PYR has a valuation problemI'm a latecomer to this party, having been introducted to the story in late August when I bought a very small position in the mid 5 range. Sold it for a loss on November 13th after the CEO's update on the business made me think twice. At this point I would not buy back in until the share price went below $2.00/share. Maybe lower.
Why? The market has clearly been pricing a large lead order into PYR's share price, and the current valuation is much higher than it should be.
I know some will call me a basher for saying this, but here is my back-of-the-envelope valuation of the company for those who care to follow my reasoning.
I want to emphasize that I believe PYR has much potential, and I anticipate 3-5 years from now it will likely have proven out this part of the business to a much greater extent. That doesn't mean it isn't significantly overvalued in the short term.
PYR's current market cap is ~$620 million compared to 2019 revenue of ~$4.8 million and a 2019 net loss of (~$9.2 million). As of Q2 2020, PYR had generated ~$2.8 million in revenue and a net loss from operations of (~1.9 million). They were able to announce a net income of ~$3.5 million for Q2, but that was only due to the increase in share price of HPQ. This can be reported as revenue, but is also prone to future losses when the investments DECREASE in value. So a very different kind of revenue than selling torches.
PYR has put out some recent good news, including an increase in backlog and the much anticipated navy contract, so let's give them the benefit of the doubt and say that 2020 revenue could end up being a banner year. Having said that, the navy contract will happen over 18 months according to the press release, so the $11.5 million won't happen within one fiscal year. For that reason, I would cap their 2020 revenue at $15 million USD. This means that between June 30th and Dec 31st, PYR will have $12.2 million in revenue to report vs. the $2.8 million in reported in the first six months of 2020. Possible? Maybe. Profitablity is also not a given, and will depend on a variety of factors including the price of HPQ shares.
PYR's CURRENT VALUE
At the assumed $15 million in 2020 revenue, that implies a market cap of $75 million based on 5x sales expectations. This is generous for a small cap company with this kind of revenue, and to be honest you could justify PYR trading at more like 2x revenue, especially considering it hasn't been profitable on an operational basis in recent years.
So pick your own multiplier. But my own valuation, assuming $15 million of 2020 revenue, would be between $45 million and $75 million.
BUT WAIT, YOU SAY, WHAT ABOUT FORWARD EARNINGS?
I guess the big question is what can we expect in 2021?
While today's press release may be a foot in the door, it has made very clear that the large cap iron ore companies make decisions on their own timeframe. I would expect a trickle of sales in 2021, somewhere between 10 and 50. Maybe there will be more, but I would say based on today's announcement that it could also be less.
10 x $1.8 million = $18 million
50 x $1.5 million = $75 million
I'm reducing the per unit price for 50, as I assume they will be discounted further if such a large order is placed.
There will be other revenue too, of course, but it remains to be seen how quickly all of this can be rolloed out. These things often take time, and I wouldn't stay in suspense expecting a massive $100 million+ order anytime soon. There's a much greater likelihood that PYR will continue making progress on a number of fronts, slow and steady ("slow is fast"), but this also means the revenue will show up on the balance sheet over a number of years.
FAIR MARKET VALUE
Which brings us to my own fair value calculation for PYR, which I admit is back-of-the-envelope and mostly focuses on my own expectations for a much slower roll-out of torch sales.
LOW END: $25 million for 2021 (based on five torch sales) = $50 million FMV.
MID RANGE: $50 million for 2021 (based on 20 torch sales @ $1.6 mil) = $100 million FMV.
HIGH END: $100 million for 2021 (based on 50 torch sales @ $1.4 mil) = $200 million FMV.
These valuations are all based on 2x forward-looking revenue, which to me is a reasonable valuation metric based on PYR's current business.
This of course implies a FMV share price in the $0.32 to $1.29 range.
Will the share price sink that low? Probably not. I think many investors will continue to focus on the "huge potential" of the various business segments and it will continue to trade at a premium, at least in the short term. However, I would not personally be a buyer until at least the $2.00 level, and only then a small position. If it srops to the $1.30 level, I would add sigbificantly more.
GLTA