How do you value IRR 91%14 Sep 2022 09:03
Ignoring for the minute inflation (in both capex and opex) since the current DFS was published how to value a company with 91% IRR. Because certainly compared to other miners I've invested in, it's off the scale.
1.6 year payback from the DFS of $40m capex means we make a square $25m USD net profit/year (based on the previously published basked price, which is very conservative now, but allowing for the gov free carry% lets stick with it). The DFS also states that stage 2 expansion (assume similar capex for now) can be funded from FCF by year 4 so $40m could be repaid in 1.6 years and leave enough to fund stage 2.
Profit goes up after stage 2 expansion as does tax to allow for $1bn pre tax cashflow over 15 year mine life would be $66m pre tax, throw in the tax (ignore the free carry offset by higher graphite price) call it average $45m net profit/yr over LOM. Subtract $80m capex from that figure even though some will get funded from equity. Call it $40m USD net profit a year average over LOM allowing for capex.
£35m net profit trading at a conservative 6x of P/E (LOM is limited but mining open in every direction means you can sustain it a lot longer than 15 years to extend the resource) would give us a £200m mcap. I think this is very realistic and should become apparent after sufficient FCF is being generated from mining ooperations to show that stage 2 can be built.
So the number that is unusual for Armadale is that you can get to £200m mcap ($230m USD) with a $40m initial outlay. You can achieve 6x the valuation of the initial investment give or take, which is where the ridiculous IRR comes in. The company will be in due course generating more NET profit per year than the initial capex.
All of the above of course is all well and good but we need to build the mine. Personally I'm very confident graphite will be very in demand this decade at least to drive prices higher and add to the numbers above. We also need to catch the sweet spot as the demand curve gets going get financed and get mine built - short mine build is a good thing here. Again personally I would be hanging around till expansion with at least a decent chunk of the initial investment because that's where we can see the £200m mcap numbers. Given we are still at around £10m now, thats 20x but of course we can't ignore some dilution to fund equity for mine build so the final multiple may (and probably will) be less. Also 4 year stage 2 could be 4 years after stage 1 2028/2029. I'd be happy to run 20m shares to end of decade for 22p outcome assuming 900m shares in issue for £4.4m. There would be dividends along the way because stage 1 capex gets funded from FCF as does stage 2 expansion.
These are my thoughts on how you value IRR 91% but of course a lot can go wrong (or not happen) along the way, there is always risk....
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