Monday, April 09, 2007

Earth for Sale

Check out the bullboards and complaints about undervaluation of a stock because of the reserve or resource abounds. I've found the metal values in the ground staggering at times myself.

So, just what is the value of the metals in say the top 1 km of the Earth's crust?
Well, copper makes up about 0.00007% of the Earth's crust, which is 40 km thick and that is about 2.6% of the mass of the Earth, and the mass of the Earth is 6 x 10^24 kilograms. Convert that to copper and you get 6 quadrillion pounds, which at today's prices is $18 quadrillion dollars. In case you'd never hear of a quadrillion, its 1000 time bigger than a trillion, so $18 quadrillion is 18,000 times bigger than a trillion. It's 2000 times bigger than the US federal debt. It's $300,000 for every man, woman and child on Earth.
So, then I looked at Uranium. It makes up about 4 parts per million of the Earth's crust, so there is about 32 quadrillion pounds. At $100 per pound it comes to $3.2 quintillion, that's 32 with 17 more zeros or about 350,000 times more than the US debt, or about $50 million for every man, woman and child.

Then there's gold, silver, zinc, lead, platinum, rhodium, palladium, cobalt, nickel, etc., all worth outrageous amounts of money at today's prices.
Truly, the only metal worth those prices is the metal being sold today that those prices.
So, how do you value that which is in the ground?
There was a small item in a paper I was reading that said the industry standard for buying a copper resource property is about a 1c per pound for the resource, and copper resource cut-off is 0.2% or roughly 4.4 lbs per ton. This means anything under 0.2% you can essentially assign zero value unless it is producing or a by-product.
In that light the valuation of a property becomes a lot different. For copper, that's about 1/300th of the value you hear on the bullboards.
Consider that mining a property requires acquisition costs; exploration costs; capital costs; production costs; operating costs; taxes, etc. The acquisition costs have the longest carrying time and can take a long time to recover the investment.
So, that's where you start and then you add or subtract depending on the answer to the following questions:
  • How good is the quality of the grade?
  • What's the likelihood that the management team will actually turn the resource in a mine?
  • What is the access to infrastructure?
  • What's the length of time to actually build a mine?
  • What will the labour costs be like?
Certainly those who are mostly likely to make real money are current producers and near term producers, and then it just makes so much more sense to value the company based on production.

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