I want to make a model for UROY, which is a uranium royalty company. I am familiar with regular dcf models, but have never made a model for a company where their revenue somewhat depends on the fluctuating price of an energy asset.
To summarize, how would this model look different than the dcfs I’ve normally built? What steps do I need to take outside normal modeling? Are there any resources I should refer to?
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Not familiar with UROY specifically but have covered royalty names before. Modeling should be super simple given the operating model. You just need to understand how the royalty is calculated and the cost profile of the underlying asset to model volumes. Typical operating build would look like:
Commodity price (x) Volume (x) % Royalty = Royalty revenue - Corporate/Admin - Taxes = FCF
Use the latest futures strip for the commodity price, then add some upside/downside cases for price and volume. Volume can fluctuate in the near-term due to operational issues, but long-term if the underlying asset is not breakeven at the modeled strip (e.g., if breakeven is $50/lb and modeled strip is at $25/lb, underlying asset may choose to mothball production).
Only other thing to flag is if you're using multiples for terminal value, be sure to use a "through-the-cycle" multiple since current trading multiples only represent current the market attitude and commodities are very cyclical.
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