DCF KaunisvaaraDCF estimate for Kaunisvaara (base case)
My unrisked base case DCF estimate as per Dec. 31, 2010, for Kaunisvaara is USD 800 mill. (post tax). My calculation of DCF is below derived step by step.
Discount rate: 8 % p.a. (real rate)
All money numbers are real numbers, i.e. expressed in the value at December 31, 2010
USDm = million USD
dmt = dry metric tonne
mtpy = millon tonne per year
USD per tonne pellet feed (dmt):
+ 100: market price CFR China per tonne (dmt) for hematite standard material 62% Fe; long term real price (USD 100/dmt is anticipated as marginal long term cost for the domestic Chinese iron ore mining industry regarded as the global iron ore industry’s marginal producer; the iron ore industry is behaving like an oligopoly; Vale in July 2010 said they regard USD 90-100/dmt as a sustainable long term price as Martins in Vale also said: “So long term, I believe that this price will not go below $100”)
+ 29.75: market premium for high grade 69 % Fe Kaunisvaara; long term premium per 1% extra Fe grade USD 4,25/dmt * (69%-62%)
+ 6.90: long term premium for value-in-use (due to magnetite, low in impurities, fine grindled)
= 136.65: price per tonne (dmt) CFR customer for Kaunisvaara pellet feed 69% Fe; long term real price
- 18.80: seaborne freight from Narvik to the average customer (freight to Europe USD 10/dmt * 2/5 + freight to China USD 30/dmt * 2/5 + freight to North Africa USD 14/dmt * 1/5: I anticipate 1 mtpy via Standard Bank to North Africa)
= 117.85: FOB price per dmt Narvik for deliveries to the average customer
- 5.89: 5 % deduction for eventual discount on market price and sales commision to Stemcor and Standard Bank (my estimate) * FOB Narvik 117.85/dmt
= 111.96 FOB price per dmt Narvik deducted for eventual price discounts and sales commission
- 54: cash operating costs FOB Narvik according to DFS
- 6: addition to DFS-cash operating costs when adjusted for difference between USDSEK today (7,00) and USDSEK-assumption in the DFS (8,125), and assuming 3/4 of costs incur in SEK
-3: sales & marketing, R & D, general administrative expenses
= 48.96 EBITDA
x 0,737: adjustment for income taxes (26.3 % tax on net result)
=36,08 EBITDA per tonne (dmt) post taxes
- 3: sustaining CapEx (to maintain the annual capacity, including rolling equipment)
- 17: initial CapEx which consists of the sum of: 1) Annuity per tonne of initial CapEx USDm 694 + addition to initial CapEx of USDm 55 due to difference between USDSEK and EURUSD today and the corresponding assumption in the DFS, and assuming 1/2 of CapEx incurs in SEK, 2) Annuity per tonne of initial Capex USDm 100 for Pellivuoma, 3) Annuity of CapEx USD 100 x 2 in future to expand the resource and reserve base to extend the life of Kaunisvaara from 20 years to 30 years with an average production of 5 mtpy pellet feed per year.
- 1: annuity per tonne of investment in working capital USDm 70
+ 3: taxation effect of depreciation of CapEx for taxation purposes
= 18: annuity cash flow per dmt over life time of 30 years for Kaunisvaara mines producing 5 mtpy
x 5: mtpy production of pellet feed magnetite 69 % Fe
= USDm 90 per year: annuity cash flow per year over life time of 30 years for the Kaunisvaara mines producing 5 mtpy
x 11,30: multiplicator to convert 1 year of cash flow to an accumulated DCF for 30 years life time for the mines using a real discount rate of 8 % p.a. (30 years based on todays Kaunisvaara reserves and resources for Tapulivuoma, Sahavaara and Pellivuoma pluss an addition of 15 % (i.e. 55 mill. tonnes of magnetite in ground and 31 % Fe in situ) for anticipated new reserves and resources discovered during a 30 year life of open pit mining operations in the Kaunisvaara area)
x 0,794: discounting back to December 31,2010, from start of production in my DCF-model (December 31, 2013) using a real discount rate of 8 % p.a.
= USDm 807: DCF as per December 31, 2010, for pellet feed production 5 mtpy during 30 years in Kaunisvaara