NPV and EBITDA Don’t Explain Trading ActionThis just serves to illustrate that “The Market” is not always rational as some may believe. Katanga is operating in the same province of DRC as Kamoa. They enjoy a market cap of C$1.2 billion, despite incurring a loss of $116 M in the fourth quarter. They did earn $59 M in Q3. Once their cobalt production gets back on stream they should return to profitability. Cash on hand is just over $5 million. But they also have more than $6 billion in long term debt due in 2021 with interest between 5.5 and 7%. With that kind of high debt load, they may return to profitability, but investors won’t see a cent. If investors won’t see so much as one thin dime, why the relatively high market cap? A company is supposed to generate profits. Yet the market generates stories. In mining, traders often value companies based on their story, more than the bottom line. In other words, sometimes stocks trade strictly on emotions.
Compare that with IVN. Even at NPV8, where cash flow is discounted by 8% to consider the time value of money, they are still wildly profitable for all three advanced projects. Cash on hand plus short term deposits are around US$600 M. That’s a big improvement over $5 M. And debt will likely come in at $1 to $1.5B, not 6B+. The Company should develop one project at a time, only forging ahead with construction, when another is already in production. That way they can avoid a debt trap like KAT is experiencing.
To summarize, NPV, EBITDA, BV and other measures are important to arrive at an objective value for the Company. However, they often can’t be used to explain trading action. Don’t try to force a square peg in a round hole. If objective measures indicate high value, the market will eventually meander around to the same conclusion in time.
One note: Kasparov is right. The political situation in DRC and South Africa has a direct impact on bottom line profits. So, its legitimate for posters to bring up news on the topic. But as can be seen from the comparison with KAT, that impact can be hard to quantify. Even in a politically stable jurisdiction, it would be difficult to justify KAT’s C$1.2 B market cap, strictly by objective measures. Of course, on a practical level, more political stability and less corruption always make for a much better business climate.