VERDE NPV NOT WORTH $2 BILLION ... BUT OVER $5 BILLION !!!It appears that most on this board have been confusing the actual potential VALUE of Verde with the NPV of the PFS. I believe that this view is incorrect for the following reason:
The $2 billion valuation of the PFS considers the net present value of the project over 36 years with ZERO terminal value ascribed at the end of the period. Although this is considered normal practice in the general mining industry, it is conceptually wrong in the specific case of Verde.
The main reason for this is that although the PFS takes into consideration the 777 million tons of RESERVES to arrive at the valuation, in actual fact, the RESOURCES of more than 3.3 BILLION tons can keep the project going well in excess of 100 years !
Under normal circumstances the use of reserves alone would be a necessary requirement for a Bankable Feasibility Study (BFS) had the company been following the more conventional route of seeking bank financing for the project. Luckily this is not the case for Verde anymore, and we all painfully remember where following the "conventional" route got us last time round.
Certainly Verde has to be commended for their prudence and being very conservative in using the very highest standard for valuing the project to achieve an NPV of $2 billion. Perhaps it is too conservative but at least it puts a solid floor.
Those who know the history of the company well can remember that back when Verde was drilling to prove the huge resources in order to satisfy the bankers, the costly process became something of a monotonous repetition of drilling resources and converting them to reserves again, and again, and again to the point of boredom and unnecessary waste of money. So they, wisely, just stopped. It therefore stands to reason that, had this tedious process been continued senselessly ad infinitum, most, if not even all, of the resources would today have been converted to reserves and the life of the project would well exceed 36 years.
In any event as we can surmise from the above that the project will not just grind to a halt after 36 years so, clearly, a SIGNIFICANT terminal value must be ascribed to a project that has, potentially, another 100 more years to run. This is not reflected in the $2 billion NPV of the PFS.
Although it is difficult to reasonably value something 36 years down the line we can thankfully use some accepted comparative yardsticks to be able to approximate a value a little closer in time with a higher degree of confidence.
Verde's stated aim through the PFS is to ramp up the production of Super Greensand to some 25 million tons by around 2025 i.e. in about 7 years from now. Once that level is reached then it will continue in a steady state for the lifetime of the project, whatever that may be. At that time, it would certainly not be inconceivable to think that once full production was achieved any present skepticism would disappear and a friendly / unfriendly bid could even be launched (if not earlier). Even in the absence of such a bid Verde should by then be trading closer to full valuation.
It is therefore reasonable to try and peg such a value in 2025 and discount it back to the present.
In order to achieve this, all we have to do is look at comparable metrics within the sector today where we can see that peers are trading on average at a PE of 20 or a price to cash flow of around 14.
So, with Verde producing 25 MT in 2025 at a net profit of about $30 / Ton all in, we would expect that the company will cash flow some $750 million annually less taxes, depreciation, amortization and interest. Depreciation and amortization including sustaining capex should run about $25 million per year max, so we would be left with about $725 million and, since there would be no interest payable, all we have to substract are corporate taxes which are at 34% in Brazil.
This then leaves us with $478 million net annually.
Now comes the fun part. If we take the peer average price to cashflow of 14 and multiply it by the above number, we end up with a valuation of almost $6.7 Billion which, discounted back 7 years to today at 8%, then yields a net of $3.7 Billion.
However in Verde's case due to relatively very low depreciation and amortization and no interest or other charges to speak of, cashflow is virtually the same as earnings so we can apply a peer-equivalent P/E of 20 which equals about $9.5 Billion and that is discounted back to $5.3 Billion.
So which is it ? $3.7 Billion or $5.3 Billion ?
You take your pick, but I tend to lean towards the higher value which is fully defendable. Also consider that in the average valuation metrics above I have excluded specialty companies such as, for instance, SQM which is trading at a P/E of 30. One could certainly make an argument in favor of Verde being such a specialty company when looking at it's product pipeline, in which case these valuations could be even higher by as much as 50%.
Finally, I could start an argument about which discount rate is appropriate. A discount rate has nothing to do with risk assessment but is merely the time value of money which today is certainly not 8%. A more realistic discount rate at present would be 5% or less which, if applied to the PFS would substantially increase the NPV and also increase my valuations above. When investors price risk they actually discount the (discounted) NPV to suit their appetite. Judging from the price of Verde in the market today, depending on whether you pick the NPV of the PFS or my higher value NPVs the discount being applied is anywhere from about 98.6% to 99.5%. WOW !!!
Let me rephrase that differently: Verde today is trading at as low as 0.5% i.e. 0.005 of NPV.
Now that's quite a risk discount...
I think I might have to write a post in the next few days on "The Mouse that Roared" and the story of The Great Northern Iron Ore Properties Trust.
Rick Rule just said in a recent interview that he believes that of all stocks in the market today, probably the most undervalued sector by far are the fertilizer companies.
In Verde's case it most certainly is.