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the diff between their 8 & my 10 could arise from a combination of unknown assumption/calculation differences so it's not possible to say however the numbers are close enough for me to be satisfied am in the same ballpark
You are right to pick up the 20% as extremely conservative
Banks have depts working to figure out correct discount factors for NPV calculations however the basic principle is the bigger the risk the higher the discount rate and theory of DCF is to apply an equity risk premium to the risk-free rate which traditionally has been the rate on a 10 year govt bond (although the financial crisis and the invention of negative interest rates has made this even more subjective)
IMO this enterprise is essentially de-risked and something like 10% would be appropriate and probably still conservative
Your attitude is correct, you rarely get complaints about over delivery!
Just to say I have been in this for 2 years and I liked it because it is essentially low risk as low tech and low capex
The only real risk was permission and placings while in development
now the quality of the market will determine valuation
It seems to be equivalent to an interest rate reflecting credit risk. Whether it changes or not would depend on what is normal for mining operations. Maybe the permit etc.. risk is all in the 70% and 20% is standard for mines even when they're up and running? I think I need to read analyst reports for other small mining companies to develop understanding here.
Dfens' analysis looks fair minded to me.
Thanks for the link SGD, really useful.
The SVS research states "It must be noted that this valuation contains both a 70% funding and a 20% cash flow discount rate given Sunrise’s early, pre- commercialisation, stage of development"
Do you think that the 20% cash flow discount rate stays the same or does it reduce now that we have permitting. Does it them reduce again once sales contracts are know and the spades are on site?
The rate makes a big difference to the calculations. Drop to 15% and then the share price jumps to 2.1p.
Thank you SGD27, this is exactly the kind of thing I hoped to learn by coming here.
Every year that everything progresses according to plan and on time, you can remove the discount for that year. So in our case the value would rise by a factor 1.2 i.e. go up by 20%.
You might also then decide that as things are going so well, a reduced factor would now be appropriate, which would lift the value even further.
The DCF rate is something I don't understand very well. Is it something that would reduce once the site was actually in production and demonstrating a profit ?
Should we be hoping that our new broker produces an updated report? I would imagine that if anything would get the market paying attention it would be a report from an independent broker stating that the company is significantly undervalued?
Hi Dfens, thanks for your thoughts on this. I do think it's a good way of doing things to start by understanding what SVS have done, then recalculate with updated/modified assumptions.
Might the difference between your 10m & their 8m just be due to knocking off a few million for capex before applying the 70% risk discount?
The 20% DCF rate does seem quite conservative, and combines with the 5 year ramp-up to hit the value quite hard. By the time we reach full production we're discounting by (1/1.2)^5 = 0.4, i.e. knocking 60% off!
Then again, my attitude is to be conservative and leave plenty of room to be surprised to the upside!
Just picking up on this thread from last week about the 8m valuation
That valuation is out of date and was a "risk adjusted" valuation which conflates DCF valuation with a probability of it happening or not, the 70% bit, SGD picked this up
IMO this is really pretty meaningless for a single stock more useful for estimating the potential value of a portfolio of investments
Looks like they used a 20% discount for the time value of money and then applied the probability
Plugging their stated assumptions into a simple financial model structured as above I came to a value of £10m vs their £8m, so reasonably close
Using their number of 8 and removing the probability NPV is £8m/.30 = 27m and 27/2736m* shares = 1.0p
If I change just 2 assumptions, life of mine from 15 years to 27 and no of shares to 3314 my model shows 1.6p
obvs all assumptions should be updated, Capex and its funding would be a big factor for instance
please regard this as no more than an attempt to sense check an external valuation and all usual caveats apply
Hi Twiggy, market cap is not always aligned to the true 'value' of a company (market sentiment, hype for instance with unsubstantiated rumours of a new contract/takeover etc throws this off kilter frequently. ), I prefer to think of a share price as a value that indicates the perceived future potential of a company by investors, akin to the the global stock indices which reflect the optimism or pessimism for the future of a nations economy- they don't always correlate to the actual state of the economy at the present time. Look at how the current pandemic has tanked the price of some companies that in reality still have excellent fundamentals.
So how is Mcap arrived at? I mean. I know its the total value of all the shares in issue but how does the market decide that? Is it just the market that sets it based on perceived value or is there some good calculation?
I would suggest that a company with an operation that pretty much guarantees annual profits of £20m+ for the next 27 years, as well as having other interests, should have quite a high cap. Certainly it should be way in excess of one years annual profit?
My beer mat calculations estimate that annual profit from year 4 onwards would be $20m+. That's based on the pozzolan at $100 per tonne and expanded perlite at $350 per tonne. The latest presentation suggests that these figures could be as high as $120 and $850.
MCAP of £26m would be a good start but I'm sure that once the operation is up and running it will increase significantly from there. If PC then "unlocks" the value in the precious metals which he has alluded to doing....................very exciting times ahead.
I think I would be a little disappointed. With how much is in the ground, selling price, cost to get it etc.
I can't see how the mcap would be £26m.
Come on,let’s av it again today.time Sres got a bit of love
It's still a good return, it just seems really harsh that the perceived risk *after permits, transport etc.. are accounted for* is so high that it effectively reduces the value of the company by a factor of 3. Live and learn.
If the mcap rose from 7m to 26m you're saying you'd be disappointed?
Isn't that where the 70% comes in then? That gets added back because the risk of it not happening is gone?
If that 20% always applied, it would mean the analyst would value the company at 8/0.3mm or about 26 million after production had started and was making the profit cited in the model; seems very low ?
Does the money they say they're going to generate stop being discounted once they actually start generating it?
The 20% is the DCF rate which they've used to put a value on the asset. It's to take into account that money someone says they're going to generate in the future is worth less than money in your pocket now.
Very loosely speaking it's the inverse of the PE ratio, so 20% corresponds to a PE of 5, which would be quite typical for this sort of operation. It's actually a bit more complicated than that, because of the way production ramps up over the years, so for that you'll have to look at the wiki link I gave.
The 70% is just representing the possibility that the whole thing never gets off the ground.
So when they start shipping you can disregard the 70%, but the 20% DCF calculation remains.
Just my amateur understanding, happy to be corrected if wrong. As always DYOR.
I'm not following; is it that the 20% and the 70% discounts applied overlap in some way? or is it that the discount shouldn't be reduced as the risks they represent are overcome ?
I'm no financial expert, but I don't think it quite works like that.
"this valuation contains both a 70% funding and a 20% cash flow discount rate given Sunrise’s early, precommercialisation, stage of development. "
I get 90% from 70% plus 20%
70% not 90%?
You might also want to factor in higher shares in issue on the down side, but increasing price of pozz/perl on the up side.
A remaining risk is transport costs, but with current price of oil (and maybe even electric trucks before too long) that's probably not a big issue.