At todays gold prices, the Kiniero gold project is going to pay off handsomely for shareholders. According to the latest presentation the project can generate US $50m in free cash flow with a gold price at $1,650/oz. Today, gold is trading at US $2,233/oz which tells me the figures below are conservative estimates.
Anyway, let's use $50m in fcf and a mine life of 9.5 years. About $50 m in capital costs have been incurred with another ~ $110m left. It is easy to see that the mine can be paid off with internal cash flows very quickly.
Let r be the discount rate so that the net present value of the capital project is 0. Let's compute the internal rate of return (r) for this investment using $160m in capital costs upfront. For simplicity, let's use a mine life of 9 years.
0 = $50m/(1+r)^1 + $50m/(1+r)^2 + ... + $50m/(1+r)^9 - $160m
The rhs can be condensed using the formula for geometric series.
a (R^n - 1) / (R -1) where a = first term ($50m)
R = 1/ (1+ r)
solving for r and adding $160m to both sides we get,
$160m = 50m*[1/(1+r)^9 -1]/[1/(1+r) - 1]
Or r =~ 0.43 or 43% !!!
What does this mean?
This tells me that if shareholders demand a return of ~ 43% or less then this project is going to create value for shareholders. That is a significant margin of safety and tells me that their capital costs is justified by the internal cash flows they can generate.
If investors require a 15% irr then the Kiniero project would add approximately US $114m in additional value.
If investors are satisfied with a 10% irr, then the project would add US $156.74m
Today the value of the company is only C $147.7m and the market is discounting its future cash flow potential.