The Mining Valuation Handbook: Mining and Energy Valuation for Investors and Management (3rd Edition)
By Dr. Victor Rudenno
Dr. Victor Rudenno has written what is recognized as the definitive book on the extractive industries in Australia, a continent that has a lot of natural resources. The book is intended for resource analysts, mining company managers and meticulous investors. In effect, this is the Bible for how to analyze resource companies and assign a value to them.
Make no mistake. This is a reference book. It’s the type of book that is probably required reading for graduate students at the Colorado School of Mines. In other words, this is not a book that one reads for entertainment. This is a book that one reads solely for the purpose of education. Which means only those closely associated with the mining industry would ever pick it up in the first place.
Each and every topic in The Mining Valuation Handbook is discussed comprehensively and depicted in technical terms. Anyone not familiar with the extractive industry, the stock market and valuation theory will quickly get lost in the mist. Additionally, a substantial background in higher mathematics enhances the book’s readability.
Everything that has been said about the book so far sounds vaguely negative. This is not the reviewer’s intent. In actuality, The Mining Valuation Handbook is – for all intents and purposes – outstanding. It’s just that those intents and purposes are narrowly defined: this is a textbook specifically designed and written for mining industry professionals.
Dr. Rudenno starts off with an overview of the resources industry. He points out that “the mining industry is very capital hungry.” In other words, development costs and equipment costs devour mountains of cash. And in the present economic crisis, Rudenno believes a lot of developmental projects will be scrapped for lack of funds.
One of the more interesting sections of The Mining Valuation Handbook, especially for analysts or investors, is the explanation of feasibility studies. And as Rudenno says, “Feasibility studies in resource projects relate not only to the physical aspects of resource recovery, but also to the economics of the project.” This is important because at each stage of the project more and more money needs to be spent. For this reason, project developers use pre-feasibility studies to decide if the project should be pursued at all.
Even then, things can go wrong.
Rudenno provides analysis of Pegasus Gold Inc., as an example of how and why things go wrong. Pegasus Gold ended up writing off $353.5 million of shareholders funds. This was due to increased operational costs of the mine. In his analysis of Pegasus’ failure, Rudenno provides a good investment tip: the most critical factor in any mining project is the grade of the ore. “The higher the grade, the safer the investment.”
In chapter 7, Rudenno talks about mining and hydrocarbon recovery. First, he discusses the different types of mining and the problems associated with each type. Then he introduces a brief discussion of oil and gas drilling, which is followed by sections on marketing and processing. The reader comes away with an understanding of just how complex and expensive mining/drilling and processing operations really are.
Rudenno gets to the nitty gritty in chapter 11, which is where he explains valuation and pricing techniques. There are three basic techniques: fundamental, relative, and statistical/graphical. Rudenno presents and dissects each method in great detail, using charts and graphs and complex mathematical formulas. Frankly, for readers uninitiated in such computations (discounted cashflow, etc.), the material gets very confusing very fast. For readers who know what Rudenno is talking about, this portion of the book is extremely helpful.
Under the tag of ‘Quantifying the Risk,’ Rudenno talks about sensitivity analysis and probability analysis. Sensitivity analysis is used to determine the hypothetical net present value (NPV) of a company. According to Rudenno, sensitivity parameters need to be examined prior to an investment and monitored after the investment is made. He also feels probability analysis can “aid in the decision-making process.” However, probability analysis is quite complicated, requiring randomly selected values that are plugged into what is called a Monte Carlo simulation. This simulation “provides a feel for the robustness of the project.” Yet as Rudenno warns once again, “Things can go wrong.”
In other words, hypothetical analysis is exactly what it says it is – hypothetical.
Most resource analysts would benefit from reading Rudenno’s explanation of ‘cut-off grade theory and practice.’ For this is where mines make money or go bust. It’s simple: if the costs of getting the gold out of the ore are greater than the return, the mine is a bust. If the costs are less, “it could be economic to mine.” Rudenno provides a handy formula to determine the cut-off grade for any mining project.
The final section of The Mining Valuation Handbook is devoted to commodity profiles. Rudenno provides valuable summaries of common mineral resources. Each summary includes the name of the commodity, along with pertinent information about price, supply and demand, geology, average grades, capital and operating costs, processing issues, and refining charges. He begins with Aluminium and hop scotches his way to Zinc.
Extensive supplementary material is provided in the book’s appendices. There is also a glossary, which is quite useful for anyone who undertakes the task of reading Rudenno’s book. One imagines that the only people who would never have to consult the glossary are professional accountants working in the mining industry.
Dr. Rudenno certainly knows his subject matter. However, the focus of the book is extremely narrow and very advanced. Thus, The Mining Valuation Handbook is intended for a select group of readers. If you’re a mining analyst, mining executive or a serious long-term investor looking for a greater understanding of the technical, financial, economic and investment side of mining, this is the book for you.
On the Read-O-Meter, which ranges from 1 star (yucky) to 5 stars (delicious), The Mining Valuation Handbook assesses 5 stars.