Metals and mining question
Why would a developing company that may have negative earnings or even very low cash flows trade higher than a producer based on EV/EBITDA?
I get that a developer is highly speculative and may have a higher EV premium based on speculation alone and producers are more predictable, but if a developer typically has very low earnings and sometimes negative earnings why would they trade higher than a producer? It doesn’t make sense to me.
I was recently asked this in an interview, and answered that a producer would trade higher. It doesn’t really make sense.
Developing companies may not have an EBITDA/profit over the next 1 or 2 years, but this could be very different once production starts. Hence a low EV/EBITDA or P/E today may not be reflective of what a 3 or 4-year forward multiple would be (when they are producing).
M&M companies trade on an EV/Resources or Reserves basis (N2I or 2P), i.e. how much exploitable ore they can extract from the ground. A developing company may have a longer reserve life (i.e. 10 years of remaining production) vs a producer (i.e. currently producing but only 2 years left of remaining production), which could also explain the discrepancy.
Overall concept is right but EV / Reserves is bit too simple of approach as same reserve bases (in moz) are valued widely different depending on AISC/capex etc so stick to consensus NAV if possible
The amount of mining projects and companies out there that don’t have a single shred of research coverage is staggering. Consensus NAV is not always applicable and if you go the route of building your own mine model even when using technical report assumptions the results can vary significantly. For early stage explorers with only a resource especially, the assumptions you would have to make to built out a mine model are ridiculous and almost always off the mark of the eventual actual mine plan.
EV/Resource isn’t a great metric in terms of approximating value I agree, but for most early stage players there really isn’t much more to work with for a simple valuation. Of course things like exploration potential/resource growth, permitting/jurisdiction, funding, grade, infrastructure and management etc all contribute significantly to the valuations of the early stage guys, but it’s much harder to quantify. EV/resource with the right peer group delineated can be very insightful in terms of value when there are no other viable options.
The fact is that junior miners don’t really “trade” on any metric but P/NAV and a handful of qualitative metrics investors use, but EV/resource is certainly helpful to guide value when used correctly.
If we are just talking about a current year multiple (not forward EBITDA), would the producer trade higher by a EV/EBITDA basis? It seems silly that an interviewer would ask this, especially since if we are not basing on any assumptions on forward earnings, the developer would be trading at negative earnings. I understand the discrepancy it just seems like such a tricky question to answer with such little info and assumptions.
Developer might be breaking ground on or close to production on a blockbuster asset or a better one than the producer. Maybe bigger resource, higher grade, longer LOM type stuff.
It actually definitely makes sense. Developers take time to ramp up production year over year, whereas producers may already be at their peak (if its a single or dual asset company), or they'll have pretty stable or slowly growing production if they're a larger diversified company. As such, if you're looking at EV/NTM EBITDA for the developer, the EBITDA estimate is gonna be low compared to two years from now, and even more so for three years for now. A higher multiple consequently factors in this growth. Same reason new fast growing tech companies trade at higher multiples than mature cash cows.
That being said, the primary valuation multiple for developers, and even producers, is P/NAV, not EV/EBITDA. NAV is like a DCF which factors in earnings over the life of the mine, which makes it easier to compare producers and developers. The main metric used is P/NAV, followed by P/CF. I've only seen EV/EBITDA used a few times.
I understand that. I am just confused here. The interviewer asked me which one would trade higher by a EV/EBITDA perspective. I prepped for this interview knowing that you wouldn't use EV/EBITDA for a developer. Was this a trick question? I don't even think that developers are earning anything, and may even have negative earnings during the development cycle. He didn't specify whether it would be based on forward earnings or present, he just asked what would trade higher.
My finance coach said that a Developer would trade higher not specifically due to EBITDA but because EV would be higher because its more speculative, and EBITDA may not be generated until the future.
From an EV/EBITDA perspective, it's important to consider the longevity of the asset and its potential to generate revenue over the long term. However, if you really want to impress the interviewer, tie it back to the net asset value (NAV) or net present value (NPV) of the asset. After all, the value of an asset ultimately depends on the future cash flows it can generate.
For example, imagine you're comparing a producer with an asset that only has 2 years left in reserves to a developer with a 30-year asset that's still being developed. The developer would naturally demand a higher premium because their asset has the potential to generate cash flows for a longer period of time. But you can't just stop there - you need to sprinkle in a few other factors to really make your answer shine.
Consider the jurisdiction in which the assets are located. A Tier 1 undeveloped asset in Canada is likely to be more valuable than a producer in the DRC, which has a history of criminal activity. By factoring in these additional variables, you're showing that you're thinking about the bigger picture and can provide a more nuanced perspective.
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