Rick Mills, writing for Ahead of the Herd has written that a pound of copper in the ground is worth $.04 per pound in an acquisition. (That would be a pound in South America, not just anywhere.)
He then goes on to say,
On the flip side, the assets of a company such as operational experience, speed to production advantage and in place financial partners for production are the “intangibles” that ultimately create the most shareholder value.
Under these circumstances, he writes, most analysts would support a valuation that is 5X cashflow.
Teck, our SC partner, has the operational experience and financial abilities that provide these intangibles.
So, our share of the cashflow under production is $113M per year. That would give us a valuation of $565M as an acquisition, or $1.36 per share.
This valuation does not include the value remaining in our contract with Teck which is another $40 million cash. (I'll ignore the $60M Teck is spending that we won't owe back because that forms part of the "speed to production" value.)
What the heck...add that $40M in and it works out to $1.46 per share.
Cashflow is very important because all in-situ copper is not equal. Even at the current rate of $1.04 per pound Schaft Creek is a far better project than many others. (Take NCU, for instance, whose cash cost per pound is $1.58 for the first 5 years then $1.69 thereafter, well over the median price of about $1.50. Los Lambos has a whopping cash cost of $1.89 per pound.)
Taking a flat price per in-situ pound of copper is too simplistic and misleading a method for calculating value. Starting with the cashflow allows you to incorporate everything except geopolitical risk, and allows comparisons between projects on a more even footing.
