Inventory Valuation and per Carat Estimate for Auctions 1 and 2

DYOR. Not qualified for advice.
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Applying some logic and reasoning I’ve arrived at estimated valuations for the first two auctions. There's about 20 hours of work in this estimate alone and it builds on hundreds of hours of earlier research/analysis.

Treat as a rough valuation (see what I did there) but the it's the best I can come up with in the absence of a rough ruby price index. I think the assumptions are broadly reasonable. They are fully documented in the PDF attached to this post. Read on for an overview.

Summary of Results

The key figures for Rough Ruby are provided to the right of each table. Cut figures are provided for comparison.






Analysis Method

Applying some logic and reasoning I’ve arrived at estimated valuations for the first two auctions. My original analysis was in three groups ( large/special, medium and small stones ). I determined that much finer granularity was needed in the analysis method and hence I have extended this analysis with grade/quality grouping for each and every carat size (except for the largest stones). This results in quite large and complex price tables but was necessary for a best attempt at an estimate to avoid averages within size groups distorting the results.

Mustang commenced Ruby bulk sampling operations in a lower-quality deposit in 2016. With the acquisition of license 8245L Mustang have been able to recover “almost exclusively” high quality Rubies from the end of June 2017.

Mustang are pre-classifying Rubies as either “High Quality” or “Commercial Quality” Ruby. The inventory will then be transferred to the auction location for final grading according to the Rough Ruby Grading System.

It’s very important to understand that the current 8245L deposit being mined is a Secondary Deposit that yields much higher quality rubies than Primary Deposits. Think of it as a survival of the fittest and essentially under natural processes the highest quality material collects in “Ruby Traps”.

The core assumptions are:

• Auction 1 Inventory - The 200,000 carats for auction 1 was been broken into two inventory segments. For the first segment of 100,000 carats prior to July 2017 I have assumed 70% of the Rubies are Commercial Quality Ruby and the remaining 30% as High Quality Ruby. For the second segment of 100,000 carats I assumed 90% as High Quality Ruby and 10% as Commercial Quality Ruby.
• Auction 2 Inventory - I assumed 90% as High Quality Ruby and 10% as Commercial Quality Ruby. I’ve assumed Mustang can comfortably recover and process enough Ruby to achieve a 200,000 carat production target for the second auction, based on the recovery rates reported in the 4 September announcement.

The Weibull distribution was used to create statistical models to spread the carat inventory into stone buckets by sized of stone.

Wholesale Cut Ruby per carat prices have been sourced from a Gem Guide table which was published in Mustang’s Q3 2016 Quarterly report. After a discussion with CJ at the General Meeting, I have extended the price table with estimated per-carat values for a lower-grade group of Rubies.

Rubies in the 1 carat to 19 carat size range have been distributed amongst quality grades using the proportions as shown in the figures below. This distribution is based on the reasoning above. For the larger stones greater the 20 carats I have picked some Higher-quality grades.

Red / Purple = High Quality Ruby​

Grey = Commercial Quality​

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Based on some e-mail questions to a US-based Gem Cutter and reasoning I determined conversion rates to convert cut ruby wholesale prices to rough ruby wholesale/tender prices. 25% is used for the smallest stones, 32.5% for mid-sized stones and 40% for the largest stones.

I have assumed a sliding scale of cut ruby yield from rough. This starts at 25% for the smallest rubies and rises to 40% for the largest rubies.

For a particular size rough ruby, I determine the size of the cut ruby that can be achieved based on cut yield and use the resulting figure to lookup the price band. Then based on the price band I calculated a proportional cut ruby price based on position within the lower and upper limits of cut ruby size. The per-carat price is multiplied by the cut ruby size in carats to arrive at an estimated wholesale price for the cut ruby. By applying a reserve price ratio I then determine a possible reserve price for the rough ruby.

By tallying all the results I can the calculate the following:

• Total value of inventory as cut ruby
• Total value of inventory as rough ruby
• Per-carat value of rough-ruby inventory

Some interesting points and to give some perspective on the estimated values at different ends of the ruby inventory:

• Towards the top-end of the inventory, a 21-carat rough ruby will yield a 7.33-carat cut ruby. The cut ruby will have an estimated value of $254,333. Assuming a 40% reserve, the rough ruby will have a value of $101,693 ( or $4,842/ct ).
• Towards the bottom-end of the inventory, a 1-carat rough ruby will yield a 0.25-carat cut ruby. The cut ruby will have an estimated value of $51 (“High Commercial”). Assuming a 25% reserve the rough ruby will have a value of only $13 ( or $13/ct ).

The full set of assumptions and detailed analysis is in the attached PDF. Enjoy!