Hi Stonks92,
Thank you for your contributions here of late. In light of this last comment, I wanted to provide you with some commentary/another perspective. The substantive aspect of these thoughts are not my own, they are those of Peter Lynch, whom I respect, and I think he knows a thing or two about investing. If you are not aware of his work, you can reach more here. Lynch heavily favours the assessment of companies based on their P/E ratios. He said that different types of companies should trade at different P/E ratios based on their growth prospects and stability. Here are some key points he made about the main types of companies and their P/E ratios:
1. Slow Growers: These are mature companies with low growth rates, typically utility companies or large, established firms in slow-growing industries. Lynch suggested that these companies should have a low P/E ratio, typically in the range of 8 to 12, because their growth prospects are limited.
2. Stalwarts: These are large, well-established companies with moderate but stable growth rates, such as Coca-Cola or Procter & Gamble. Lynch believed that stalwarts should trade at a P/E ratio in the mid-teens, around 10 to 20, reflecting their steady earnings and moderate growth potential.
3. Fast Growers: These companies are experiencing rapid growth, often in emerging industries or sectors with high potential. Lynch suggested that fast growers should have higher P/E ratios, sometimes 20 or more, depending on the sustainability and magnitude of their growth. The higher P/E ratio reflects investors' expectations of continued rapid earnings growth.
4. Cyclicals: These are companies whose earnings are highly sensitive to the economic cycle, such as those in the automotive, construction, or steel industries. Lynch noted that cyclicals can have varying P/E ratios depending on where they are in the economic cycle. During boom times, P/E ratios may be low because earnings are temporarily high. Conversely, during recessions, P/E ratios may be high due to temporarily depressed earnings.
5. Turnarounds: These are companies that are currently struggling but have the potential to recover and improve their earnings significantly. Lynch believed that turnarounds might have low P/E ratios due to their current difficulties, but the P/E ratio could rise dramatically if the company's fortunes improve.
6. Asset Plays: These companies have valuable assets that are not fully reflected in their stock prices, such as real estate or natural resources. Lynch suggested that the P/E ratio for asset plays might not be as relevant as the underlying asset value, but they often trade at low P/E ratios due to the undervaluation of their assets.Lynch emphasized the importance of understanding the context and growth potential of each company when assessing its P/E ratio. A high P/E ratio might be justified for a fast-growing company, while a low P/E ratio could be appropriate for a slow grower or a cyclical company at the peak of its earnings cycle.
Of course, you might be thinking that WA1, being a junior explorer, does not fall into one of the 6 categories, which all rely on earnings as a crucial metric in the P/E ratio. However, brokers have provided a DCF calculation and outlined price targets based on the company's economics, suggesting that the company is moving beyond the purely speculative/exploratory stage and starting to be evaluated more like an operating company with potential future cash flows. With this maturing, Lynch looks at transitioning categories such as;
1. Early Stage Growth (Fast Grower): If the DCF and price targets are based on significant expected growth in production and revenue, WA1 could be viewed as an early-stage growth company. This category includes companies with high growth potential, though still with significant risks until they achieve steady production and profitability.
2. Cyclicals (Potential): Once WA1 transitions from exploration to production, it could eventually be categorized as a cyclical company. This would depend on the extent to which its revenues and profits are tied to the economic cycle and commodity prices.
In my opinion, WA1 is definitely a potential cyclical rather than a fast grower, which is left to the lofty P/E ratios given mostly to those in the tech space (NVIDIA, Alphabet, Meta for the mature growth stocks, and upcoming Biotechs and AI companies in the early growth stage). If we look at CBMM - Niobium mining, like other mining industries, tends to be highly cyclical. The demand and prices for niobium, which is used primarily in steel production and various high-tech applications, can fluctuate significantly based on economic cycles, industrial demand, and commodity market conditions. Mining companies experience booms and busts in line with these cycles. Other considerations (among those discussed many times on these forums) are; commodity prices, production costs and reserves and geopolitical risk.
