DCF valuation of a copper mining company
We have a copper mining company to value. The share of our company in global copper market is very small-less than 0,5%. We are going to use 2 models.The first one is Discounted cash flow model and we are struggling with it. In order to calculate free cash flows we need projected revenues and capital expenditures for 5 years. How can we project revenues? We have one choice: We are going to use projected copper prices by bloomberg and projected production given in the company reports. Is it correct way? Or should we include projected world copper supply and demand?
It's safe to say that Bloomberg price estimates already factor in projections about world copper supply and demand - how else would they do it?
That's not to say Bloomberg's guesses are any better than the next guy. If these things were easy to project then most of us would be out of a job. Personally, I'd get a few sources and pick the median (Bloomberg's estimates may already be an aggregate of experts, in which case they've done this for you). If you know the industry well enough to have a view on the market, tweak accordingly.
If the company discloses it, it may be a useful exercise to compare the company's realized selling prices versus the benchmark copper price that the Bloomberg estimates are projecting. Different factors like geography and surrounding infrastructure can contribute to differences between the realized prices at Company A and Company B. This may or may not be significant for your company.
I don't know the copper industry well enough to tell you how reliable a company estimate of production might be (how elastic/inelastic is production?). It could be based on an overly optimistic view of prices. By default I'll usually make my projections more conservative than the company, but I'm in credit and my job is to look for downside. Many equity analysts are the opposite and optimistic by default.
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