- Market capitalization is shares outstanding times the share price. Fully diluted figures add options, warrants and other securities that can become shares.
- Enterprise value adds debt to market capitalization and subtracts cash, so it shows roughly what the market is assigning to the business and its projects.
- For explorers with large cash balances, enterprise value can be far below market cap. Always check how old the cash figure is.
Introduction
Ask how big a junior mining company is and most people will quote its market capitalization. That number is easy to find, but it mixes two different things: the company's projects and the cash in its bank account. For an exploration company that has just raised money, the cash can be a large share of the total.
Enterprise value separates the two. This guide explains both measures, how to calculate them and what to watch for. All numbers below are invented for illustration.
Market cap prices the shares. Enterprise value prices what the shares own, net of cash and debt.
Market Capitalization
Market capitalization is the total value of a company's outstanding shares at the current market price. To calculate it, multiply the number of shares outstanding by the share price.
Suppose a company has 100 million shares outstanding and they trade at $0.50. Its market capitalization is $50 million.
As FINRA notes, market cap is the market's perceived value of a company at a point in time. It is not a measure of what the company's assets would sell for, and it moves every time the share price does.
Basic vs Fully Diluted
Junior miners often have a large number of securities that can turn into shares:
- Stock options granted to directors, officers, employees and consultants.
- Warrants, often attached to units in a private placement.
- Restricted, deferred or performance share units.
- Convertible debentures or other convertible securities.
Basic market capitalization uses only the shares outstanding today. Fully diluted market capitalization adds the shares that would be issued if all of those securities were exercised or converted.
Continuing the example, suppose the company also has 10 million options and 30 million warrants outstanding. Fully diluted, it would have 140 million shares. At $0.50, that is $70 million.
Two refinements matter. First, options and warrants priced above the current share price are unlikely to be exercised soon, so some analysts count only the in-the-money ones. Second, exercise brings cash into the company. If 30 million warrants have an exercise price of $0.40, exercising them would add $12 million of cash along with the new shares. A consistent approach counts both.
Our fully diluted shares calculator does this arithmetic, and a separate guide covers a junior's capital structure in more detail.
Enterprise Value
Enterprise value (EV) starts with market capitalization and adjusts for the balance sheet. A common version of the formula is:
Enterprise value = market capitalization plus debt minus cash and cash equivalents
Some versions also add preferred shares and minority interests. For most juniors, the main pieces are debt and cash.
The logic is simple. If you bought every share of a company, you would also take on its debt and receive its cash. Debt adds to the real cost of owning the business. Cash reduces it, because it could in principle be used to pay you back part of the price.
Why It Matters for Explorers
Consider two hypothetical explorers, each with a basic market capitalization of $50 million.
| Company A | Company B | |
|---|---|---|
| Market capitalization | $50 million | $50 million |
| Cash | $20 million | $2 million |
| Debt | None | $5 million |
| Enterprise value | $30 million | $53 million |
On market cap alone they look the same. On enterprise value, the market is assigning $30 million to Company A's projects and $53 million to Company B's. Company A has just raised money; Company B is low on cash and has borrowings, so it is likely to need financing soon, which may mean more shares.
The gap can also run the other way. Most early explorers carry little or no debt, so their enterprise value is usually below their market capitalization. A company building a mine may borrow heavily to fund construction, and then its enterprise value can sit well above its market cap. Comparing an explorer and a developer on market cap alone hides that difference. Comparing them on enterprise value puts the debt back in view, although it still says nothing about when the debt is due or on what terms. The loan terms are in the notes to the financial statements.
This is why EV is often used for comparisons such as enterprise value per ounce or per pound of resource. Those ratios are rough. A resource in the inferred category is not comparable with measured and indicated material, and grade, depth, metallurgy, jurisdiction and stage all differ between projects. EV per ounce is a question to ask, not a conclusion.
Traps in the Calculation
- Stale cash. The share price is live, but the cash figure comes from the last financial statements, which may be several months old. An explorer running a drill program can spend a lot in a quarter. Our cash runway calculator helps estimate how far the cash goes.
- Committed cash. Some cash is already spoken for, for example money raised for a specific exploration program or held as reclamation security. The notes to the financial statements and the MD&A describe restrictions and commitments.
- Other obligations. Option payments on a property, reclamation liabilities, leases and amounts owed to suppliers are not always counted as debt, but they still claim cash.
- Share count date. Check the share count after the balance sheet date. A financing completed since then changes both the shares and the cash.
- Currency. Make sure the share price, cash and debt are in the same currency.
What to Check
- Shares outstanding on the most recent date available, from the MD&A, the financial statements or the company's latest news.
- Options, warrants and units, with their exercise prices and expiry dates, from the notes to the financial statements.
- Cash, debt and their date, from the balance sheet, and any spending since.
- Restrictions and commitments on cash, from the notes and MD&A.
- How you are comparing. Use the same method for every company you compare, and remember that projects at different stages carry different risks.
The financial statements and MD&A are filed on SEDAR+. For the differences between Canada's exchanges, see our guide to the TSX, TSXV and CSE. This guide is general information and not investment advice; speak to your own adviser before acting.
Frequently asked questions
Market Cap Explained, FINRA, 2022-09-30
This article is published by Bellmare Capital, a brand operated by Apollo Shareholder Relations, for information and education only. It is not investment advice, a recommendation, or an offer or solicitation to buy or sell any security. Bellmare Capital is not a registered investment adviser or dealer, and this is not independent research.
Apollo Shareholder Relations provides paid investor relations, marketing and communications services to public companies, including companies in the sectors Bellmare Capital writes about, and may be compensated in cash or securities. Apollo, its principals, employees and contractors may hold securities of companies discussed and may buy or sell them at any time. Where an article covers a company that pays Apollo, it is labelled Sponsored at the top with the compensation and holdings.
Information comes from public filings and other sources believed to be reliable, but its accuracy and completeness are not guaranteed, and it may be out of date. Small cap and junior resource companies are speculative and volatile, and investors can lose their entire investment. Bellmare Capital and Apollo Shareholder Relations accept no liability for any loss arising from use of this content. Read each company's own filings on SEDAR+ and consult a registered adviser before acting.
Get the next one by email.
