At midweek let us pause to decide if you should buy, hold, or sell your mining stock. This enquiry is brought on by news that Suncor is “preparing for $40 crude…getting ready for the worst.” The issues is should you prepare for the worst and how should you prepare?
There is a book called Valuing mining companies by Charles Kernot that you can get from Amazon at $159 down from $209. But it gave me no guidance. Oh sure the usual:
- Intrinsic Value > Market Value = BUY
- Intrinsic Value = Market Value = HOLD
- Intrinsic Value < Market Value = SELL
But how in goodness name do I establish the intrinsic and market values of Suncor? It makes no sense to do what those popcorn courses tell you to do, namely to build a valuation model, determine inputs to valuation model, analyze the factors the affect inputs. Even sillier and more difficult to do is the advice to rate company management or analyze the geology of the deposit. How do you forecast demand, net alone supply?
The only thing I read that makes any sense is the warning that the variables could vary in a random, chaotic way. The only thing I can believe is that Suncor is caught in the middle of a complex system that is beyond the understanding or control of any individual.
You could spend $50K on the gensym G2 software and compile a model that includes components 
that simulate everything from the Saudi King to the Iowa Prius dealer, and you could run the model through a million Monte Carlo walk simulations and you still would not be getting close to the truth. And that is because there is no truth. As the guys at the Sante Fe Institute tell us the economy is an emergent complex system that generates its own patterns, elements, and aggregates. In short, the flutter of the wing of a butterfly in China today could give rise to a tornado in Florida next week. And nobody could predict this.
So I must reject all the common sense advice on how to value a mining company, on how to decide to buy, hold, or sell stock. The ideas behind this advice is that the economy is a static, equilibrium, rational thing that can be fully and accurately quantified. If recent events have taught us anything, it is that the economy is not static, rational, or at equilibrium. It cannot be quantified except in hindsight.
All the mathematical models in the world, even those that incorporate discounted cash flow etc. are basically no more than a rough guide to judgment. Your judgment and gut feel. As an old professor once taught me: engineering is the art of applying science; practicing art involves judgment; so before exercising judgement, do all the science calculations you can, then get blind drunk on a good bottle of brandy, and the next morning do what your belly tells you to do.
I submit this is the only pragmatic way to evaluate Suncor’s situation and your dilemma about what to do with your Suncor shares. So tonight I am going to hit the brandy, and tomorrow I will decide. But today I will gather, assimilate, and calculate all I can.
Let me know how you decide.
You can do all the numbering crunching possible, on assets, cash flow, net earnings, etc.. but ultimately a stock is only worth what other investors are willing to pay for it. If no one is buying, then share price may not move regardless of how good a company is. On the other hand, stock prices may move regardless of how lousy a company is if it holds “hot” commodities (eg, diamonds years ago, potash most recently). So one needs to assess market sentiment for a given company & industry as well as the specific financials for that company.