Still havin' trouble with my addin'I was just looking at some numbers for Kipushi and K&K...
For Kipushi, say we take all the numbers from the PEA, except to revise downwards the treatment and refining charges from USD 200/tonne to USD 100/tonne to be conservative, because rates recently hit USD 40-50/tonne. And adjust for the spot price of USD 2700/tonne, or USD 1.225/lb zinc. Then we keep the USD 409 million capital outlay, even though it's supposed to come down. Assume also that we provide all the capital, and then factor in capital reimbursement from Gecamines. (Even if we don't, the numbers don't change a great deal, since capital is small in relation to profit.) Then run revenues through the mill of operating costs, sustaining capital and tax, to arrive at a free cash flow pre annum, and it's around USD 200 million/ann at 68% share net to Ivanhoe. Discount it back one year at 10% given we're apparently a year from production, so around USD 180 million/ann.
For K&K, say we take the USD 1.06/lb C1 cost number from the Kakula PEA press release, but run the 8Mtpa blended production scenario for 300 tpa, and use the current spot of USD 5714/t, or USD 2.59/lb copper. Keep the USD 999 million capital outlay. (Assume we provide half.) Depreciate it over 10 years and tax profits at 30% (after royalties and export taxes, the latter of which are going away?) At 40% interest we have free cash flow of nearly USD 300 million net to Ivanhoe. Discount it back 3 years at a rate of 10% for the pre-production period until 2019-2020, to arrive at USD 220 million FCF, as if it were commencing today.
So one could look at it as USD 400 million in annual free cash flow net to Ivanhoe, after discounting for the pre-production period. Then take the market cap of roughly USD 1.8 billion. Net out USD 400 million in cash, and either add 100% of Kipushi's USD 400 million in capital and 50% of K&K's USD 999 million in capital, shared with Zijin, to arrive at a pro-forma enterprise value, and then add back Gecamines and DRC's repayment of capital to cash flow; or, simply add 68% of Kipushi's and 40% of K&K's capital to arrive at a pro-forma EV. Either way it doesn't make much difference. The result is a pro forma EV of roughly USD 2.1-2.3 billion to a free cash flow of about USD 400 million, or a little more in the former scenario.
Either way it's just a hair over a 5x unlevered free cash flow yield, after taking effect of discounting cash flow for development time. The reciprocal is a 20% free cash flow yield. I don't know too many assets with this kind of yield, do you? I think 10x at least would be a more sensible fair value, which would take the stock to CAD 6.50/share for starters.
But then a number of other assumptions could be changed. If we assume, as apparently under consideration, a doubling of initial production at K&K, with the same operating cost profile, and double the upfront capital (USD 2 billion), then the current EV/FCF goes from 5 to under 4. And at at 10x multiple the stock would have to be CAD 9-10/share today.
3 years out, the accretion of the discount would take the stock to about 13.
But then, if 3 years from now, when mining assets may be somewhat more in favour, if the interest rate- and general equity valuation environment is anything like today, a 5% FCF yield may be more germane. (Actually, there aren't too many assets yielding 10% today, come to think of it, and high class properties like blue chip stocks, Class A real estate, and yes, tier 1 mines, yields closer to 5%, with a 20x FCF multiple.) A 20 multiple for a hundred year mine makes sense, but in Kipushi's case, is it fair? Well, it is open, and in an average market, there is some credit given to "finding as you go". (Might the richest crack in the earth be a good place to look for minerals?) So for that 20 multiple we would need a stock price of 27. I don't really like to use aggressive valuations, but the reality of markets is that if 10x is fair (many would argue historically conservative for FCF) and they go to 5x, then they also go to 20x. It's simply in the nature of the beast.
But remember that all this is unlevered, and at current spot prices. Furthermore, astute observers may have noticed that there has been no mention of Platreef. And let's just value exploration potential at zero. After all, let's face it, we never seem to unearth anything good. You get the picture, and you can play around with your own assumptions, e.g. metal prices, discount rates by geography, etc. All this does seem a little absurd. If I misplaced a decimal, I hope someone will be kind enough to point it out.