Hi John, How do you feel about the used discount rate? Some seem...

Hi John,

How do you feel about the used discount rate? Some seem to be saying 10% isn't conservative for the country they are operating in?

Source

Regal Resources (ASX:RER) has announced the outcome of a scoping study at its Kalongwe copper project in the Democratic Republic of Congo. Regal owns 30% of the project with Traxys (30%) and a government holding (40%).

According to the scoping study, the Kalongwe project could be brought into production for less than $40M, producing on average 45 million pounds of copper at a production cost (including transportation) of $1.38/lbs. This results in a superior payback period of just 13 months and a post-tax IRR of 81% using a base case copper price of $3/lbs.

The after-tax NPV10% is approximately $78M, which means the value attributable to Regal Resources’ 30% stake is just over $23M which isn’t exactly great. If you’d use a copper price of $2.7/lbs, the total NPV of the project decreases to $60M, and even if you’d use a copper price of $3.3/lbs, Kalongwe still wouldn’t be a rainmaker as the NPV10% would remain lower than $100M.

Additionally, we aren’t sure a discount rate of 10% is sufficient. After all, the DRC still is one of the worst countries to operate in as a mining company, so a 10% discount rate might not be sufficient to take the potential risks into account.