Valuation Method Of A Gold Mining Company

This paper aims to provide an understanding of the gold mining company characteristics and to identify the most applicable valuation method for the gold mine.Conventional discounted cash flow valuation is considered to be archaic and unsuitable,because the valuation technique doesn't incorporate management flexibilities,and it is implemented under an assumption that decisions are independent of gold price movements.But in reality,management reacts to gold price fluctuations by altering the production plan.These management and operational flexibilities can be incorporated using the real option valuation,which is deemed to be appropriate and adaptable for valuing mines.The author applies DCF and relative valuation methods on the Porgera gold mine,which is managed and operated by Barrick(Niugini)Ltd.This particular single mine company was acquired by Zijin Mining Group in 2015.DCF and relative valuation results suggest that the acquirer overpaid for the gold mine.The real option valuation gave a significant positive value for the purchase because the author found the individualistic flexibility Porgera gold mine possessed.Overall,the first part of this paper will introduce the case,the second section provides financial and operational data on Barrick(Niugini)Ltd and the Porgera gold mine.And the third part is a literature review on various valuation methods and on mining management flexibilities.The last part presents the valuation process and results of DCF,relative valuation,and real option valuation.This paper serves to evaluate and to compare different mining valuation methods available for valuing a gold mine.With cross-border mines M&A on the rise,this thesis serves to elicit insights for future investors seeking a way to value gold mines and assets with unique and individualistic characteristics.