"Value an airport" or "value a mine"
Got this interview question and definitely stumbled. How would you answer these questions: 1) How would you value an airport? 2) How would you value a gold mine?
Note it's not the company you're valuing but the actual airport or mine itself. Thanks for any help
Is this for a project finance/infrastructure type role?
For the airport, figure out all the forms of revenue an airport can bring in (bag handling fees, hangar fees, plane docking fees, food services and vending rents, etc) and less all the costs (CapEx, maintenance, property tax, environmental taxes, etc). Then discount at an appropriate rate (likely a cost of debt since usually airports are 100% debt financed... I think).
I'm a big infrastructure buff so I'd love to hear what others think.
I had a similar question. They asked me how would you value a LOSS-making airport? You can't compare with other airports in India as they are profitable etc, also no airport is listed on the stock exchange in India. What would be the Market Rate of Return you'd use as a benchmark?
1) SOTP, DCF, EV/ticket sales, ticket sales per flight, liquidation value
2) Annual production, reserves, precedent mine sales, comparable mines
I feel like these questions are bull shit and can be answered as below for almost anything (almost is a key here though):
For the Blank, figure out all the forms of revenue Blank can bring in ([examples]) and less all the cash outflows Blank has ([variable costs], [fixed costs], [capital costs], [taxes]). Then discount at an appropriate rate.
Oh and trading comps, precedent transactions, and asset/liquidation value.
True, but it would be more difficult to use that answer for the gold mine question. The gold mine would have to account for the fluctuation of gold prices
Agreed, there are many assumptions to be made with the mine. The airport is no different.
For the mine, you use a NAV model where everything flows from the reserves. You also have to project commodity prices, and differentiate b/w speculative/actual reserves. Use multiples like EV/EBITDAX or P/NAV, P/MFCE. Mines dont tend to use much debt as their cash flows are so variable, so wacc may be higher.
If you're doing a NAV model (emphasis on asset), corporate financing decisions shouldn't affect the WACC for a mine-level DCF. It's based on the commodity and the risk profile of the mine (i.e. exploration vs producing stage, safe geopolitical jurisdiction vs riskier jurisdiction)
The key point here is that the mine has a definitive life (you will eventually deplete all of the ore), whereas the airport arguably has an indefinite life (similar to a lot of infrastructure assets). This has implications for valuation.
You would most likely use a DCF for both. But the DCF for the mine would include cash flow projections encompassing the entire mine life (whatever it is...5, 10, 30 years etc) and there would be no terminal value. Once the mine is depleted, there is nil value. The DCF for the airport use a more standard approach, since it's reasonable to assume you can expect cash flows into perpetuity.
You're overthinking this. In an interview setting, I'd go for the DCF first. It's actually fairly easy and makes you look like you know what you're talking about.
Now, I know absolutely nothing about the Metals & Mining space, but think about it: How does a mine make money? It pulls gold out of the ground and sells it until there's no gold left. Let's assume this means the mine has a 10-year life span and it depletes at an even 10% per year. For a single mine, free cash flow is then just going to be (Gold spot price - production costs)*(Ounces Produced) - CapEx - Taxes - Interest.
From here, just make assumptions: Let's say the spot price is $1,200. It might cost $300-400/oz to pull it out of the ground. So the margin on each ounce of gold is about $800-900. Let's say the mine produces 1,000oz per year; so every year it makes 850k. Call taxes 30% and you're looking at about 600k of FCF per year, assuming this was a debt-free project.
I'm not sure if any maintenance CapEx is required for a gold mine, but it sure costs money to build. Let's say it costs $2M to build -- your Year 1 cash flow is -$1.4MM and your cash flow in years 2-10 is $600K per year., or $5.4MM. On a PV basis, those are roughly worth 50% of their total value discounted at 10%, or $2.7MM. So the mine has an NPV of ~$1.3MM ($2.7MM less ~$1.4MM) at a 10% discount rate.
The only thing that should be majorly different (i've haf this interview question too) is that i've heard mine dcfs are projected out through its entire lifetime with a minute salvage value because a mine's production capabilities/costs are much more predictable other than the actual metal price.
Honestly, DCF is just not a practical way to go in either case. Fluctuating prices and economic scenarios make trading comps the easiest method.
Just make sure you come up with unique ratios - gold reserves remaining/ EV, or air traffic/ev, etc., then set the bottom of the valuation at the asset liquidation value.
The point of the question is to see if you can walk through a revenue build and make reasonable growth/cost assumptions, not how many valuation metrics can you spit out. It's a thinking question.
if you're a prankster (like I am)-
after staring at him blankly for precisely 5 seconds
"How do you value sanity?
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