Compustat. Data Navigator. White Paper: Mining Industry-Specific Data

Transcription

1 Compustat Data Navigator White Paper: Mining Industry-Specific Data February 2008

2 Data Navigator: Mining Industry-Specific Data Higher reserves for a mine translates to greater longevity and higher worth. Analyzing a mining company is a bit different than analyzing most companies. In fundamental analysis, for example, P/E ratios are rarely used to value precious-metals companies because they tend to be much higher than for a typical common stock and have little use in comparisons. Mining companies are valued not according to earnings so much as assets, and so factors such as material reserves and production must be taken into account. Because of such particularities in analysis, Compustat now provides new industry-specific data for companies in the GICS sub-industries of Gold ( ), Diversified Metals & Mining ( ), and Precious Metals & Minerals ( ). A full listing of the data is available for reference at the end of this paper. The data chosen helps simplify analysis for those who understand the mining industry and want to compare the costs, reserves, and production rates of different companies. For those unfamiliar with analyzing mining companies, this article will help shed light on the industry and how Compustat s new data can be used in analysis. Using gold mining as an example, we will look at three key areas of analysis: reserves, costs and valuation. When beginning to examine a mining company, one important area to consider is its reserves. Reserves are the amount of resource a company still has in the ground. Our data item Gold Proven and Probable Reserve (MMPPRAU) reflects the total ounces of gold, both proven and probable, that a company expects to extract from their mines. This is an important figure because reserves are the lifeblood of a mining company the larger the reserves, the longer the company s life and the higher its typical worth. If a company has dwindling reserves, an investor may think twice before buying into what might later prove to be an empty mine. A company must add additional reserves (through 1

3 As long as a company s cash cost is below their sales price, they can continue mining for a profit. exploration, new mine development, or mergers) in excess of its annual production to be successful. One ratio to look at when considering reserves is mine life. Mine life for a gold mine is equal to reserves divided by annual Gold Production (MMPAU). Mine life represents the years a mine has left, or the company s success at replacing reserves in relation to its current production rate. The higher the mine life, the better; some investors won t consider a company unless mine life is at least five to ten years. Another important factor to consider in analyzing mining companies is costs. If two comparable mines both have the same reserves, yet one mine has higher costs per ounce of gold production, then the mine with lower costs is ostensibly the better investment. Several things determine costs for a mining company including mine type (surface mines cost less to operate than underground mines), mining method, ore grade and location. Given these and other factors, a gold mining company is able to determine their overall cost per ounce of gold and provide two different figures: Gold Cash Cost (MMCCAU) and Gold Production Cost (MMPCAU). Gold cash cost is the cost of producing an ounce of gold for a given period. It factors in mining, processing, milling, refining and other direct costs, and excludes depreciation, reclamation, and other non-cash costs. Cash cost is important as a break-even point as long as a company s cash cost is below their Gold Sales Price (MMASPAU) *, they can continue mining for a profit. The lower cash cost producer essentially has greater longevity than the higher cash cost producer. It is also important to note that cash cost is widely used to determine the operating leverage of a company. On a per ounce basis, low cash cost gold producers will generally have greater operating leverage than higher cash cost * For some companies, Gold Sales Price is the same as the market price for gold (termed an unhedged company) and for some companies Gold Sales Price varies with how they contract to sell on the futures market (a hedged company). In a rising gold price environment, a company that hedges its production won't get the full benefit of the higher gold price and will likely carry a lower valuation than a company that is unhedged. 2

4 Mining companies are valued using market cap per ounce of reserve and market cap per ounce of production. producers. However, in a bull market, high cash cost producers will see their operating leverage (or profit margin) increase more rapidly than low cost producers. That is to say, as gold prices go higher, the percentage of earnings change for a high cash cost company will initially rise much faster than for a lower cash cost company, potentially driving their stock price upward. In this way, a company with a higher cash cost might be a better (though overall more risky) investment based on market conditions. Production cost, or total production cost as it is sometimes referred to, is equal to cash cost plus depreciation, reclamation and all non-cash costs. Focusing on production cost is a more comprehensive way of evaluating a company than using cash cost. For example, if an investor determines a company s sales price is high enough to cover cash cost, but production cost is not quite covered, they might be wary of investing in a company that has little left to finance exploration. In terms of costs one should also consider Gold Reserve Average Ore Grade (MMAOGAU). This figure is standardized and provided in grams per metric tonne; it is used to evaluate how rich the gold ore in reserve is. As a rule, the better the grade of ore, the easier, and more cost effective, it is to extract gold from the ore. A higher ore grade translates to lower overall costs for a mining company over time. As mentioned previously, mining companies are not valued by earnings so much as assets. Two important ratios to consider when valuing a mining company are market capitalization per ounce of reserves and market capitalization per ounce of production. Market capitalization per ounce of reserve is equal to market cap (MKVAL) divided by Gold Proven and Probable Reserve (MMPPRAU). This figure tells investors how much they are paying per ounce of gold the lower the number, the better the value. Market capitalization per ounce of production is equal to market cap (MKVAL) divided by Gold Production (MMPAU). This figure tells how much the market is willing to pay for each 3

