This is from a great poster on TCC. Hope it helps a few here understand the huge opportunity this stock is for everyone.

Below is an article (and one follow up comment) that speaks about the 'weaknesses' of various valuation methods, which is useful to see the logic behind using an insitu resource valuation model at this stage of Zenyatta's development.

Of note is the following quote about using an insitu resource valuation model:

"The in situ valuation, therefore, is a very weak method to use when valuing a mining company. It is most useful when many of the above items aren't known or can't be estimated accurately (such as in the case of an exploration company that has established a resource but has not yet performed a feasibility study.)"

The comment that follows, discusses the use of the insitu resource value method:

"The in-situ valuation method is easy and powerful because it compares companies based on very simple and objective metrics. Resource Stock Guide - resourcestockguide.com - calculates in-situ valuation for a couple of hundred of gold, silver, uranium stocks."

I'm going to expand a bit about the use of valuation metrics, in the hopes that we as a group can get on the same page with regard to model selection. Here are the two points I've tried to convey so far:

1) The in situ resource method is the most appropriate valuation model to use as a framework for analysis at this point in Zenyatta's development. Using NAV, NPV or 'cash flow' numbers is simply an exercise in "garbage in, garbage out" at this point. I know we all want those numbers, but we have to wait until the drill gives us a bit more information.

2) The way to use this model is to 'be conservative'. However, you can always use the model to produce 'conservative', 'moderate', and 'what if' type valuations. Although, in ZEN's case the what if is truly staggering and 'unbelievable'.

The best use of the insitu resource method is to take into account the information you can make guesstimates about, and eliminate the use of more complex numerical calculations 'too many times'. That's actually why the insitu value model is the most reliable valuation model to use at this time.

So, first off you estimate the volume of the deposit, calculate some tonnage numbers, assign a $ figure for what each ton is 'worth' and then assign 'probable market cap' based on a fraction of that insitu resource value, because after all, it is still in the ground! So, what fraction do you use? If you have industry comparables, you may want to use the industry average. You might even calculate what the standard deviation of the industry is, and assign a value range.

For example, if the average market cap of a juniour gold explorer is $29/insitu gold ounce (ala Danny Deadlock, 2013), and you are looking to see which one is 'undervalued', you would want to make sure that the one you were looking at was at the bottom of the industry range. If the standard deviation is $12, you might only look for companies valued as low as $10/ounce because anything within that first standard deviation ($17-41)is just 'average' anyway.

The discussion in the article below assumes that the only value the model produces is as a relative metric in comparison to ones peers. While that is one approach with how to find the model useful (as per above), it by no means has to limit the model's usefulness. The article below also seems to assume that the insitu resource method does not take into a wide range of qualitative or even quantitative factors that would have a significant impact on a valuation. But, as we'll see, the model can be adapted to that information.

A second way of using the insitu model is to estimate potential worth of company ABC. If they have 1M ounces gold in the ground, shouldn't the market cap be be worth about $29M? Well, not if all the qualitative factors indicate otherwise. The qualitative factors are still an important part of using the insitu valuation model. That's how the model becomes (more) powerful. Only using the insitu numbers might help you decide company ABC is worth a market cap of $29M, even though the gold is .25 grams per ton and under the ocean.

So how do you blend the qualitative factors into the simple calculations of the insitu resource model to guide an investment decision? By using a 'balanced scorecard' of the various other key data you have to determine the probable percentage of insitu value that can be expected of the market cap.

$29/ounce is slightly less than 2% of the current market price for an ounce of gold. Obviously, the market isn't found of those companies right now. This is the low end of the kind of percentage of insitu value that gets assigned to resource companies. Although it depends on the underlying resource itself, an acceptable market cap range to use as a 'rule of thumb' is 1% to 10% of the value of the resource.

While you can see that some of the gold juniors are right there at 1% and some may even be below that THERE ARE QUALITATIVE FACTORS that cause that. As a guide, using 1% of insitu resource is considered the very low end of the insitu value range, for a market worthy resource. 10% sometimes expected during a buyout. If anyone has examples of buy outs or just market cap valuations that exceed this 10%, AND THEY ARE COMMON, let me know and I'll adjust this 'rule of thumb'. However, you'll always find that they can be explained based on the qualitative or quantitative factors (like, they had BFS with better numbers to use) involved. in the absence of better numbers the 1-10% range is applicable.

When choosing an appropriate fraction to apply to ZEN's possible insitu value, we have to look for 'resource industry' guidance, because we don't have any hydrothermal vein/lump graphite peers to compare ourselves to. Good luck with that.

So if we put some numbers on Zenyatta's possible (C = conservative, M=moderate, WTF=WTF)insitu resource:

C1 = 10M tonnes @3% =300,000 tonnes @ $8000/ton = $2.4B
C2 = 20M tonnes @4% =800,000 tonnes @ $8000/ton = $6.4B

M1 = 60M Tonnes @3% =1.8 M tonnes @ $8000/ton = 14.4B
M2 = 60M tonnes @4% =2.4 M tonnes @ $10K/ton = 24.0B

WTF = 167.5M Tons @ 3% = 5M tonnes @ $17,000/ton = 85B
(Based on Hoov's tonnage calc, 3%, and Valuefinders $/ton price calc).

