Understanding Valuation: Unlocking the Truth About Your Investments

No matter where you are in life, investing can be intimidating and rewarding.

The early months of the year typically represent a heavy buying time for investors and traders with portfolios of all sizes want to know where the best places to dedicate their money lies.

Here is a guide to understanding valuations so that retail investors can make sure they are not overpaying for their investment.

When calculating how to value a company, a key metric to consider is a company’s net present value (NPV), the worth of a company’s net cash flow, minus its initial cash outflow.

NPV is an important metric because it weighs the value of time, considering that future cash flows can translate into money today. It also offers a solid number that management teams can use to compare the initial outlay of cash with the return’s present value.

Taking a look at an example of this in the small-cap spectrum we hear a lot about companies being “undervalued” or “overvalued”.

The metals and mining sector, specifically base or industrial metals, offers a lot of options for investors looking for value who also need a way to protect themselves against the upcoming inflation surge. To gather the best possible returns, a few things to keep in mind when gauging an opportunity is to look at a company that is in production, or the late stages of its construction, with a project feasibility filed in the last few years on SEDAR, and ideally has funded its capital expenditures (CAPEX, or the funds used to acquire, upgrade, and maintain assets).


(INV Metals Inc. stock chart. Jan 2020 – Jan 2021. Click to enlarge.)

Two mining stocks in this league would be INV Metals Inc. (TSX: INV), a Toronto-based company with a focus on projects in Ecuador. It boasts an after-tax NPV $356 million and an initial rate of return (IRR) of 24.7%. Since INV had not performed as well this past year, when comparing its returns to its $56 million market cap and cash runway (the amount of time a company has to remain solvent) is less than a year, this stock has been considered “overvalued” by analysts.


(Trilogy Metals Inc. stock chart. Jan 2020 – Jan 2021. Click to enlarge.)

On the other side is Trilogy Metals Inc. (TSX: TMQ), a fair valued exploration and development play headquartered out of Vancouver, with operations in Alaska, which boasts an after-tax NPV of $1.1 Billion and after-tax IRR of 27% TMQ recently turned a profit and it has been a stable stock during volatile times, though it also underperformed the Canadian Metals and Mining industry. With a $ 400 million market cap, this company trades at about 36% of its NPV.

Taking a deeper look at an example of an operation being undervalued is agriculture technology and chloride free potash miner (agri-tech) company Verde AgriTech (TSX: NPK) who is very comparable to some of the tech giants based on their common triple digit growth pace. Where it differs from Trilogy, is that Verde trades at a mere 2% of its NPV despite being profitable and having publicly declared itself independent from Bay Street.


(Verde AgriTech stock chart. Jan 2020 – Jan 2021. Click to enlarge.)


Verde trades at a heavy discount to its NPV, which makes for an appealing opportunity in this sense, especially when considering potential future revenue of $631.5 million (USD) Verde AgriTech’s NPV per share is C$ 53.811and their current share price is below $2.

Also, hidden in the PFS there are other two major upsides which would further increase this disconnect.

The first is that the PFS was based on a potash price of $250 (USD). Potash is currently being offered by major producers in Brazil (CFR) for approximately $300 (USD). This alone would translate into a $2.6 billion (USD) NPV, according to the PFS.

However, the project has also benefited from a weakening Brazilian Real (R$). When the PFS was made, it was based on US$250 potash price, translated into R$1,134 for potash delivered directly to farmers. CFR Potash price in Brazil at the month is around R$1,800, which is 58.7% higher than the price used for the PFS.

The NPV per share based on the sensitivity analysis, which has already been overtaken by current price, is C$71.362.

Secondly is the exchange rate. Brazil’s currency (R$) had crashed from R$3.28/US$ when PFS was made to approximately R$5.40/US$ and its Real fell to all-time low recently. This alone can provide a drastic reduction to the CAPEX as it was mainly sourced locally and will also reduce costs.

A problem that investors encounter with companies that have large NPVs is that they also have a CAPEX that is equally as large. Big CAPEX often means dilution which destroys shareholder’s value. Verde’s situation is very unique because it has a major NPV above $2 billion (USD) but the total CAPEX is reasonable at US$369.59 million. Equally unique, is how the Company has a scalable project that allows it to grow from accumulated cashflow and debt, instead of having to raise any equity.

Investors face more choices now than ever and it can be daunting for beginners and the experienced alike to make sense of where the true value lies. It is clear that proper stock valuation is a key component to any good investment decision. When assessing any opportunity, evaluating its revenues (past, present, and projected for the future), EBITDA, as well as NPV will help paint a clearer picture of what can be expected, especially when comparing any company to its peers.

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FULL DISCLOSURE: Verde Agritech is a client of Stockhouse Publishing.