In a past post, see here, I did some speculations on Minera Andes valuations based on extrapolating some of Rob McEwen’s comments in last years corporate presentation. In that thought experiment I considered the copper to be worth more than the $.02/lb based on other recent explorer buyouts at the time. The table from that corporate presentation is included below.
|San Jose (Ag, Au) $3.6 billion X .5 X .49||$880 Million||$3.06/share|
|Los Azules (Cu) 12.5 billion lbs inferred at $.02/lb||$250 Million||$0.87/share|
|Exploration properties||$50 Million||$0.17/share|
I’m always looking for other peoples approach to valuing a company, especially when I respect them. That said I listened to a recent comment by Eric Sprott (posting on this appearing soon) where he uses a very simple formula to determine if a silver miner is cheap, or as he described it the “stealing candy from a baby” price. The formula is 3 X earnings 2 years out earnings.
So I started doing some calculations of Minera Andes (MAI) using this formula to determine what the “stealing candy from a baby” price of MAI was.
|$19,000,000.00||4th Quarter net income (based on $24/oz silver)|
|$76,000,000.00||Estimated annual net income based on above|
|$91,200,000.00||Assume 10% net income growth for the next 2 years (hopefully too conservative a number)|
|$182,400,000.00||Lets assume silver is $50/oz in 2 years, seems conservative.|
|$547,200,000.00||MAI value of silver at 3X two year out earnings ($50 silver)|
|$1.90/share||MAI dirt cheap value if there was only the current silver production|
|$2.94/share||MAI dirt cheap value if you include the numbers form the table avove for copper and exploration properties|
|$3.80/share||MAI dirt cheap value if there was only the current silver production AND you were comfortable with assuming $100/silver 2 years out|
|$4.84/share||MAI dirt cheap value if there was only the current silver production AND you were comfortable with assuming $100/silver 2 years out + copper ($.87/share) and explorations properties ($.17/share)|
So the $50 silver estimate is a number I’m personally very comfortable with. It should also be remembered that the cash flow next year, when the loan payments to Hothschild end, should boost earnings. I’ve left this out on purpose to help de-risk the numbers. Leaving out the boost from the increase in cash flow and hence earnings also offsets if MAI looses on the copper play.
So $2.94/share or under would seem to be what Eric Sprott would consider the ‘Stealing candy from a baby’ price for Minera Andes.
Disclaimer: The above is simply my thought experiment on Minera Andes cheap valuations. Please do your own due diligence.