Just some numbers to play with.

So where in the 1-10% insitu value range will ZEN's market cap compute? Now we apply that 'balanced scorecard' approach to try to put in as much of the qualitative info that we have. Here's the approach mentioned previously (Haitokin on SI):

You can expect a market cap range of 1-10% insitu resource value for 'a resource idea'.

Lots of different factors determine where a company can get positioned within that kind of range:
Geopolitics. Canada = higher than average range.
Required capex. Low = higher than average range.
Insitu value (less than $1B =low; $1-5B middle of range, $5B+ = high). $2-4B = middle range.
$ Value per tonne ore (less than $50 = low, $50-100 middle, $100+ = high) $200 = higher than average range.
Promotional ability. Looks like Zenyatta management is very well tuned into this side of equation. = higher
Promotional appeal. Looks like graphite has always been expected to become 'sexy'. = higher.
There are other factors too like share structure, management team, overall market conditions, etc.

To this we can add (and please mention all the other ones not included here. Build your own list, and use your own opinion on things like 'stength of management', etc):

1)Risk/Reward is attractive so higher side of range;
2)Gross margin percentage is higher than resource industry average ($1000 costs/ton versus $8000/ton revenue is like having a netback of $70 when you sell your oil for $80/barrel), so higher end of range;
3)Share structure is tight so higher end of range;
4)'Management strength' seems to be focused on shareholder value and has high ownership of project mid to higher end of range;
5)Unique product in strong demand (just electrodes and furnace use alone) so higher end of range;
etc.

So in general, it looks like the qualitative factors involved seem to point towards a market cap that will fall on the higher side of the 1-10% range of the insitu resource. Let's just use the midway point, again sticking to the 'conservative' principle of valuation metrics.

So then market cap could be expected to be (based on conservative, moderate or WTF scenarios):

C1 = 5% of 2.4B = 120M mkt cap or $2/share fully diluted
C2 = 5% of 6.4B = 320M mkt cap or $5.33/share
M1 = 5% of 14.4B = 720M mkt cap or $12/share
M2 = 5% of 24B = 1.2B mrkt cap or $20/share
WTF= 5% of 85B = 4.25B market cap or $70.83/share

Now, please do your own 'area of a cone' calculations, and apply proper specific density to come up with the right tonnage. Choose the 'scenario' you think is best in terms of what the drills are going to show.

Please don't ask about NAV, or NPV numbers. They just don't make sense at this point. That's one reason for the lack of analyst coverage. There were next to no diamond industry analysts in Canada when Diamet made their discovery either, and it took analysts a while to bend their brain around the discovery and crunch some numbers. In the beginning the numbers they crunched took the same approach as above. Not until next year will you get a PEA from ZEN. until then, this is the only approach that's valid.

TA is more important at this point, but will obviously be buoyed by simple resource analaysis.

GLTA (Go long, or just pound sand)

http://seekingalpha.com/article/78163-valuing-mining-stocks-in-defense-of-net-as
set-value

From Ben Murphy, posted in 2008

While browsing the various fundamental evaluations of mining companies made by investors on internet message boards, I have consistently seen two valuation methodologies - the in situ method and the cash flow method - used frequently, while the traditional net asset value [NAV] method used by professionals is neglected or not used at all. The NAV method, I believe, is superior to the other two, and the following is a defense of this valuation technique.

The in situ valuation is the easiest valuation methodology to use for a mining company. It consists of merely adding up a company's resources and dividing this into the market cap of the company. If this quantity is less than the industry average, the company is said to be "undervalued." This method is easy, and it allows quick comparisons of dozens of mining companies. Unfortunately, however, it has a vast multitude of weaknesses:

It does not take into account a company's other assets and liabilities, such as cash on hand or long term debt.
It does not take into account the capital cost (either initial or sustaining capital) necessary to extract the ounces from the ground.
It does not take into account the operational cost necessary to extract the ounces from the ground.
It does not take into account future rises or falls in the commodity price.
It does not take into account the mineability (or lack thereof) of the resource. A proven/probable ounce is valued no higher than an inferred ounce (unless, of course, one uses different $/oz figures for the different resource classifications.)
It does not take into account the time necessary to extract the resource, or the time value of money.
It does not take into account the capital structure of a company.
It does not take into account the recovery rate of the resource, which can vary widely.
It is a relative valuation; it relies on the whole sector being valued accurately.
Using "equivalent" in situ resources does not take into account differences in the underlying resource fundamentals. The silver in a silver-lead polymetallic deposit, for example, may be in contango, but the lead may be in backwardation.
It does not take risk into account.
Industry "average" $/oz figures are statistically suspect; the deviation from the average is very large for many companies.
The in situ valuation, therefore, is a very weak method to use when valuing a mining company. It is most useful when many of the above items aren't known or can't be estimated accurately (such as in the case of an exploration company that has established a resource but has not yet performed a feasibility study.)

