Disruptive Discoveries Journal

IRR

The Fallacy in Mining Valuation

Chris Berry2 Comments

By Chris Berry (@cberry1)

 

For a PDF of this note, please click here

 

A great deal of attention has been placed recently on the resurgence in rare earth prices and the concomitant increase in share prices. Given the general bloodbath in the mining sector since 2011, this is extraordinarily welcome news. Nevertheless, it leaves one question unanswered: Is this enough? Specifically, is a double digit increase in underlying commodity prices enough to make specific projects “economic” and justify the start of a new cycle? 

I think the answer in most cases is no, but this then raises a second question. The tailwind of select higher commodity prices (should they last) will undoubtedly help project economics, so how do you accurately value a company with no revenues, no cash flows, no operating history, and management with limited (or no) operational experience?