Some of you might have seen my NPV estimates for PTM and MAG. I decided to try my hand at the same thing for SGR.

This is a estimation of the Net Present Value discounted from future cash flows - i.e. how much money will the company make over the foreseeable mine life, and what that is worth now, discounted by the interest rate one deems appropriate for the money at risk. Of course, to attempt something like this, it helps to have access to as much information as possible. Since I don't work for the company, I therefore have to make some assumptions, based on the information publicly available:

1. No assumptions are made regarding inflation. This is the same as assuming the value of the company will appreciate at the same rate as inflation throughout the scope of the estimate.

2. The long-term price of gold used is the trailing 36-month price of $662/oz. This is done in order to be conservative. This post will also include estimates using the current POG.

3. The ramp up in production starts at an average of 400 t/d for 2008, increasing to 1,200 t/d by 2010. This will in turn ramp up to 1,800 t/d by 2012, which is the long-term modeled steady-state production. The 1,800 t/d value is the number I've heard here and on other forums that could 'easily' be obtained with the addition of another crusher unit. I've contacted the company to inquire how easy it would be to expand the milling capacity further, but have not heard back from them yet. In terms of production, this comes to ~58,000 oz this year, ~83,000 next year, rising to ~248,000 oz when running at 1,800 t/d.

4. The estimated mine life is 35 years. You can add more years, but even at reasonable discount rates, the NPV runs into diminishing returns when looking >35 years out.

5. The estimated average ore grade over the life of the mine is 0.4 oz/t. This might seem low to some and high to others. That, in my opinion, makes it a fairly prudent estimate.

6. Production costs vary in the model. They sit at $420/t for the first year, decreasing to $105/t once 1,200 t/d milling capacity is reached in 2012, then to $95/t once 1,800 t/d is reached in 2014. (This equates to $1,050/oz, $263/oz and $238/oz, assuming 0.4 oz/t head grade, for you $/oz guys. High grade helps.).

7. The mill is assumed to be in operation 345 days out of the year.

8. A smelter rate of $1.50/oz is assumed for refining costs.

9. The number of shares outstanding used is 258,164,101, fully diluted, as posted on the company's website. I realise that future dilution is more than likely, but I have no way of estimating how much, or by when. Present cash on hand is estimated at $25M.

10. The royalty agreement is ignored. A few million in present values approaching $500M - $1B didn't seem to me to be worth the headache of factoring into the spreadsheet.

One thing to remember is that the closer we get to steady-state production, the more risk and time is removed to positive cash-flow, and therefore, the more the company is worth. These estimates are of the share value today.

Pumping the numbers into my spreadsheet, I came up with the following results:

$662 Gold:

$2.80/share 10% DR

$4.08/share 7% DR

$5.45/share 5% DR

$934 Gold:

$4.81/share 10% DR

$6.94/share 7% DR

$9.20/share 5% DR

Time warp into the future, when SGR is at full 1,800 t/d x 345 production:

$662 Gold:

$3.95/share 10% DR

$5.32/share 7% DR

$6.75/share 5% DR

$934 Gold:

$6.48/share 10% DR

$8.73/share 7% DR

$11.09/share 5% DR

My conclusion? Holding tight. With both hands.

I look forward to seeing any comments or criticisms that help in determining a more accurate ‘fair’ price for SGR shares.

D.