The second popular valuation method is the cash flow per share method. This method takes a little more work than the in situ method. First, one must determine the number of shares outstanding and then divide this into the cash flow of the company. Cash flow, in this case, is usually taken in the simple manner (Revenue minus non-GAAP cash costs) rather than using GAAP operating cash flow. The resulting cash flow ratio is then compared to the industry average for the sector to determine whether the company is undervalued or overvalued. This method also has significant weaknesses, however:

It does not take into account the size of the company's resource. Mining companies have discrete resources; they can only produce cash flow until the deposit is mined out.
It does not take into account a company's other assets and liabilities.
It does not take into account the capital cost necessary to extract the resource.
It does not take into account the time necessary to extract the resource, or the time value of money.
It only partially takes into account the capital structure of a company.
It is still a relative valuation; i.e. it relies on multipliers derived from the valuations of its peers.
Definitions of cash costs (non-GAAP) vary notoriously amongst the different mining companies.
It does not take into account future expectations for the underlying commodity (i.e. - the futures curve.)
It does not take risk into account.
Thus the cash flow method of valuation, while somewhat more useful than the in situ method, still does not take into account many of the factors that need to be accounted for in a valuation.

The most accurate way to value a mining company, I believe, is to determine its net asset value [NAV] based on discounted cash flows. All of the above weaknesses in the in situ and cash flow methods are addressed in the NAV method:

A company's other assets and liabilities can be figured into the calculation of NAV.
Resource size, capital and operational costs, recoveries, taxes, etc. are all accounted for in the cash flow schedule.
Expectations for future commodity price increases/decreases can be accounted for in the cash flow schedule.
One is free to add some (or even all) of the M&I resource into a mine life schedule as one feels appropriate based upon other research. Even if this is done, however, it is still discounted by the method since it adds cash flow at the end of the mine life. In other words, proven resources still receive the highest value.
The capital structure of the company is fully taken into account, including cash flows from option and warrant expiry.
It is an absolute valuation; it does not rely upon empirical averages established by peer groups.
Time value of money and risk can be taken into account quantitatively via the discount rate.
The NAV method does have some disadvantages, of course. Many precious metals miners seem to continuously trade at a premium to NAV. This is certainly true if one uses constant metal price assumptions in the valuations (this is most simple and most common.) The reason that precious metals miners trade at a premium to NAV is that the underlying commodity is in contango (i.e. speculators expect the commodity price to rise in the future.) The solution, however, is pretty simple. Depending on the intention of the valuation (e.g. are we finding a buy point or a sell point?) one can use whatever commodity price schedule they like and calculate future revenues based upon this schedule. Some professional analysts use a version of the Black-Scholes equation to calculate the "optionality" of each of the company’s assets with respect to the variability of commodity prices. Either way, it is not difficult to modify a NAV valuation to account for future commodity price increases (or decreases), or to just accept that a producing gold/silver miner will trade at a premium to NAV when using constant current metals prices.

Another deficiency of the NAV method is that it does not account for reinvestment of future cash flows. This is certainly true, but it is also true of the other valuation methods. There are simply too many unknowns in the mining industry to be able to quantitatively account for future reinvestment with any degree of accuracy. The NAV method is most useful in finding a minimum value (i.e. - a buy point) of a company. When one is trying to determine a sell point, peer comparisons and technical analysis should be used to supplement the NAV method. None should be allowed to replace the NAV method, however, as it is the most comprehensive method for taking into account all of the factors that influence the value of a mining company. We are in the midst of a bull market in commodities, and the rising commodity prices have masked what I believe to be fundamentally flawed valuation methodologies. Investors would do well to recognize that there is much more to mining than just a resource in the ground, and that one year’s cash flow isn’t sufficient to value a company with discrete resources.

Leave us some thoughts on how you value mining companies and why.

Note: If you are investing in junior mining stocks and don't take the time to value mining stocks by at least one of the above methods you probably are going to lose a tonne of money.

This was responded to by the following comment worth noting as well (author unknown):

While the article makes some very valid points about the weaknesses of in-situ and cash flow methods, I think NAV has a number of its own weaknesses. There are numerous subjective inputs going into the NAV calculation, which can make NAV turn out to be just about anything you want. It is no secret that analysts can justify just about any target price for the stocks they cover. In addition, it is impossible to calculate the NAV unless there has been a feasibility study done on the mining projects analyzed.

The in-situ valuation method is easy and powerful because it compares companies based on very simple and objective metrics. Resource Stock Guide - resourcestockguide.com - calculates in-situ valuation for a couple of hundred of gold, silver, uranium stocks. They call it EVPU - Enterprise Value per Unit. Enterprise value takes into account cash, debt and the capital structure of the company. The lower the EVPU, the cheaper the stock. Of course, EVPU has to be combined with additional research on the company for successful investing.

This website also calculates the cash flow valuation for each stock, but unlike the EVPU, this service is for subscribers only.

Anyway, good article, but the realities of resource stock investing make NAV very difficult to calculate objectively.