RE: hi coach: some ramblings Hi Hydrocarbons!
You have raised some good questions. I picked a 10 times forward cash flow multiple because it is a round number that is reasonable for a back-of-the-envelope estimate. I assume from your screen name that you play oil & gas stocks, and that sector is where I would draw my comparison for the future direction of the PM sector. O&G stocks were trading at single digit cash flow multiples a few years ago, despite higher commodity prices. The analysts assured us that the cycle was mature, and that prices above $30 could not be maintained, and the market reacted to this expectation. However, it took about a year for the market to realize higher commodity prices were here to stay, and in 2004 just about every producer rocketed higher as that reality was priced into the producers. I think that is how it will play out again. I do not see too many analysts projecting higher than $2 copper prices going forward. Perhaps we are at the top of the cycle, but I doubt it. And if I am right, then all of the producers will enjoy a ramp up when the higher prices are discounted into forward projections.
I do not think there is any standard in the industry to value juniors. My numbers are not net earnings projections. I go with cash flow multiples because I think we can get a more accurate estimate that way. When you get into trying to discount in admin expenses, option charges against earnings, depreciation and depletion, taxes, travel costs, IR expenses, etc it becomes very difficult to get a handle on what the net earnings will be. Furthermore, many of the juniors that are currently producing do not have earnings to report yet. So cash flow makes more sense to base a target price on. But there is no consensus priced into the market.
I do not know what the forward cash flow projections are for other producing base metals juniors like DIB, IVW, ARG, PMI, or NNO are, and I would suspect that no one else on this forum could answer that either. I think the primary driver of market prices right now is speculative upside and not fundamental financials. But I would also guess that all of the juniors I listed trade at higher than 10 times cash flow.
A final comment, I think we will eventually see a similar regime to what happened in the late 1970s. The metals prices will continue to climb, making the cash flow generation compelling and drawing in more investment interest to the sector. Companies will be awash in cash and start to issue sky-high dividends. The juniors will be carried along in that environment to trade at multiples that seem ridiculous today. How do you try to discount something like that into a target price? I just stick to basic fundamentals and am quite happy to sit on my CS shares. I think everyone can agree that we are extremely undervalued right now, and the question is simply, how high will this one go?
cheers!
COACH247