io benchmark price, page-10

Good post Inc.

There is always confusion as to why shares are not valued on in-ground resource.

People need to remember that in-ground value is simply tonnes x sales price.

The real value is (firstly) tonnes x sales price less opex.

And these are only 2 inputs into the equation. A time model must be calulated with capex in Year 0 (meaning you spend capex before you even dig a tonne out of the ground, sales less opex less tax (for simplicity lets say this is the cash flow)for years 1 to say 20 (assuming a 20 year life).

This then needs to be discounted at the Weighted Average Cost of Capital (WACC) for each year, remembering this is a cumulative discount so that cashflows in year 20 are worth almost nothing today (ie: Time Value of money), to get NPV. Clearly the NPV is $ for $ on the upfront capital as it is spent today (ie: in Year 0), and the cash flow is discounted further and further each year. A good WACC for a company like UMC would be around 12.5% (WACC is calculated as an average of the cost of capital and the cost of debt....cost of debt is usually lower than cost of capital).

I have simplified the above, other issues are maintenance capital etc... and does not take into account all types of risk factors.

The final NPV is the time value of future cash flows in dollars of the day. IF (and a big IF) shares were priced perfectly on the above including all risk factors then an exploration company would have a per tonne value of between aoround 50 cents to $3.00/tonne.

I could write on this stuff for hours, but just wanted to explain why Inc's method of calculation is the correct one to use to value exploration companies....of course there are exploration companies that are valued differently due to expectation of increasing tonnage etc... but hopefully you get the idea of the above.

Cheers, Tony.