Valuing mining company, DCF finite ou infinite?
Hi everybody,
I creater a DCF model to value mining companies. I've got one big problem pour the terminal value because i've two options:
Finite life: a mine doesn't last forever, lets say 20 yrs or 40 yrs, Infinite life: with the classic terminal value (FCFF actualized/K-G)
Lots of people use a finite life for mining companies but this kind of company has a lot of exploration expenses. So if a mine is over, there will be another new one producing cash flow, so we could argue that the mining company has an infinite life.
Thx for your help and sorry for my english
Or if I value a group, do i need to value each mine per dcf?
I'm also interested about this topic.
if they have a few but major mining operations you will want to model each one out on its own, but remember once you get 5 years out it won't be accurate anyways
Perpetual does not make sense given the finite life of the mine. If you have an estimate of reserves now and reserves to be depleted each year you can apply a multiple to the ending reserves, though you might be hard pressed to find precedent transactions or reasonable comps.
i understand but what if the company spend a lot on exploration and discovers each year 1 mine? So the life is infinite?
Essentially when you're valuing a mining company using a DCF, you build out separate NAVs for each of the different mines, sum them up and then incorporate corporate adjustments (i.e. debt, cash, etc.)
Every mine should have a finite life depending on the resources/ throughput from the technical report (i.e. 43-101 in Canada, JORC in Australia). Typically you would model it out based on that and if you do need an upside case, you can make adjustments to how much of the resource you mine, plant expansions, etc.
If the mine doesn't even have a pre-feasibility study you would have to just apply a EV / resources multiple on the mine based off comps / precedents if you want to allocate value to exploration properties.
Given how different mines can be, it'll be fairly inaccurate to assume all mines would grow into perpetuity. You wouldn't be accounting for the incremental capex and changing operational costs as you expand the mine / mine less economic resources and you would significantly overvalue short-lived mines with high grades.
You also don't just "find a mine per year". You have to conduct scoping, feasibility studies, spend capex to develop the mine, build plants, infrastructure before the mine finally starts producing. Of which there should be a significant enough lag time between initial exploration and production that it wouldn't be too material to the value.
Granted, the whole optionality of increased exploration / growth is partially why some companies trade at a premium to NAV. But from a DCF perspective, you shouldn't have a terminal value for mining companies. Even mines like Oyu Tolgoi have a finite life.
Generally, the combination of actually finding something, working interest, lead times, and discounts for uncertainty will make the value of future exploration pretty marginal.
If you insist on going through the work, you can create a reinvestment model that takes into account the things mentioned above/by bear396 after projecting production each year based on expected mine life and type curves. The basic idea is that if you know the company's exploration plan you can flow CAPEX back through your operating model as it will affect the level of production each year.
This is for prospective areas with estimates/tests and will get a massive discount. Don't even bother trying to value the idea that "they will find some mine in the future"; that is just stupid.
Thank you all for your help!
value each mine for all of its lifetime you have to be aware of sales and operating costs which are very sensitive i don't know how to value exploration activities, you might want to value the exploration division separately and based on its success rate.
Thank you so much
Another problem is the cash cost!
Does the cash cost include royalties?
I can post the model when it's done if you want
Thx all
I'd like to know more about how to value mining companies. Does anybody have a sample model? I would appreciate if someone could share it with me. Thanks.
benbxl, would be nice if you could share it. Thanks
Depends, usually its included but you can argue it based on the type of royalty structure. It makes sense to include royalties in cash costs if it is based on production or is a sliding scale royalty.
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