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.
Assuming this is forward EBITDA, or the definition of "developer" is a project that achieved commissioning but has yet to hit nameplate capacity? Otherwise EV/EBITDA for a developer would be nmf since EBITDA would be negative. Putting aside all of the qualitative aspects that may drive a premia in market value (i.e. jurisdiction, management track record, etc.), generally premium EV / EBITDA multiples in mining are driven by two factors:
1. Growth (no different than other industries) - if looking at EV/EBITDA multiples of a developer that recently achieved commissioning of the project, it takes time for the project to achieve "run-rate" throughput. As such, if looking at a trailing EV/EBITDA (or T+1) for example, the EBITDA for the time period isn't indicative of what a run-rate EBITDA would be once fully operational. In addition, developers might have multi-stage expansions in the future that investors might be pricing in, whereas the the producer might be a mature asset that's expected to maintain the same level of production until end of mine life.
2. Mine life / duration (this might be a novel concept for those outside of resource extraction) - Since mines are depleting assets, generally longer-life projects command a premium multiple. A developer might have a 20 year mine life ahead of it, whereas maturing assets might only have 5 years left before closure of the mine. Think about it this way - if you had the option of holding 2 stocks into perpetuity, and EBITDA for both are identical: A) a recently-commissioned producer trading at 10x run-rate EV / EBITDA with 20 years of mine life, or B) a mature producing company trading at 8x run-rate EV / EBITDA with a 5 year mine life, which would you rather own? Most investors would opt for A) since they'll get an additional 15 years of FCF accruing to their equity value.
Hopefully this makes sense.
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