VSA Capital has initiated coverage on Ares and put a $2.17 target price on the stock!VSA Capital has initiated coverage on Ares and put a $2.17 target price on the stock! Valuation
Our valuation of Ares Strategic Mining (ARS CN) is based on a risked DCF valuation. The assumptions underpinning the model are set out above in the financial model summary. Due to the conceptual nature of the mine plan, pre-production stage and lack of resource we have applied a P/NAV risk factor of 0.7x. It is likely that at least initially the company will trade at a discount of some kind to NAV while confidence that the mineral inventory is robust is established, however, the prospectivity of Spor Mountain is impressive and we are confident that with the number of future targets an extensive mine life will be realised. We value this by way of a terminal value, common for bulk mining analysis, although apply a risk factor of 0.3x to reflect the exploration risk. We use the WACC of 7% and a terminal growth rate of 2%.
The execution risk of getting into production is also somewhat reduced by the fact that ARS has the support of strategic partner Mujim Group. We are confident that this will be demonstrated over time, however, in combination with the other factors mentioned, we believe this is a prudent approach. As exploration drilling is undertaken and a production track record is established, we anticipate that this discount will narrow and we will adjust our target valuation accordingly.
Valuation Summary
Division Division NAV, C$m
Attributable NAV, C$m P/NAV Fair Equity Value, C$m
Lost Sheep Mine 178,938
178,938 0.7 125,256
Terminal Value 268,573
268,573 0.3 80,572
Total NAV, C$mn 205,828
Consolidate Net Debt (YE FY 2021) 6,529
Minority Interest -
Total Equity Value 199,299
# of shares 91,952,108
Current price, CAD/share 0.55
12-mo Target Price, CAD/share 2.17
SOURCE: Company data, VSA Capital Research.
Currently, as well as being the only listed fluorspar entity with a permit to produce in the USA, it is the only near-term producer providing pure exposure to fluorspar globally. The Mexican entity Orbia, which owns the Las Cuevas mine in Mexico that currently supplies the US, is a conglomerate with a wide variety of product streams where fluorspar accounts for 12% of revenue. Commerce Resources (CCE CN) is exploration stage but is primarily an REE play, which has recently rerated on account of the changes to China’s imports rules, while perhaps the closest peer Canada Fluorspar has delisted. London-listed Tertiary Minerals is also exploration stage. ARS therefore is unique in its offering, in our view, and with a low-cost base, fast construction period and near-term cashflows, investors have the rare opportunity to invest in a near- term cash generative opportunity which can be achieved with minimal capital.