5 ounce of production and is again good for comparing relative value across mining companies. Let s take a look at an example of a report from Compustat using the data we ve discussed. The following is a snapshot of several high-production gold mining companies (GICS code ) for fiscal year 2006: We ve divided the data into three sections: Reserves, Costs and Valuation. At the bottom we ve also included industry averages taken from eleven senior gold-mining companies (including the six in our population). Scanning the reserves section, Barrick and Newmont both have the highest reserve and highest production out of any of the companies. Their mine life is about on par for the average, at 14.2 and 16.1 years respectively. They appear to be large, stable mining companies that might make good long-term investments. With respect to costs, both have kept their gold cash cost relatively low compared to the average, particularly Barrick at $282. In terms of valuation, they had $216 and $217 market cap per ounce of reserve for 06, about the median for our population. They also have a market cap per ounce of production in excess of three thousand, relatively high for our population (except the outlier of Goldcorp at 7 thousand). In addition to looking at this snapshot, 4

6 it would be useful to track the same data across periods to determine things like year-to-year growth in reserve, mine life, costs, etc. When using our data in such comparisons, one can be assured the data is accurate and comparable. Compustat s industry-specific mining data is based on what Standard & Poor s data analysts consider significant in the industry and what is consistently available in 10-K, 10-Q, newswire and website data sources for mining companies. The data is checked for accuracy and standardized for comparison across the mining industry, so you don t need to root through lengthy reports and recalculate figures based on differences in reporting. Compustat s data is immediately comparable across time and companies. Understanding the finer points of analyzing mining companies is important to making investments in the industry, and although not inclusive, we hope this guide has provided a starting point for using our industry-specific mining data to do so. The concepts here are applicable for silver, copper, nickel, zinc, iron ore, coal, and metallurgical coal all of the mining areas we cover in our new industry-specific mining data. For more information on analysis of the mining industry, see Standard & Poor s Precious Metals Industry Survey. The survey is available with subscription to Standard & Poors Market Insight. 5

7 Mining Industry-Specific Data Items Mnemonic Data Item Name Measurement MMXPX (Q) Mining Exploration Expense (company total expense) Au (Gold) MMASPAU (Q) Au Sales Price US$ per oz MMCCAU (Q) Au Cash Cost US$ per oz MMPCAU (Q) Au Production Cost US$ per oz MMPAU (Q) Au Production Actual oz MMPPRAU Au Prv&Prob Reserve Actual oz MMAOGAU Au Res Avg Ore Grade Grams/ton Ag (Silver) MMASPAG (Q) Ag Sales Price US$ per oz MMCCAG (Q) Ag Cash Cost US$ per oz MMPCAG (Q) Ag Production Cost US$ per oz MMPAG (Q) Ag Production Actual oz MMPPRAG Ag Prv&Prob Reserve Actual oz MMAOGAG Ag Res Avg Ore Grade Grams/Ton Cu (Copper) MMASPCU (Q) Cu Sales Price US$ per lb MMPCU (Q) Cu Production '000s of lbs MMCPDCU (Q) Cu Cathode Production '000s of lbs MMPPRCU Cu Prv&Prob Reserve '000s of lbs MMAOGCU Cu Res Avg Ore Grade % Cu Ni (Nickel) MMASPNI (Q) Ni Sales Price US$ per lb MMPNI (Q) Ni Production '000s of lbs MMPPRNI Ni Prv&Prob Reserve '000s of lbs MMAOGNI Ni Res Avg Ore Grade % Ni Zn (Zinc) MMASPZN (Q) Zn Sales Price US$ per lb MMPZN (Q) Zn Production '000s of lbs MMPPRZN Zn Prv&Prob Reserve '000s of lbs MMAOGZN Zn Res Avg Ore Grade % Zn Fe (Iron) MMPFE (Q) Fe Production '000s tonnes MMPPRFE Fe Prv&Prob Reserve '000s tonnes Coal MMPCOAL (Q) Coal Production '000s tonnes MMPPRCOAL Coal Prv&Prob Reserve '000s tonnes 6

8 Metallurgical Coal MMPSC (Q) Met Coal Production '000s tonnes MMPPRSC Met Coal Prv&Prob Reserve '000s tonnes (Q) signifies the item is available quarterly as well as annually. Compustat Contact Information: North America U.S. and Canada Mexico ; then dial Europe London ++44.(0) Asia Hong Kong Japan India