Let’s take ECU Silver Mining Inc. (ECU.T)(C$.50) as an example of an advanced junior exploration company with one of the largest silver deposits in the world with its Velardena project in Mexico. The rule of thumb for pricing juniors exploration companies is that if they are not yet in production, you can usually buy them safely up to ten percent of “in situ metal value”. If you have ten million tonnes of ore worth one-hundred dollars per tonne, you have a one-billion dollar in-the-ground value. Using discounted net present value modeling and accounting for both mining costs and capital costs, you can arrive at various valuations depending on term and rate of interest and capital cost payback period but the rule to which I adhere is that I can pay up to ten percent of a billion dollars or one hundred million because the major mining companies, when they take an interest, will pay between twenty and thirty percent of in situ metal value. My “lift” is therefore two to three times my cost base.
In the case of ECU, I take the January 26th report authored by Bill Lewis of Micon (an independent) who states that there exists between 569 and 930 million “silver equivalent ounces” present at Velardena. This would imply an in situ metal value or “in ground” value of (assuming U.S.$10/oz. silver) of between $5.6B and $9.3B. Using my rule, I am therefore “safe” in buying ECU for a valuation of between $569-930M (10% of in situ metal value) or after dividing by the undiluted shares issued of 242M, between U.S.$2.35 and $3.64 per ECU share. With the shares quoted on 3/17/09 and U.S.$.38, I submit that it is this type of severe discounting that is hampering the TSXV’s rebound while at the same time.
;;;;;;;;;;;;;;
I believe that these juniors represent excellent risk-reward opportunities.Those looking to take advantage of in situ metal valuation adjustment should look to ECU Silver Mining Inc. (ECU.T) and those looking for an exploration discovery valuation adjustment should consider Explor Resources Inc. (EXS.V) where such adjustments could be in the order of 800-1,600% over the intermediate term as these junior markets experience normalization and a return to sanity. It “feels” like the ‘70’s and very few remember how many fortunes were made in a very short window – but I do. It was wondrous.
Comment: Is it any wonder the we play the schitoprhenic game of hold on tight and get angry about the price action? We're right .... and losing money. I am just happy that I am stuborn when I believe the available anlysis.
