Queries How to evaluate mining companies

Could you provide me with some possible sources of information on the relationship between a mining company’s mineral deposit and the company stock price. I would also like some information on how to interpret exploration results and predict future stock prices. B.G., Montreal

Predicting the future value of a given mining stock is comparable to forecasting tomorrow’s weather or the likely winner of next year’s Kentucky Derby. But you can narrow the odds, according to Rick Cohen, a mining analyst with Bache Securities in Toronto.

In an article titled “The Golden Rules of Investing,” published in the September, 1986 Northern Miner Magazine, he says there are two major areas to look at when attempting to evaluate a given stock: the hard items and the soft items.

Hard items are those which can be quantified. They include the actual gold deposit, including the geology, reserves, location, cost and level of production.

Soft items are those that can’t be so easily quantified. These include geology, reserves, location cost of production, management analysis. As you are probably aware, people like Mr Cohen spend their entire lives analyzing mining stocks. Their opinions are published in research reports which are sent directly to investors. Toronto-based Wood Gundy Inc., for example, publishes some of the most comprehensive research reports available.

If you would like to get on their mailing list, write to Wood Gundy Inc. at Royal Trust Tower, Toronto- Dominion Centre, Toronto Ont. M5K1M7.

Other brokerage houses like Nesbitt Thompson and Gardiner Watson Institutional (both of Toronto) also publish their own reports.

These reports are a good way of getting some expert opinion on a given stock. But Mr Cohen says investors should try to do some of their own homework in analyzing investments. Key factors to look at, he says, are the number of common shares in the company, current price of the shares, reserves of the mines, estimated gold production, estimated cash cost of production and level of earnings.

These can be used to calculate a great deal of information, starting with price-earnings multiples which are defined as the market price of the stock divided by its annual earnings. Typically, he says, Canadian gold stocks have multiples ranging from 15 to 60 times earnings.

A publication called Mining Oil and Gas Explained may give you some important background information. Published by Northern Miner Press Ltd., it is a good beginners guide to the terminology and methods used in modern mining.

You will also find a complete listing of Canada’s mining companies combined with share prices and properties in the Canadian Mines Handbook. Published by Northern Miner Press, it is updated annually and is therefore one of the best reference sources available in this country. The 1987-88 Handbook contains information on well over 2,400 companies.