For a more explicit valuation of diversified mining groups the net present value (NPV) based on the forecast future discounted cash flows has are spectable following. Here the value of a mining group's after-tax earnings over ten to fifteen years is calculated, and then discounted back using an appropriate interest rate, these days between 5% and 10%.

Discounted cash flow. Net present value (NPV) calculation.

It might be argued that operations in high inflation countries like South Africa and some Latin American countries should carry a higher discount rate. However, it must be remembered that virtually all metals are priced in hard currencies, particularly the US$. This means that if local currencies are consequently weak because of high inflation, operating margins may not be affected as revenues, and thus returns, may keep pace with rising costs. Whatever the rate used, the discounted results in today's money are then aggregated to give a final net present value per share of the group's earnings potential which can be compared against the current share price.

Using this measurement does entail making heroic decisions about the metalprices to be used in calculating the stream of income, but it does in the endgive a calculated value for the group's shares, which can be compared againstthe market value of the shares. An NPV, however, can end up giving a resultmaterially higher or lower than the market share price, and it may be thatwhether the result is higher or lower relates to where we are in the miningsector cycle.

Example:

Net present value calculation

Using internal management earnings figures from a small UK company developing a mine in Asia, we can see below the forecast discounted cash flow (taxed earnings) discounted back to give us the NPV of the mine. The mine may have a longer life than ten years and the effect on the cash flow of using a relatively low discount rate of 5% is much more gradual than if a higher rate had been used. For instance, if you wanted to be conservative and use a 10% rate, which would be rather drastic today bearing in mind that interest rates and the rate of inflation are al legedly well below 10%, the sort of effect that that would have on the figures below would be to reduce the current NPV of Year 10's cash flow to around 4.5 million rather than 8.1 million. In relation to the NPV the company's market value suggests that there may still be value in the shares.

Year

0

1

2

3

4

5

6

7

8

9

10

Cash flow (?m)

(8.8)

(1.6)

8.5

18.9

16.7

14.8

14.1

11.6

9.4

13.2

13.2

NPV (5%) (?m)

(8.8)

(1.5)

7.7

16.3

13.7

11.6

10.5

8.2

6.4

8.5

8.1

 

(?m)

Total cash flow

110.0

Total NPV

80.7

Company market value

49.3

Table 4.2 Forecast discounted cash flow

Add comment


Security code
Refresh

Markets

Loading
Chart
o Microsoft 46.95 ▲0.90 (1.95%)
o Google 559.08 ▲8.77 (1.59%)
o BRE 0.00 (%)
o Yahoo 46.05 ▲0.42 (0.92%)
NASDAQ:MSFT

Microsoft

Company ID [NASDAQ:MSFT] Last trade:46.95 Trade time:4:00PM EDT Value change:▲0.90 (1.95%)
NASDAQ:GOOG

Google

Company ID [NASDAQ:GOOG] Last trade:559.08 Trade time:4:00PM EDT Value change:▲8.77 (1.59%)
NYSE:BRE

BRE

Company ID [NYSE:BRE] Last trade:0.00 Trade time: Value change: (%)
NASDAQ:YHOO

Yahoo

Company ID [NASDAQ:YHOO] Last trade:46.05 Trade time:4:00PM EDT Value change:▲0.42 (0.92%)

Capital Market Expectations:

CAPITAL MARKET EXPECTATION TOOLS. Survey

The survey method of expectations setting involves asking a group of experts for their expectations and using the responses in capital market formulation. If the group queried and providing responses is fairly stable, the analyst in effect has a panel of experts and the approach can be called a panel me...

Tuesday, 17 May 2011

Fixed Income Manager:

Emerging Market Debt

Emerging markets comprise those nations whose economies are considered to be developing and are usually taken to include Latin America, Eastern Europe, Africa, Russia, the Middle East, and Asia excluding Japan. Emerging market debt (EMD) includes sovereign bonds (bonds issued by a national government) as well as debt securities issued ...

Friday, 20 May 2011

Alternative Investment:

Real Estate Market. Types of Real Estate

As one of the earliest of the traditional alternative investments, real estate plays an important role in institutional and individual investor portfolios internationally. The focus of our discussion is equity investments in real estate (covered in the definition given earlier)....

Wednesday, 25 May 2011

Equity Manager:

Long-Short Portfolio

Whereas style investing is concerned with portfolio characteristics (low P/E, high earnings growth, etc.), long—short investing focuses on a constraint. Essentially, many investors face an investment policy and/or regulatory constraint against selling short stocks. Indeed, the constraint is so common and pervasive that many investors do not even recognize it ...

Tuesday, 24 May 2011