Digging for Outliers in the Gold Mining Field
Analyzing reserves can uncover hidden clues about which gold miners may be mispriced.
When analyzing gold mining companies, an important metric that investors should consider is the company's proven and probable gold reserves. This metric roughly quantifies the total amount of economically minable gold located beneath the firm's properties. The reserve figure is a key driver of a gold miner's future earnings power, representing potential future earnings which are realized over time, as gold miners convert below-ground ore reserves into tangible gold output. Given this direct link between reserves and future earnings, we analyzed the reserves figures for the 17 gold miners in our coverage universe in order to better calibrate our valuations. Our analysis also seeks to identify outliers--mining companies that the market may be undervaluing or overvaluing relative to their peers.
Our analysis was a two-step process. First, we recorded the total proven and probable gold reserves for each of the mining companies we cover. However, this step was complicated by the fact that gold mining companies also frequently own reserves of various byproduct metals such as silver, zinc, or copper, which may not be captured in the headline gold reserves figures. In order to compare reserves on an apples-to-apples basis, we translated the various byproduct metal reserves into gold-equivalent figures, relying on current spot prices for the various metals to inform our assumptions.
Joung Park, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.