The valuation of mining companies often starts with a calculation of Net Asset Value (NAV). NAV assessment is a cumulative discounted cash flow analysis of a company’s portfolio of assets (mines) minus associated corporate and other overheads. Enterprise value (value of equity + debt – cash) can be compared to NAV. If enterprise value is higher than NAV then the company trades at a premium. If enterprise value is less than the NAV, than the company trades at a discount.
Generally, NAV is calculated using a 5% discount rate but there are often occurrences where this value will be increased (geopolitical risk, asset risk, permitting). The fact that NAV is generally calculated at 5% is very impactful. If Franco Nevada trades at a premium to the 5%NAV than that means that the market is pricing in a lower discount rate. A 2% discounted cash flow analysis is probably a value that brings Franco closer to its market price. Conversely, if Alio Gold is trading at a large discount to their 5%NAV then the market is implying that something closer to a 10% discount rate could be utilized.
Sometimes the market can be become irrational and punish projects/companies. A discount/premium to NAV analysis can be a useful way to identify “value” plays in the space.
The banks have teams of analysts that produce DCF models for each of the mining companies. I do not have this luxury. I do have, however, published technical reports, and market prices. Almost all technical reports include a summary of NPV and most of the time it utilizes a 5% discount rate. This is great. For single asset companies, I now have a view of the company’s NAV (ignoring adjustments).
Single asset companies are the most interesting as they provide the most direct view of the company’s NAV; less noise. The chart below plots
It’s an interesting mental exercise, hypothesizing why some companies are undervalued relative to their projects. A few ideas:
- Time/Stage: technical reports usually display the NPV as of the time that a construction decision is made, not the current time period. If we assume that the standard PEA is 6 years from a construction decision and use an 8% discount rate, the discount value is 58% when compared to the published NPV. It shouldn’t be a surprise that Valentine Lake and Mt. Todd are at such a large discount as they are at the PEA stage. Conversely, the highest ranked project (Ollachea) is currently in construction.
- Jurisdiction: This goes without saying and explains why a project like Block 14, located in the Sudan, is not generating much share value for Orca Gold.
So how do we use this information? A value investor could look at this and see if the market is mispricing any assets. We could also look at the development path of an asset and predict a share price appreciation.
A useful example would be Valentine Lake. Marathon released a PEA on the property at the end of October which showed an
Seems like Valentine Lake could be an interesting opportunity.
What do you think?