I received an interesting email from "The Daily Reckoning" this...

I received an interesting email from "The Daily Reckoning" this morning on how to value junior gold shares.
http://www.dailyreckoning.com.au [free subscription]

I don't pretend to understand all the techno babble but here are a few quotes that caught my attention:

".... You know what a gold mine is don't you? It's a hole in the ground with a liar standing next to it, usually. But not always."

" .......To calculate an EV per ounce, you simply add up the total number of ounces attributable to the company via its projects and divide this number into the Enterprise Value.

" ......you can't conceivably take a producing gold mining company and compare its EV per ounce with an exploration company and come to the conclusion that the exploration company offers better value. You would be excluding the costs associated with the development of the mine, not to mention the premium a company receives in the market for successfully developing the project."

" ..... Bigger deposits tend to attract a premium due to the higher probability of being developed based on better economies of scale."

" ...... Different resource classifications dependent on drill spacing and economic viability. Reserves both Proven and Probable (supported by economic studies) versus just a resource (no supporting feasibility study work)."

" ...... Is it shallow enough for cheaper open cut mining methods? (Generally 150m-200m or ideally shallower) Are there large amounts of overburden that need to be stripped away adding to the cost of mining (stripping ratios)."

"........ The average grade of the deposit. Generally speaking, higher grades are cheaper to produce and attract a premium. If you are mining underground, higher grades become essential due to the additional capital cost associated with underground mining."

"..... Underground mines have higher ongoing capital costs associated with the continuation of underground development.

"...... The metallurgy (recoverability of the metals). Sulfide deposits generally have lower recovery rates than oxide and require a more complicated extraction process."

"...... The exploration potential on the properties and the probability of future expansion of the deposits."

"....... A simple way to avoid this risk is to have a basic sense of value. Perform a quick EV per ounce calculation and see what you are paying. Compare this to some of the company's peers and establish whether what you are paying is reasonable. Don't be the chump that is buying shares off the people that were fortunate enough to get in at the ground level and are cashing out."