how to value a junior gold

Here's part of an interview of Frank Holmes on Goldseek:-

TGR: What criteria do you use to evaluate juniors?

FH: Unless they have two grams of gold (per ton) or a million ounces, junior explorers have been drifting lower and lower. Historically in situ reserves have traded at one-tenth of an ounce of gold. So, if gold is $600, then your reserves are worth $60 per ounce. When gold was $300, they were worth $30. That was the model for determining a fair market cap for junior explorers. With gold at $850, these companies should be worth $85 per ounce of reserves, but they’re not. This amazes us. And when one of these companies is bought out, it’s usually paid more than the ten times ratio. But valuations are now drifting down to $40 and $35 per ounce. So the market is basically valuing a company that has 8 million ounces as if it had only 4 million ounces.

TGR: This is a short-term phenomenon, right?

FH: Yes.

TGR: So, when this situation changes, how quickly will producers and majors start buying up the juniors?

FH: That’s a different point. The seniors are going to buy only those juniors that have two grams of gold per ton or a million ounces. The other juniors will just work their way out of the system or go bankrupt.

TGR: What other criteria do you use to evaluate juniors?

FH: We ask some simple questions: Is the CEO technically competent? That is, is he a geologist? If not, that may be okay, but does he have a broad network to make up for that lack of technical knowledge? Does he know the newsletter writers, like Doug Casey, for instance? Does he know the investment bankers?

We’ve found that if the CEO does not know the Street, and doesn’t know the newsletter writers, it doesn’t matter if he’s a geologist or an engineer. There’s going to be no liquidity in the company’s stock, unless there is a multimillion-ounce discovery with a grade of greater than 2 grams per ton. But if you have a company whose CEO knows lots of newsletter writers, gets lots of coverage, knows the value in the Street and gets research for it, that company is going to have a higher price-to-book valuation, which makes it a much more attractive investment.

TGR: Anything else you look for?

FH: Financing is crucial. Companies that are rapidly spending money are going to run out of cash in about six months. The market undervalues them until they have financing in place.

Quiz: what value would he put on CRK shares?

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