RE:opinion The Hat prospect appears to have a many-limbed group of ore bodies with some continuing at depth. Apparently the grades also seem to improve in the deeper parts so as I have analysed it, the timing of the transition from surface to underground mining is a major variable in the overall value realized.
In the calculation I sent yesterday there were several places I reduced the mineable ore quantity and quality as you probably noticed. And I certainly fudged the financial side to make it much less favourable (I cannot see a mine paying 50% taxes on income ever). Partly I did those things to be conservative in the final numbers, but partly I did them to also accept that there would be some ongoing periodic capital injections required, more trucks, shaft sinking etc. etc.
But, having done all that I still ended up with an orebody that lasted 37 years to the 400m depth.
So I made another assumption, not always a very good one, that says essentially the metal price realized will keep up with inflation and that the mining costs will not increase faster than inflation. Over 37 years you and I both know there will be periods of time when the metal prices are out of step with inflation. Even so, targeting a $50,000,000 return seems reasonable enough.
The assumption is key in that I allowed pay back of the $500,000,000 capital cost in the first 7 years based on the pay back being before-tax money normally. The next 30 years of operation were assumed to maintain the after -tax return of $50,000,000 per year. With the assumption on the cost and income side as noted above, I used a discount rate of 10% to calculate the net present value of the returns. Again, 10% is a very high rate of return, especially in today’s climate of negatively priced bonds, and 30 years is a long, long projection, but that is what I did.
So the net present value of the $50,000,000 annual return, discounted at 10% compounded for 30 years added up to $471,345,723 which when divided by the number of DBG shares outstanding today yields a net present value of $4.21 per share for the situation as I outlined it above. This treatment is very simple in that it assumes no dilution of equity occurs in financing the initial capital required, that the market can absorb a substantial production increase with no losses, and finally, does not include any value from the ore below the 400m depth.
The Hat property is very attractive and optimizing the mine designs so the transition to underground occurs at the most beneficial time will have a major favourable impact on the valuation I have projected. If the current drilling program indicates more ore and possibly better grades, below the 400m depth, then a good mine plan could make major improvements to the valuation I have provided above.
I am sure there are accountants some where who have modelled the metal price and projected it for the next 30 years that would argue with my cavalier treatment of inflation and costs but considering all the safety factors I have applied I would love to build and operate this mine.
- Former Mining Supervisor of Suncor Energy & Syncrude