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Page: Mineral Deposit Value - How to Calculate the Potential Value of a Mining Project

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Mineral Deposit Value - How to Calculate the Potential Value of a Mining Project

images/Mineral-Deposit-Value_3152951160_9f0ef159b5_o_780x390px_85pct.jpg

When the preliminary feasibility study of a mineral project has not been completed yet, but you do want to estimate the mineral deposit value, you can calculate the potential value of a mining project by the back-of-the-envelope calculation described in this article.

Before you can calculate the potential mineral deposit value, you first need to gather some specific data regarding the ore body and the individual drill results.

This required data can be found in the mining company's press releases in which they announce their drill results. Make sure that this data is announced according to the guidelines of National Instrument 43-101 (i.e. approved by a Qualified Person) or similar international reporting standard.

The required data for calculating the potential mineral deposit value is explained in the table below.

Required Data  Description  Example 
Average Grade  The concentration of a mineral in the ore body (i.e. % or g/t)  2% copper and 1.5 gram per tonne gold 
Strike Length  The length in which the mineralization is found in the ore body (horizontally)  500 meters 
Depth  The depth in which the mineralization is found in the ore body (vertically)  200 meters 
Width  The width in which the mineralization is found in a drill hole  100 meters 
Specific Gravity1  The density of the ore body (i.e. the rock)  2.5 

To find out what I do in case some of the required data is missing or incomplete, or what I do when I need someone to verify some of the data provided in the mining company's press release, I recommend you to read the first note at the bottom of this page.

4 Steps in Calculating the Mineral Deposit Value

1. Calculate the Tonnage of the Mineral Deposit

Formula  Example 
Strike Length x Depth x Width x Specific Gravity = "X" (in tonnes 500 x 200 x 100 x 2.5 = 25,000,000 tonnes 

2. Multiply the Tonnage by the Grade

Calculation 

Result 
25,000,000 x 2% copper =  500,000 tonnes of copper 
25,000,000 x 1.5 grams per tonne gold =  37,500,000 grams per tonne of gold 

3. Convert Copper to Pounds and Gold to Ounces

Calculation  Result 
500,000 tonnes x 2,204.62262 =  1,102,311,310 pounds of copper 
37,500,000 gram per tonne divided by 34.2857 =  1,093,750.4 ounces of gold 

To find out how I come up with the numbers 2,204.62262 and 34.2857 I recommend you to read the break even analysis page, on which I explained How to Calculate the Cut Off Grade.

4. Convert the Pounds and Ounces to the Corresponding Metal Value

Calculation  Result 
1,102,311,310 x $3.82 per pound of copper2 $4,210,829,204 
1,093,750.4 x $1,649.80 per ounce of gold2

$1,804,469,410

As you can see in the example above, the deposit does not have to be enormous in size (only 500 meters long by 100 meters wide) to contain a valuable deposit (approximately $6 billion worth of minerals).

However, in order to be as realistic as possible about this valuation, you can not assume that the complete ore body contains the same grade (i.e. 2% copper and 1.5 gram per tonne gold). In addition, you have to keep in mind that a typical ore body does not fit into a right angled box of three dimensions (strike length, depth and width), as the shape and continuity of the minerals found will be different in every deposit. Consequently, it is very important to deduct a certain percentage of the calculated mineral deposit value. Ideally, this percentage should be your best estimate of the overburden3 and tailings4 combined from the right angled three dimensional box, calculated in the example above. The outcome of this estimate is what I refer to as the adjusted mineral deposit value.

You also can not expect that this adjusted mineral deposit value, is the price the mining company will receive from a buyer when this property is sold, as for instance, the costs of extracting the metal from the ore and other operating expenses are not deducted from the mineral deposit value. Therefore you could see a major or mid-tier mining company that wants to replace their mined reserves just pay a small percentage of this metal value for the deposit (i.e. 5% to 10%).

To find out how much of this mineral deposit value I assign to the mining company's value as a whole, I recommend you to read the second note at the bottom of this page.

 

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Note: Whenever I conclude that (a part of) the required data is missing or incomplete, I always contact the mining company's management directly, to kindly ask them to provide me the missing data. I also contact the management directly, whenever I need some of the data provided in the mining company's press release to be verified.

Note: Personally, I estimate the adjusted mineral deposit value conservatively at 5%. Dividing this outcome by the total amount of shares outstanding helps me to easily determine which part of the share price corresponds with the assigned value of this deposit.

 

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1 Water has a specific gravity of 1, and so minerals with a specific gravity greater than one will sink in water, and those with a specific gravity of less than one are less dense than water, and so will float.

2 Prices from March 23rd, 2012.

3 In mining and in archaeology, overburden (also called waste rock or spoil) is the material that lies above an area of economic or scientific interest. In mining, it is most commonly the rock, soil, and ecosystem that lies above a coal seam or ore body. (Source: Wikipedia)

4 Tailings, also called mine dumps, culm dumps, slimes, tails, refuse, leach residue or slickens, are the materials left over after the process of separating the valuable fraction from the uneconomic fraction (gangue) of an ore. (Source: Wikipedia)


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