Due to the fact that the cyclicals don't have an assigned P/E ratio due to the multitude of variables above, lets do some peer comparisons. Cast your mind back to the AFR summit on the 22nd May of this year, where Paul presented alongside Amanda Lacaze (MD of Lynas Rare Earths) and Tom O'Leary (MD of Iluka Resources). Based on todays prices, the P/E ratios of those companies are as follows;
- Lynas Rare Earths P/E ratio: 28.10
- Iluka Resources P/E ratio: 7.39.
Some other ASX mining companies and their respective P/E's.
- Yancoal Australia Ltd P/E ratio: 5.06 (the third lowest P/E ratio on the ASX for any company, and lowest of the mining companies)
- Pilbara Minerals Ltd P/E ratio: 6.41
- Nothern Star Resources P/E ratio: 22.69
- BHP Group P/E ratio: 19.06
- Fortescue Metals P/E ratio: 7.61
- Ramelius Resources P/E ratio: 27.31
Lynch also favours the long term P/E ratio as it takes into account the swings that cyclical stocks in the mining sector face. Some examples;
- BHP Group Long Term P/E: 10 to 15
- Rio Tinto Long Term P/E: 8 to 14
- Fortescue Metals Long Term P/E: 8 to 12
- South 32 Long Term P/E: 10 to 15
Although different commodities, I am sure you are seeing the pattern above, more established players such tend to have lower P/E ratios due to their predictable earnings, whereas newer developers have higher P/E ratios due to their ability to grow and mobilise with fluctuations in underlying prices. Gold producers also have higher P/E rations due to the perceived stability of gold as a commodity.
I found your valuation of $15-17 as being "fair value", of interest. Bell Potter, in declaring a price target of $28, said the following;
"We increase our valuation for WA1 to $28.00/sh (previously $17.65/sh) and maintain Our Speculative Buy recommendation. Our valuation for WA1 is based on a notional development scenario (NDS) for the Luni prospect. We then apply a 40% risk discount to account for the early stage of the project.
We see the potential for Luni to be a globally significant niobium project, capable of generating on average A$514m in annual EBITDA. Using Lynas (LYC, Buy TP $7.55/sh) as a comp, which trades on a 10.9x EV/EBITDA multiple, yields an enterprise value of A$5.6bn for WA1."
Lets go even more conservative than Bell Potter for the moment, on their enterprise value for WA1. If we use the P/E ratio of Yancoal, again, being the lowest P/E mining stock on the ASX, and one that is still not a fair comparison (due to its established nature and the fact that coal earnings are seasonal), we get the following;
514m * 5.06 = ~$2.6bn.
As per Mondays corporate presentation we had 64.9m shares on issue. 2.6bn divided by 64.9m = a share price of $40.06.
Bell Potter seem to think our share price should be 5.6bn/64.9m = $86.29.
The suggestion that $15-17 is a fair value would place our P/E at;
Lower end PE per Stonks92
514m/64.9m = 7.92 EPS
7.92 / 15 = 0.528 P/E ratio
Higher end PE per Stonks92
7.92 / 17 = 0.466 P/E ratio
If WA1 were to trade at a P/E ratio below 1, lets say 0.5 for arguments sake based on the above, that means the stock would trade at half its earnings per share. A lower than 1 P/E ratio implies one of the following per Lynch;
- Th stock is undervalued
- An earnings anomaly exists
- Market sentiment (company is facing significant risks, declining market share, legal issues)
- Financial distress (market has concerns over long term viability of the company)
Given this is a Tier 1 resource, that will only go to production if the economics of a multi decade deposit are established, we can rule out number 2, 4. WA1 may face declining market share if more Niobium is found in similar deposits worldwide, but currently only 1 other superior deposit exists. The rest are low grade, yet still profitable (this rules out 3). This then leaves us with the only option remaining - the stock is undervalued.
A company that has a good portion of the market, has solid economics, good management and long term viability, will never trade below a P/E ratio of 1. Let alone 5, as we are seeing on the ASX.
@stonks92 If WA1 goes to production and becomes profitable, and trades at a P/E ratio of 0.5, irrespective of what the share price is at that time, this will be known as a "free lunch". Warren Buffet will tell you that "there is no such thing as a free lunch, but there's still free dessert." What you are suggesting would be akin to the greatest investing opportunity of all time.
I welcome your opinion on the above.
Cheers
PutSauce
(20min delay)