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Understanding the KBFO Implied Project Value Tables

Understanding the KBFO Implied Project Value Tables

A key element of our company profile pages has long been our Implied Project Value (IPV) Charts which provide graphic representations of the valuations attached to individual projects by the market. The normalized to 100% value a project is receiving in the market is calculated by dividing a company's market capitalization by its net project ownership. This figure does not represent what value the project ought to have based on a project valuation method such as the discounted cash flow method (DCF); it simply represents what the market says the project is worth if all other company assets are discounted to zero. Our IPV Charts simply plot the market's valuation according to the project's stage in the standard exploration and development cycle of a mineral project.

The rational speculation model comes into play as a valuation tool which offers a standardized value trajectory for a project based on the expected value of the outcome and a probability ladder associated with the exploration and development cycle of a mineral project. In plotting the market valuations of active companies against these theoretical trajectories we can rapidly develop an initial impression of whether a company is under or overvalued. When a set of similar projects are displayed together within one chart it yields considerable insights regarding the relative valuations of similar or peer projects. The IPV Charts thus help us understand how and why the market is valuing a particular project, and how it is valuing a class of projects.

This article introduces and briefly describes the new features associated with the expanded IPV Chart We Reports, while also presenting a recap of the logic behind the IPV charts. Together with the existing individual company profiles, the KBFO resource estimate pages, and the sectoral indexes, the IPV Charts and associated tables represent a very significant step in making KBFO an essential research tool for those that follow the junior mining sector.

The Logic of the IPV Charts

The IPV charts serve two functions. One is in observing, within the larger context of the rational speculation model that seeks to assess the value of resource projects as they advance through the project cycle, the valuation of a particular project relative to potential ultimate project values. As projects move forward and the size of the target takes shape it becomes possible to identify "normal" ranges of valuations for specific stages in project development cycles. Projects that lie within fair valuation ranges appear within the colored bands in the chart---each band itself representing a particular target or ultimate project value, with $100 million, $500 million, and $1 billion being the target trajectories we commonly employ---while those that fall outside of the bands can often be identified as being under or overvalued relative to the project stage. While the colored bands can help assess the value of a project relative to a standard trajectory, by including peer and comparative projects, both active and "successful" projects (whether they have become mines or been acquired buy larger companies,) in the IPV charts it becomes possible to assess how a play stands relative to comparative projects. While an individual project may be over or undervalued in an abstract sense, including peer projects in an IPV chart can suggest how the same project may be more or less over or undervalued in a market that is affording particular treatment to all projects of a certain class. Likewise, a project that consistently appears under or overvalued relative to its peer group may be indicative of unique features of a deposit, whether positive or negative, and recognizing this visually can serve as a call to investigate what this factor may be. This second function is a particularly helpful aspect of the IPV charts as it provides a sort of third dimension that considerably enriches one's appreciation of how the market is valuing a project and the speculative possibilities that do, or do not, emerge as a result, whether in an absolute or a relative sense.

Another element of the IPV charts is simply identifying the appropriate peer group. If a certain region, commodity, or deposit style is of particular interest, the IPV charts can serve to identify companies and projects that share such features. As we will describe further below, selection of the comparative examples used to populate an IPV chart requires considerable deliberation. Carefully considering those comparisons can suggest new ways of thinking about the market and specific companies whether the comparison is made to geologically similar companies, projects in one country or region, or through some other manner. The question of a peer group equally applies to the models employed as the "success stories" in the IPV charts, and evaluating particular projects relative to examples of similar projects that were acquired by larger companies can also provide insights about the sorts of speculative opportunities offered by particular projects.

Exploring the IPV Reports

Given the various ways in which the IPV charts provide value, we choose to develop them further as research tools and to create a larger number of them within KBFO. While the effort to develop a larger number of IPV charts is an ongoing one that some readers may have already observed--we have currently developed 40-odd new IPV charts and will continue to add them day by day going forward---more important are the expanded uses we have developed. In terms of the changes associated with the new IPV Reports, in some ways they will be minimal. For those who have grown accustomed to reviewing the IPV charts within the KBFO company profile pages, they will continue to be located in the Risk Analysis section of individual company profile pages, and the charts found here are essentially unchanged from those subscribers are accustomed to. However, in an attempt to make the charts more accessible, and also to allow subscribers to quickly identify which companies have associated IPV charts, we have also created an alphabetical listing of available IPV charts. This list can be found under the Research Tools tab on the black banner at the top of every KBFO web page. Clicking on any item in this list will take one to what we have termed the "IPV Report."

The IPV reports present several key differences from the IPV charts. While the chart itself is unchanged from what appears in the company profile pages, a significant new feature is the lower table that includes the various companies and projects that appear in the IPV charts, with direct links available to the company profile pages and the particular project sections of the company profile pages. Developing the project tables below the IPV charts is intended to allow readers to make fuller comparisons to the project in question and to more easily educate themselves regarding companies or projects with which they may not be familiar.

The addition of the table and the links it provides is an important step because the IPV charts in themselves are essentially static representations portraying the valuations of the subject company's key projects against projects we have deemed appropriate comparisons or benchmarks. When a project is compared against another it is up to the reader to understand the nature of the comparisons being made, and requires, or at least assumes, the reader's familiarity with the projects being employed as comparisons. Unfortunately, as the number of companies operating in the exploration sector, and the number of individual projects being worked, has grown considerably it has become all but impossible to retain detailed knowledge of the various properties being explored and developed. In this context, the IPV reports are particularly valuable, as they serve the dual function of both classifying projects alongside of their appropriate peers, and of providing a rapid means of conducting further research on peer companies through the links available in the table below the chart. The result is that the research necessary to quickly acquire basic knowledge of a company that might appear to be of interest on an IPV chart is immediately at hand.

Another important change made to the IPV reports includes an updated selection of Success Stories that we use as valuation benchmarks. The first generation of IPV charts made over the last few years had a largely static group of success stories that included Diamond Fields and its $4 billion valuation at the time of the Voisey's Bay buyout, Arequipa's $1 billion valuation for Pierina, Goldcorp's $2.5 billion valuation at the moment of its merger with Wheaton River, and Western Silver's $1.6 billion valuation for Penasquito. While those companies undoubtedly represent some of the greater success stories of the recent past, the vast amount of project data in our KBFO database, as well as our resource calculations tables, now allows us to employ a far more nuanced group of success stories as we employ targets having similar resource size, location, or mineralization style, with the result being that our larger data range allows us to make comparisons to similar projects and their ultimate project values, rather than simply employing the most exceptional cases as our models.

The result is that the new and improved IPV charts and IPV reports are able to provide significantly more revealing comparisons, employing a wider range of companies and projects, that make them powerful tools in assessing the valuations of individual projects and their valuations, as well as those of their peers. Below we will consider briefly several IPV charts in order to illustrate the logic behind them and suggest ways they can be profitably employed.


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