Valuing a mining company
Hi I am currently valuing a mining company (think Rio Tinto/BHP Billiton etc.) using the DCF model for university. What is the standard approach here concerning the terminal value. Should there be a terminal value like for a normal firm assuming that they will sell their commodities forever - even though I know that the existing mines are finite and I know their exact life? Or should I just forecast production until their mines are depleted and discount these cash flows. This kind of assumes that they do not find anything new, or if so that it is NPV neutral.
Thanks a lot, I appreciate your input - especially if you have worked in Mining/Nat. Resources M&A or somehow know about this topic...
If you assume a depletion of all reserves, it becomes a NAV model. Normally, companies trade at some multiple to the NAV to account for the potential to find/acquire new reserves.
The other way to do it is assume that at the terminal year, production plateaus and grows at the rate of inflation.
The most aggressive methodology is to assume some growth rate in reserves based on historic levels of discoveries, extensions, etc.
The most conservative method, therefore, is to use a NAV model, and apply some comparable NAV multiple to arrive at a valuation. Hope that helps.
Awesome response!
I so far had only heard of NAV when it comes to hedge funds, but it makes perfect sense. I have to strictly stick to DCF and not use multiples, but I think I will value the firm as a going concern and at NAV and then say Value(Going Concern) - NAV = Present Value of Growth Opportunities
I actually thought about letting production plateau and then growing everything at the rate of inflation (setting capex = depreciation), but overall use of the commodity is increasing so that would imply less market share. So I am using an alternative growth rate based on regression analysis.
if you're talking about the large global miners that are actively producing (rather than companies in pre-production), you can also just assume a terminal multiple on EBITDA
Problem with an NAV model in this case is that you would essentially need information on all their mines/projects, specifically, their individual reserve/resource & production figures - to figure out when each mine/project will get depleted. Even if you managed to get all that information, you would still then need to model each mine/project which would take forever - so there is that practicality aspect to it. Just my 2c worth.
I do agree, however, that conceptually, NAV is the way to go (re: finite life assets).
As a student doing a DCF for a project, you picked a very difficult thing to value. The large diversified miners (Rio, BHP, Xstrata, Anglo American, Vale) are involved in several commodities and usually have dozens of producing mines, development projects and exploration assets. They all have different characteristics, so as people already mentioned, the correct way to value would be to use a NAV approach for each asset by blowing down reserves.
Pick an asset, find out their reserves and resources, project out production (the correct way would be to project out ore milled, and then work your way down to paid metal using head grades, production yields and recovery rates) until reserves are depleted, project out commodity prices to find revenue, then project out cash costs. Discount back the cash flows (usually 5% for base metal assets) to get your NPV. Sum of the NPVs of the producing/development assets, then factor in cash, capitalized G&A, hedging, prefs, debt etc to get your corporate NAV
In practice, mining banking groups have access to a lot of third party data you won't have (Wood Mackenzie/Brook Hunt, AME etc) which helps them analyze each asset at a pretty detailed level.
With regards to a terminal value, they are not used at all in natres banking. Finite life is one reason you already pointed out, but another reason is that one of the biggest drivers of mining valuation is commodity prices. Using an EV/EBITDA multiple will be very dependent on what prices you assume in that year. It is more accurate to project out a commodity price deck for each year instead of using the same prices into perpetuity.
To be honest, if you can avoid doing your project on a mining company, I would pick a more straight forward industry. You'll avoid a lot of headaches!
The firm is actually not diversified, they just mine three commodities and when it comes right down to it, most of the value is in one commodity. They actually state the annual capacity, life etc. for all of their mines. Now I wouldn't use a multiple for the terminal value, but rather let prices rise at the inflation rate and come up with the pv of the perpetuity. Now the demand and volume of that commodity is strongly correlated to real gdp growth. So I would basically have a terminal growth rate of (1+inflation)*(1+real gdp growth) -1= nominal gdp growth Now this assumes that these guys keep their market share constant and mine some new stuff, including brownfield projects that they do not currently own. Is that wrong? If you value Apple, you also assume that they come up with an iPhone 5 and iPad4.
Thanks for all the great answers so far. That's invaluable feedback.
Oh and I was assigned that project and can't choose ;)
Valuing/Analyzing junior mining companies? (Originally Posted: 07/13/2011)
I'm trying to do a little valuation/analysis for junior mining, mostly explortation stage companies but I am running into some problems. Most places I've googled say that comparable analysis shouldn't be used for small cap stocks since they aren't very accurate. Plus most of these companies either have no revenues or negative earnings, so stuff like EBIT and P/E ratios don't really work. Is there a good way to value/analyze these types of companies?
sure if they are owned by John Burbank at Passport Capital then they are a good bet to own yourself. One thing he does is buy mining companies that he identifies will be bought by the larger miners Rio Tinto, BHP etc and his equity stakes will rise by 10.
Value a mining company (Originally Posted: 04/20/2015)
If you are asked to value a mining company, i know you must use an NPV to eventually find the nav. but is this NPV simply FCFF discounted at a particular rate. the only main difference is that there isn't a terminal value? thanks for the help!
Precious metals (Gold, PGM) baseline discount rate of 5% adjusted for country risk premium and stage of development Base metals (Copper): Start at 7% or 8%
Note: it's rarely pure gold. There is usually a copper stream.
No terminal value - extend model until mine life depleted based on reserve (proven / probable) and potentially convert resource (measured and indicated could be converted to 2P)
Mostly works for developed / producing mines.
If mining company is purely developer or exploration (no production, a "liar with a hole in the ground"), this type of math goes out the window.
Valuing Mining Firms (Originally Posted: 01/19/2011)
I'm interviewing with a large Canadian investment bank pretty soon, this firm has a specific focus on mining, metals and energy. Naturally, any deal I mention they were involved in will open me up to technical questions relating to valuation for these firms.
So what exactly are the differences? I've heard a Price/NAV ratio is a more relevant stat than the typical EV/EBITDA. Alos any sort of DCF should have a sensitivity analysis for an expected range of prices for the underlying commodity. Is this advice meaningful and more importantly what can I do and where can I look to pick up on these differences?
Any assistance is appreciated.
search there is a huge thread about valuation that was recent, talked about the three most important things that come with valuation......
Take a look at equity reasearch on mining firms. They are usually valued using a multiple of NAV
I've seen the sensitivity analysis done before.
Price/NAV is more relevant. Stage of the company is relevant. Closer it is to production, the higher the multiples.
For resources in the ground Proven + Probable Measured + Indicated Inferred
Realistically though, they aren't going to expect you to know that. I've had interviews before that were focussed only on mining (calgary to be specific) and not once did I get a single mining question asked.
I finished a quick and dirty dcf for some coal mines. I recall that instead of terminal value you project the dcf based on the assets life and use a production/price curve to infer income. After that you have closing costs, but no TV as they're all accounted for in your FCF analysis
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