Value investing in Mining Companies - Balance sheet analysis - Liquidation Scenario - LT Asset Value vs Book Value
I have a question for anyone with experience in analyzing mining companies (especially if you have analyzed copper miners).
I am looking at a miner's balance sheet and trying to run a liquidation scenario i.e. how much major balance sheet items would be worth on the market less all financial debt. The result is a rough estimate of equity value which I want to compare against the current market place.
This stock, along with most miners, took some serious beating over the last 3-4 months.
My question is rather industry specific. This company has a copper mine under development, a very large project. If this company goes under (its leverage is eye watering), and it was to auction of its assets, what haircut to the book value is it better to assume when trying to make a quick estimate of how much this copper mine is going to sell for? This asset is sitting in a developing nation (think Africa or Central Asia) and very dependent on close ties to the ruling dictator.
This is a ballpark estimate but I am taking a haircut of 50% to BV of that asset. Is it too much, too little? How would you go about valuing a copper mine in that scenario?
Any thoughtful inputs would be greatly appreciated.
Regards,
Book value is just a reflection of the price management paid for the asset - it cannot be relied on for valuation, especially in cyclical industries in a depressed environment. You want to put a mid cycle multiple on mid cycle EBITDA and then adjust for the proper discount rate / initial FCF burn to get to mid cycle. The fact that the mine is dependent on a ruling dictator makes this increasingly murky though, so you want to use a pretty significant discount rate I am guessing given the lack of visibility. I know other commodities but not copper well enough to give any insight specific to that market.
Thank you. For mid-cycle multiples, would you use historic forward multiples or backward looking ones? If it s the former, do you know any resources accessible to retail investors where such info can be obtained (or purchased for reasonable price)? Mine is one of the few pure-play copper players.
I like copper because it is one base metal about which the investment community seems to have a very split opinion and diametrically opposite. For most other base metals the opinion is unanimous - and it is not good :)
You want to use a forward multiple. Typically would use Bloomberg or CapIQ to pull.
Don't know of any free sites with super robust data, but maybe check Google Finance or something. If you're in B school you should have access to a Bloomberg terminal, no?
Right. Traditional BV strategies don't work too well in a supply glut or most recently 'peak steel' environment in China. The disconnect between the consumption and production profile removes its cyclicality.
Extremely difficult to reliably value a mine, let alone a mining company. What most metals & mining analysts do is build out the mine model for the life of the asset, using technical reports provided by the company. Then, you discount the FCF to get PV of the mine (i.e. NAV) - which is very sensitive to prices, ore grades, recoveries, by-product credits ("bonus" metals in the ore, like typically gold is a big by-product in copper ores due to the nature of the rock, not sure why!) etc. But this is a better way to value a non-producing mine, and why you'll see certain mining companies pay "undefined" EBITDA multiples for a property. Another way to value an asset would be to look at precedent transactions, and take the transaction value divided by proven and probable (P2) reserves. E.g. - today Barrick sold a few mines to Kinross for ~$610mn, and EV/P2 reserves comes out to about 0.3x I believe, which is typical for gold companies.
Anyways, hope this helps, if it didn't just make things worse.
I wish I had time to run full-blown NAV analysis but I don't. The precedent transaction method is very helpful though. For this company, one of development mines is almost complete, so I could value it as though it is operating. The other mine under development, I will choose to discount it 100%, as this is what I believe the market is doing at the moment. Thank you.
In running a liquidation scenario, I would also be conscientious of any potential contingent liabilities related to the environment/mine shutdown/remediation/etc that will have a higher priority on the capital structure compared to equity. From what I understand (and I could be wrong), these liabilities tend to be understated/not disclosed clearly until an asset sale or bankruptcy. These could ruin any potential equity upside if there was any upside to begin with.
End of the day, a mine will be worth as much as someone is willing to pay for it. I don't think there's any reliable way to calculate the value in an auction scenario (from a retail investor's standpoint; hard even from an institutional investor with industry contacts).
Anyone have a good source for bankruptcy docs where we can take a historical look at mining filings and liquidations and actually see where these things tend to go for / the liabilities?
Any historical bankruptcy price would be highly dependent on the price of copper at that time, geographic location, surrounding infrastructure, etc. So it won't give you an apples to apples comparison.
The price of the assets in bankruptcy would probably depend on the circumstances of the bankruptcy. Did they just shut down because the copper price is so low they can't profitably pull it out of the ground? Or did they run into trouble rolling their debt and a strategic buyer can come in with the cash and proper capital structure to continue running the mine?
Never got around to reading it myself (not too keen on looking at gold miners, in any scenario), but here you go - for something very recent: https://cases.primeclerk.com/alliednevadagold/
And here's another metals and mining company, which isn't really into mining (they reprocess tailings): https://www.donlinrecano.com/Clients/mag/Dockets
Other "mining" companies with active dockets are Alpha Natural Resources and Walter Energy, which can be found on google I believe.
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