Tis rigor and not law

Wesdome (WDO.to), sellside anal ysts and a Tuesday morning pre-bell rant about NAV-based price targets

This morning, Barry Allan of Mackie Research has upped his target on Wesdome Gold (WDO.to) to CAD$2.95 (from CAD$2.75), using what they call a “Risked Net Asset Value (NAV)” concept to do so. What they do is say something along the lines of, “We think that the “Unrisked” Wesdome NAV is CAD$2.41, but we’re going to add 54c to that and make our new target CAD$2.95 by taking into account the other things it’s doing that we can’t really value well because we’re not clever enough”. In other words, if the risky part of WDO blows up in its clients face and the stock drops they can say, “Hey dude, we told you it was risky!“. 
In other words, another no-balls sellside call and that on top of the vague pseudo-math bongo-bongo concept of NAV, which is one of the worst conceptual tools used by sellside anal ysts to make what they do sound impressive. In fact IKN tackled this very subject and on this very stock three weeks ago on August 28th in The IKN Weekly edition IKN381 when taking a good hard look at WDO and the influence of the Kiena discovery:


Valuing Kiena

This is
where the rubber hits the road. The question of finding a quantitative
valuation for a mine that may become a producer and throw off CAD$20m or
CAD$30m per year in profits for ten years. Or a lot more for longer, or less
for less. Or may not ever open. The profit potential is clear enough but for my
taste any positive free cash flow from Kiena is too far in the future to base a
valuation for the asset as things stand today, so the only way forward is to
find an asset value for the mine. And the major problem here is this equation:


(Net Asset
Value equals Make Shit Up)

It’s one of
my major pet hates of the mining anal ysis world, anal ysts who pick any old
number out the sky to value “A Thing” in order to justify their preferred
target price for the stock. It’s way waaay too easy and way waaaay too common
to see subjective “because I say so” valuations at the top of an equation that
magically turn into some kind of objective demonstration of logical truth once
the math has been applied and a target price generated at the bottom of the
stack of numbers. It grates on me like no other subject, it’s the whoredom of
sell side anal ysis writ large…and now I’m about to use the same type of
guesses to value Kiena and eventually WDO.
Bakc to the present day and the point is: If you’re going to use NAV to stick a valuation on stock, Barry Allan of Mackie or anyone else, get off the fence and make your call. You’re supposed to know more about this valuation gig than the people who read you, you don’t have the moral or professional right to offload the decision onto your clients by offering them them two NAVs and asking them to take their pick thereby covering your ass later if your call goes awry.

Bottom line: Sell side anal yst, grow a pair. End of rant, have a pleasant and rewarding Tuesday kind reader.

UPDATE: Reader ‘R’ sends in this cartoon, which is perfect:


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