RE: Upside11 Nov 2023 19:23
Hi Steve4077
Great post and calculation. But I would contest one thing.
Let us assume the JV finds a Tier 1 deposit. However, it may not find it until, say, 2 years from now - 2025? And when would production start? 4-5 years further on? 2030?
Now NPV (call it N) is calculated on the basis of this year's profit (P), plus next year's discounted, plus the following year's discounted twice, etc.
A reasonable discount rate might be 8%, so the discount factor (d) is (1 - 0.08) = 0.92. So N = P + d.P + (d**2)P + (d**3)P + ... in perpetuity.
If N = $2b (as you say), this gives annual profit of $160m. However it may be a bit higher, since the mine has a limited life span, say, 20 years, so giving about $190m.
The problem is, the first year of profit would be 2030, 7 years from now. So we need to factor in that the income stream may not start for years to come.
So the calculation becomes : N = (d**7)P + (d**8)P + (d**9)P + ...
If we let Q = (d**7)P, we get N = Q + d.Q + (d**2)P + (d**3)Q + ...
Same equation. BUT everything is scaled down by d**7 = 0.56. This equates to an NPV of 0.56 * $2b = $1.115b, or a s/p of 14.9p.
Some might call the above discount factor generous. 10% or 12% might be more appropriate, given production is so far in the future. A 12% discount factor would give a s/p of c.10.9p.
10p is what some in the past called a good buy-out price for ARCM - and if it reached that price tomorrow, I'd certainly be happy.
But whatever your view, it is the difficulty of long term prediction which makes these guessing games so conjectural.
My take is that, while there may be share price spikes in the short term (FOMO), there won't be consistent price rises until significant finds are made and proved up, perhaps a couple of years from now. And this assumes no black swan event, which is always possible with AIM miners in this part of the world.
And given that I am extremely wary of the current management (see earlier posts), I'd say this was not merely possible, but likely.
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