Understanding the multiples-based valuation approach for miners



Multiples-based valuation methods

Having discussed the net asset value approach, we’ll now discuss multiples-based valuation methods that you can also use to value gold mining stocks.

Price-to-earnings or PE

This is the most widely used multiple. It’s defined as market value per share to earnings per share. Companies with lower values would be undervalued compared to peers, other things remaining equal.

Enterprise value, or EV, to reserve

Enterprise value (or EV) is the market capitalization of the company adjusted to eliminate the effect of a company’s financial assets and obligations.

EV = Market Capitalization + Debt + Minority Interest – Cash & Cash Equivalents – Investments

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Under this method, EV is divided by the total attributable ounces to the company in terms of reserves. This ratio is helpful for assessing mining companies’ valuation because it’s difficult to assess the exact amount of deposits. So companies’ valuations follow the market value of their reserves. Companies with proven track records of successful exploration command a premium.

Enterprise value to earnings be interest, taxes, depreciation, and amortization – EV/EBITDA

This is a ratio of the EV of a company to its EBITDA. This is preferable compared to EV/EBIT because mining companies have high capital expenditures and the timing could be different for different companies, providing a distorted view.

Some firms might have negative earnings. This ratio is better for those companies.


Based on these metrics, Kinross (KGC) appears to be cheap compared to peers. Meanwhile, the market is putting quite a high value on Barrick Gold’s (ABX) and Goldcorp’s (GG) reserves—probably because they’re in politically stable jurisdictions.

Multiples-based methods are easier to use than the net asset value approach. But deciding on the premium or discount that needs to be applied to a comparable peer set is quite subjective and could vary the value of the company significantly.

One very important thing to keep in mind while using the multiples approach is that you should only value the companies comparable in terms of size of deposit, grade, depth of the deposit (“deeper” generally refers to the cost per ounce), infrastructure availability, et cetera using multiples.

Gold-backed ETFs like the SPDR Gold Shares (GLD) and Gold Miners Index (GDX) are also a good way of investing in gold and gold stocks, respectively.


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