discussion of npv of project

Hey all,

Im just having a play around with numbers at the moment.

I just want to demonstrtae how easily the NPV figure changes based on the modification on any of the variables.

In an announcement early last year, UCL advised that a discount rate of 12% was used to calculate NPV. It should be noted that 12% does not equate to actual discounted cashflow. It is simply a figure used by the company which they believe is the minimum return they require to be achieved, which incorporates shareholders expectations and the risks associated with the project. It can also be used as a basis of comparison to other similar projects which bear a similar return.

However, When valuing a company however and trying to predict the present value of futue cashflows the project will generate, you would not use a figure of 12% I believe.

For example, I have done some trial and error of what total cashflow will need to be generated to achieve a NPV of $1 billion assuming that the project has a 20 year mine life using a discount rate of 12%. The figure I got was $9.65 billion. 9.65b/(1.12^20)

If we were to use that $9.65 billion figure and instead of 12% discount rate, it is assumed that the value of money decreases by only 6% per year, we would have a NPV of $3 billion.

It makes an enormous difference to the NPV depending on what discount rate you use as has just been demonstrated.

Of course this figure would be higher still if we were to use current zinc prices in the calculation rather than $1500 per tonne for zinc which is the figure used by the company to estimate NPV.

Also if the mine were to have a life of 40 years, the NPV would be larger still assuming of course that production is not cut per annum as a result of the longer mine life.

There are many other variables to take into consideration and as we draw closer to the financing stage and bankable feasibility study, we will become more accurate with our calculation of what the project is actually worth discounted for time.

I recall UCL hitting 60c during the dot com era, which is equivalent of $6.00 (post consolidation). That would make UCL a $7 billion company approximately.

Do not be surprised if UCL does reach a new record high one day. I certainly will not.


Cheers