I agree 8% post tax is not in keeping with the spirit of the Capital Asset Pricing Model (CAPM) which should be driving the cost of equity in a weighted average cost of capital discount rate that one uses to discount cashflows in an NPV model. I believe the rate should be circa 10-11% based off my estimates about likely debt / equity funding mix and cost of mining equity in general given the nature of the risks and with where current risk free rates of interest currently sit ( Com bond rate for 10 years at present is circa 4.60 %) .The rate for equity in a mining start up development should be in my view be ~ circa 15% post tax .How I arrive at that and a WACC of 10.8 % I show below.
I would estimate cost of debt if they avail themselves of it in funding stage 2, will cost them around 12 % pre tax. Gln on its own right with a project in Argentina, so higher country risk and with where interest rates have moved up to in recent years could on its own be paying in excess of 15 %. However very likely a Glencore style of company or maybe a Ganfeng type will come along and assist in getting cheaper debt as part of the offset arrangement for DFS Stage 2 . I am very sure this will be JP and Daniels goal with DFS Stage 2 offtake and funding for Stage 2 , secure some additional prepayment + debt at some discount to market .
Given the high prepayment here and likely another one as part of stage 2 , as the prepayment is akin to getting a form of debt finance, very likely Gln can fund stage 1 & 2 with greater than 50 % debt now in my view. It could even be as favourable as something like 30 % prepayments, 40 % traditional debt finance underwritten by offtaker and then likely balance to come from shareholders , but I suspect with the last part of that they will be looking for a possible placement to a strategic investor which again maybe same person as offtake for Stage 2. I think this is definitely why they wanted that resolution at the AGM around the extra placement capacity. All of this looks very promising for long run shareholders to minimize dilution in our way to full production for Stage 2 and of course once we get there Stages 3 & 4 can almost become self funding with more debt & prepayments.
A very good write up of what is an appropriate discount rate for mining projects can be found here ;
The article highlights for Mining projects in general rate has historically been around 8 % though higher premiums should be applied for countries like Argentina. Given this and as most companies continue to stick with that rate, I kept to the same number in my own analysis . This is also not unreasonable position to take when you consider that the entire point of an NPV is to rank projects in terms of their attractiveness for financing and if every project is using 8 %, whether it is right or wrong from a theoretical CAPM perspective, you would be crazy to stray too far from that mean.
NPV as a concept is not meant to be a point estimate of long run returns to shareholders, so spending too much time arguing should it be 8 or 9 or 10 or 11 % is a bit academic . Rather it's puprose is to advise on whether a project be invested in or not by virtue of whether the discounted returns will outweigh the funding costs of the capex required to provide those returns and then you want to see in my view with an NPV number, say 2-3 times the cost of capex ( ours is circa 5 times , compare Chalice's much talked about Julimar which is barely above 1 times hence once the market worked that out recently , it got smashed ) to know you have a margin of error. This is how NPV's should be used and interpreted rather than some iron clad promise of what your future return as a shareholder will be , which in all honesty is dependent on so many factors that will come into play when a mine finally becomes operational.
GLN Price at posting:
75.0¢ Sentiment: Buy Disclosure: Held
(20min delay)