¹||The density of the ore body (i.e. the rock)||2.5|
To find out what I do in case some of the required data is missing or incomplete, or what I do when I need someone to verify some of the data provided in the mining company's press release, I recommend you to read the first note at the bottom of this page.
4 Steps in Calculating the Mineral Deposit Value
1. Calculate the Tonnage of the Mineral Deposit
|Strike Length x Depth x Width x Specific Gravity = "X" (in tonnes)||500 x 200 x 100 x 2.5 = 25,000,000 tonnes|
2. Multiply the Tonnage by the Grade
|25,000,000 x 2% copper =||500,000 tonnes of copper|
|25,000,000 x 1.5 grams per tonne gold =||37,500,000 grams per tonne of gold|
3. Convert Copper to Pounds and Gold to Ounces
|500,000 tonnes x 2,204.62262 =||1,102,311,310 pounds of copper|
|37,500,000 gram per tonne divided by 34.2857 =||1,093,750.4 ounces of gold|
To find out how I come up with the numbers 2,204.62262 and 34.2857 I recommend you to read the break even analysis page, on which I explained How to Calculate the Cut Off Grade.
4. Convert the Pounds and Ounces to the Corresponding Metal Value
|1,102,311,310 x $3.82 per pound of copper² =||$4,210,829,204|
|1,093,750.4 x $1,649.80 per ounce of gold² =||
As you can see from the example above the deposit does not have to be enormous in size (only 500 meters long by 100 meters wide) to contain a valuable deposit (approximately $6 billion worth of minerals).
However, in order to be as realistic as possible about this valuation, you can not assume that the complete ore body contains the same grade (i.e. 2% copper and 1.5 gram per tonne gold). In addition, you have to keep in mind that a typical ore body does not fit into a right angled box of three dimensions (strike length, depth and width), as the shape and continuity of the minerals found will be different in every deposit. Consequently, it is very important to deduct a certain percentage of the calculated mineral deposit value. Ideally, this percentage should be your best estimate of the overburden and tailings combined³ from the right angled three dimensional box, calculated in the example above. The outcome of this estimate is what I refer to as the adjusted mineral deposit value.
You also can not expect that this adjusted mineral deposit value, is the price the mining company will receive from a buyer when this property is sold, as for instance, the costs of extracting the metal from the ore and other operating expenses are not deducted from the mineral deposit value. Therefore you could see a major or mid-tier mining company that wants to replace their mined reserves just pay a small percentage of this metal value for the deposit (i.e. 5% to 10%).
To find out how much of this mineral deposit value I assign to the mining company's value as a whole, I recommend you to read the second note at the bottom of this page on UndervaluedEquity.com.
Note: Whenever I conclude that (a part of) the required data is missing or incomplete, I always contact the mining company's management directly, to kindly ask them to provide me the missing data. I also contact the management directly, whenever I need some of the data provided in the mining company's press release to be verified.
¹ Water has a specific gravity of 1, and so minerals with a specific gravity greater than one will sink in water, and those with a specific gravity of less than one are less dense than water, and so will float.
² Prices from March 23rd, 2012.
³ In mining and in archaeology, overburden (also called waste rock or spoil) is the material that lies above an area of economic or scientific interest. In mining, it is most commonly the rock, soil, and ecosystem that lies above a coal seam or ore body. Tailings, also called mine dumps, culm dumps, slimes, tails, refuse, leach residue or slickens, are the materials left over after the process of separating the valuable fraction from the uneconomic fraction (gangue) of an ore. (Source: Wikipedia)