Positioning for Takeover or JV bid?, page-102

So if I understand, for CDV you take the DFS capex of US$390m and add it to the market EV of US$100M (A$150m @ 0.68) for US$490M yet your table has $559M...? The EV's below don;t make sense with their actual EV's and even so, I still don;t see that your EV makes any sense of the value of the project as the market values it.



There are so many variables and moving parts I think it's best to reduce valuations to there simplest form from the perspective you're trying to achieve. The metrics you are measuring like production, resources, reserves, AISC etc are factually all greatly dependent on the capex, opex etc. The market then overlays a myriad of judgement across subjective variables of multiple risks and exploration upside and it's cumulative judgement is reflected in the market equity value of the stock. Equity Value can mean a number of different things no question, the most useful measurement from my perspective is the 'intangible business goodwill' for lack of a better definition.

An example.

An exploration company completes a gold deposit DFS and regardless of the capex, opex, production NPV etc the market values it at $150M. It has no cash or meaningful production assets so it's EV is $150M. The market is currently valuing the gold deposit at $150m (ie the intangible business value' at that point in time).

If that company raises $50M cash towards development funding and it's new market cap it $200M, it's EV is still only $150M because the $50M cash is equity, a tangible asset for production purposes.

If that company puts it's $50M cash towards a $400M capex mine using $350M debt and it's new market cap is still $200M, it's EV is still only $150M because the $50M cash is an equity component of the market capo, the debt is net zero against the asset it built. I am interested in what the market values the gold deposit at (EV) for comparison purposes free from equity/debt distraction, not how big the capex is or how it is funded.

Obviously as the funding risk is removed, then the build and ramp up risk is removed etc, the market EV net of contributed tangible equity increases over time. In my example the intangible market EV should rise from $150M to $200m and then say $300M as the mine is up and running. The intangible EV of a company as I define it tells us valuable information about how the market values the project at any point in time after considering a hundred different variables unique to each project. We can never get a perfect read from any one company because even such non-project related issues as a pending CR or management change or exploration success can move the market cap EV greatly over the short term.

How else can we possibly decide how the market will view a gold deposit's value in terrorist and sovereign risk prone West Africa without looking at the market's EV value stripping out contributed tangible equity? You can try to do it by assuming CDV has built the mine already and substitute debt for equity but you face unfairly discounting tangible equity, complicating the picture with variables that aren't important to what we're looking for, making high capex projects look more attractive because higher capex increases the EV in your method. Surely a lower capex deposit is more valuable than a high capex on when all other metrics the same?

Capex, AISC, Reserves, Margins etc are all very important and the DFS NPV gives us the answer for what the deposit is 'technically worth' using only fundamental valuation metrics. I think the DFS NPV is under appreciated by retail investors, it is incredibly powerful at simplifying so much about a deposit down to a figure that can be compared with others. Namdini has a post-tax NPV5% is US$776 at $1450/Oz. That takes into account the capex, LOM production and all other costs, variables to arrive at what profit the project will deliver the owner in today's dollars at a 5% discount rate. Very clearly the factual value of Namdini's 5.1M Oz Reserve at $1450 is US$152/Oz at 5% discount rate, more on recoverable production of 4.2M Oz (a very meaningful $35/Oz NPV or 25% lower than PFS because of the large opex increase). For comparison WAF's Sanbrado has a post-tax NPV5% is US$505 at $1450/Oz, which on the DFS Reserve of 1.57MOz is valued at US$321/Oz and a bit more for recoverable production. Each Oz at Sanbrado is more valuable than an Oz at Namdini quite clearly calculated.

Back to what we are trying to work out, how much does the market value those Oz in each project or group of projects? Net of debt and tangible assets contributed to building the mine, WAF has a market EV of A$300M using my method (ie $365M market cap - $65M cash equity contributed post DFS for mining). The market at this stage of the build and taking into account the obvious exploration upside and BF terroist discount will only pay US$130/Oz Reserve for Sanbrado (ie $300/1.57 x 0.68 usd). The exploration upside at M1Sth u/g to add another 500k Oz LOM is pretty clear so in reality the market is realy only valuing WAF at US$102/Oz ($300/2 x 0.68). This is much more valuable for comp purposes than a theoretical DFS valuation because CDV will be trading on the market because investors want to know what the market will pay.

In rough terms the market will pay one third of what an Oz is worth after considering capex, AISC, etc and discounting back today. Another way to look at the market valuation is via EV as a percentage of the NPV. As you note, Capex whether funded by equity or debt is paid back to owners in the NPV calculation. Thus my EV deducts only the contributed equity funding for the build because the debt is a wash but the equity artificially increases the market EV beyond what the project alone is being valued by the market as. For Sanbrado, WAF's $300M EV = US$200M which is 40% of the DFS NPV5%, or 30% of an 'expected' final LOM 2M Oz reserve and one third higher NPV5% of US$650M.

By removing all capex, equity contributions, costs, margins etc from this valuation we can destil down what discount the market is paying for Oz of $X value, guesswork and funding aside. NPV isn't perfect, it unfairly penalises production in further out years for a large long life mine comapred to a shorter life mine (ie favours Sanbrado over Namdini). WAF is a very good comp for CDV (except the clearly higher terrorism and country risk) because of the many similarities. Ignoring Sanbrado's obvious u/g upside, if the market values Sanbrado at 40% of it's DFS NPV5% after funding and 12 months successful and slippage free mine build then all things being equal (ie gold price and stock market mood) it is reasonable to assume CDV will be valued at 40% of it's NPV5% after funding and 12 months successful and slippage free mine build. You can tweak this a little for lower terrorist and sovereign risk, exploration upside differential etc, etc, but the rationale is clear and simple. CDV NPV5% US776 = A$1,141M @ 68c usd, so 40% is a market cap EV of A$456M. The critical unknown is how many shares on issue. If Archie goes the CR funding route at 27c he will double the shares on issue to 1000M and thus we might expect the share price would be 45c in 12 months time.

The above method of removing the tangible asset equity from already built and paid for projects in companies like PRU also works on the same simple logic. How much of a that companies market value is attributed to the gold project(s) after removing the market value of cash and assets tin addition to the projects market equity value? Armed with that market EV we have a pretty good apples to apples market valuation on your preferred metric of $/Oz reserve, or $/margin after AISC, $/Oz production etc. Same method works for say the SAR Superpit acquisition. Deduct a estimated value for the tangible LOM plant and assets to arrive at how much they are paying for 3M odd Oz of reserves, how much that $/Oz stacks up against others considering the AISC.

That's how I do it anyway, each to their own. Post has taken too long, the topic has so many nuances we could easily spend all day debating it. The one point i would emphasise to readers is that an Oz is not an Oz, obviously. Oz can have highly different profit margins before even considering risk discounts or exploration upside. Capex per Oz is also important and often left out when people only focus on AISC (on this metric Namdini looks good well under US$100/Oz). LOM post-tax free cash flow is another good metric for valuation which reduces NPV's penalty of long life mines and high capex builds. The above example clearly shows that with a higher grade, Sanbrado Oz's are worth more than Namdini's, although there is a lot less of them. With Namdini having an NPV5% of US$150/Oz all suggestions by the likes of flyboy that some will take us out for US200/Oz+ is pretty far fetched. If the exploration upside looked so obvious it was likely in 15 years the Reserve would grow by another 5M Oz then sure, someone might pay more than an oz is worth today, but that isn't the case.

Cheers