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12/12/22

16:08

Post #: 65279943
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Originally posted by cmonaussie: ↑

Well you would hope they put that cash to good use over the period it is earned. The model does indeed just keep it as retained earnings (like some of the tech giants). For surplus cash then paying a dividend is my preferred method to return cash to the shareholders as opposed to a share buyback.

My "hope" though is that CXO mgmt can find a a better use for the cash than I can ... why else would GM come aboard. Clearly there are multiple expansion opportunities available to CXO on just exploration drilling - so organic growth. I often say Wall St loves growth (some might say earnings growth) but it needs to be the right sort of growth at the right time and cadence. Presently CXO cannot project growth in the one thing it controls the most - production of SC. So I would like to see CXO reinvest their CFO into expanding operations and that means getting to a bigger resource to grow production first and mine life second. So scale up the concentrator at Finniss project as soon as practically possible.

Continuing on the growth aspect, I would like to see CXO move downstream. Now that aint easy but it is a step they must take to remain viable. It is being done by all the major spodumene companies. This means Hydroxide chemical refinery and what a great location to ship from - Darwin - straight to the Asian auto manufacturing hubs. That's AUD$1B right there. If they starting right now they might be finished in 3 years time if they get lucky ... but more likely 4 years ... and that's when Ganfeng's OTA ends (maybe there was more to that term than first thought?).

Net Net ... probably not much in the way of surplus cash till post 2026 timeframe.

Wrt to PER, I am not a fan on using a PE ratio to value a firm and certainly not for a mining company. To easy to manipulate earnings IMO. Fairly simple to "follow the money" and value that ... and Operating Cash Flow is a close enough proxy for EBITDA. So you could say maybe 5x EBITDA.

Also once producing a P/CF is probably the easiest. Could also consider using Free Cash Flow
In this case I am using the MC (since no debt) as P and CF from above model
At say $1.50/sh MC at 1.8B SOI says P= $2.7B and 2024 CF ~AUD$860M (converting at FX = 0.7)
Thus P/CF = $2.7B/$0.86B = 3.14x multiple

I like my mining companies to generate lots of cash. So a low P/CF is good (signals undervalued) . The multiple value tells me that investors are paying $3.14 for every $1 of Cash Flow. I say that is cheap.

This is not a fair comparison but it is only for comparison.
PLS has TTM casf flow of ~$650M and current MC of $13.4B so P/CF is ~ 20x ... so investors have paid $20 for $1 of Cash Flow which makes a cash flow yield of 5%. So when you look ahead and use FTM cash flow (whatever that number is) you could apply that.

Hope that helps

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Thanks cmonaussie, your response clarifies your thinking and makes plenty of sense to me.

I agree there is plenty of potential with CXO, its being played like a violin at the moment, further exploration success will be the game changer hence why they are spending so much on exploration at present.

CXO Price at posting: $1.16 Sentiment: Hold Disclosure: Held
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Oh No - Another Valuation Thread!, page-15

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