I can disagree and I am disagreeing because we're talking about 2 different things. You're talking about a company valuation model based off discounted future cashflow. I'm talking about what the stock market is valuing to stock at.
Case and point is RFR. PFS says pre-tax 40M. Post tax is actually even less. Market says 15M. So accountants view of the world is wrong, as paper value does not reflect what the market is valuing, the same as what occurs on 99% of other commodity stocks with NPV's delineated in studies.
Where the day 1 year 1 finance method falls over is that it basically states a projects value is fixed, irrespective of likelihood, timeline to production.
So it says santa comba is worth 40M now.
Was worth 40M 6 months ago and
Will be worth ~40M the day before it turn on.
It will still only be worth that in production.
Now would a company 5 years from production, with capital to secure, further dilution/debt, no offtakes and further met testing be worth the same as one in production? I don't think so.
Pre-production. The NPV methodology is the best yardstick and I personally assign "fair" value of that company dependant on where they are at in the development cycle for commodity companies.
"my general rule of thumb for (FAIR VALUE) S/P as a function of NPV is as follows.
1) SS/PFS performed, no offtakes, no finance = 10-20% of NPV
2) DFS/BFS pilot plant no offtakes no finance = 15-30% of NPV
3) Either of the above with offtakes secured = 25-40%
4) Any of the above with finance secured = 35-50%
5) in construction near term production = 50-75%"
currently we're trading at around 30% of NPV which is exactly where I think we should be if you base it off current information. However, as I've delineated I think there is actually upside to the NPV with the resource upgrade. Additionally, your probability of achieving profits, delineated in NPV, becomes more likely then a company market cap typically moves closer to the NPV figures. That's my view on the world.
You may disagree but that would also mean that a companies "value" in terms of its MC is unchanged from when it compiles the study to potentially 2y down the track when it has been substantially de-risked. In all my investing that typically never happens.
Once in production a companies MC should have approached close to NPV delineated in the studies. (noting that the NPV could be completely obsolete due to number of prevailing market conditions).
Thus IMO one can replicate very quickly a thumb-suck valuation based on current earnings using a EPS/PE for the sector you're operating is a better quick yard stick. The alternative is projecting cashflows and AISC 15Y from now in commodity cycles people barely understand or know how. For an established sector like say gold. You can fairly well obtain a view of valuation based on the companies profits and do so in minutes and use it as a rule of thumb.
You're comments around flippantly applying different ratio's i understand but it's no different to flippantly applying different assumptions in a discounted free cashflow model. Discount rate, pricing forecast, AISC assumptions, capex assumptions, interest rate (if assuming debt) etc etc all just empirically assumed and arbitrarily assigned figures based on best guess. You can however, be appropriate with applying a PE ratio by looking at sector peers. (typically growth commodities have higher PE's which are reflective of the markets perception of future growth/commodity upside).
Alternatively, you can make the PE part obsolete and simply look at the EPS. (see last paragraphs for detail). A figure which reflect the size of dividend if all profit is paid in dividends. Theoretically, at 8M post tax profit one could assume $0.05 for each share they hold.
Say 1M shares at 9c = 90k investment. Meaning in production an EPS would yield ~ 50k dividends annually. What is a stock valued at which is paying a 55% dividend yield. Well most stocks that pay all profits in dividends are typically around 8-10% dividend yield. 55%/9% = 6. Meaning I believe the S/P would need to be around 6 times higher if all profits paid in dividend and a 9% yield. = 54c. That would equate to a MC of around 80M (which you could have obtained also quite easily be using a rough PE model.
Your accountants view on the world would be half that. So basically would mean RFR paying a 20% annualised dividend. Know many stocks paying 20% yield?
If you're accountant view on the world held any credence in investing every company would have a MC exactly the same as their NPV? Doesn't happen that way, which is why 99% of companies not earning profits are worth less than their NPV. NPV and PE/EPS are not perfect sciences to determine a company MC. If it was everyone would be millionaires. Well in-fact they wouldn't because everyone would be attributing identical valuation to companies and no one would trade stock.
Bringing it back to RFR.
Assuming the figures from the PFS I management to land at pre-tax NPV 41M.
Now that included 7M USD upfront capital for the project.
Now lets assume we secure the capital.
Can re-run the NPV figures with 0 capital requirement and hey presto NPV is ~51M.
Basically accountants view on the world added 20% of value to the project.
However in the first scenario the discounted FCF aren't occurring and will never occur without the capital and in the second state with capital, they are.
IMO
a company with PFS stating a pre-tax NPV of 40M - will not be worth 40M it will be "valued" by the market at a fraction of that.
vs
The same company actually in production with 8M AUD post-tax profit P/A.
14M/$0.091 = ~154M SOI. 8m/154m = EPS of $0.052.
PE ratio of 10 = 51M (funnily enough pretty close to the NPV valuation)
or
15 would be ~78M (very close to dividend yield I calculated earlier).
Clearly we will not agree on this which is fine. I understand your view of NPV as the be all and end all for project valuation. However I've learned that the market value and paper value are not often always aligned and that when it comes to NPV it's not a straight line an assuming a company is worth it's NPV at any given point in time is fraught with danger.
SF2TH
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