Monday, July 10, 2017 11:52:31 AM
While we're on the topic of projections, let's talk a bit about valuations. You will commonly see three terms that are used to describe a company's (or project's) valuation and/or merit:
- Net Asset Value (NAV): For development stage companies, NPV is typically used as Net Asset Value, as there are usually no other assets in play except for the project they are looking to place into production.
- Net Present Value (NPV): NPV is the summation of a 'discounted' series of future cash-flows (both negative and positive) typically annualized. The discount rate applied reduces the 'value' of the cash-flows further out in time. Cash-flows that occur many years out have a negligible impact on NPV. The higher the discount rate, the less future cash-flows will contribute to NPV. The combined effect of these future discounted cash-flows are then summed and represented as a single value dubbed NPV. The chart below shows the amount that the future cash-flows are derated prior to being summed for various discount rates.
- Internal Rate of Return (IRR): IRR is closely related to NPV. It asks the question, "What is the discount rate that drives a project's NPV to a value of $0"? Hence, IRR is not a 'valuation' per se. It provides a figure of merit for a given project. Project's with a high IRR are of more value than ones that have a lower IRR.
There can be a big disconnect between the pro-forma valuation, i.e., the NPV shown by the company in a Feasibility Study, and the value that the market places on a project. This disconnect is clearly evident in Excelsior's current valuation, which is far below the NPV published in the FS. The market is currently valuing the Gunnison Copper Project at approximately 18% of the NPV in the FS. The disconnect between market valuation and the valuation in the FS is primarily due to two factors: (1) perceived risk and (2) where the company is at in terms of bringing the project online, which is still related to risk.
Stay tuned for another post where I will address the degree of risk present in Excelsior's Gunnison Copper Project. I will also make a case that the reduced valuation due to perceived risk in the project is way overblown.
PG
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