Estimating The Fair Value Of Dynasty Gold Corp. (CVE:DYG)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Dynasty Gold fair value estimate is CA$0.22

• With CA$0.18 share price, Dynasty Gold appears to be trading close to its estimated fair value

• Dynasty Gold's peers are currently trading at a premium of 205% on average

Today we will run through one way of estimating the intrinsic value of Dynasty Gold Corp. (CVE:DYG) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Dynasty Gold

Step By Step Through The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CA$, Millions)	CA$277.4k	CA$367.1k	CA$452.5k	CA$529.2k	CA$595.4k	CA$651.5k	CA$698.7k	CA$738.7k	CA$773.2k	CA$803.4k
Growth Rate Estimate Source	Est @ 45.23%	Est @ 32.32%	Est @ 23.28%	Est @ 16.95%	Est @ 12.52%	Est @ 9.42%	Est @ 7.25%	Est @ 5.73%	Est @ 4.66%	Est @ 3.92%
Present Value (CA$, Millions) Discounted @ 6.6%	CA$0.3	CA$0.3	CA$0.4	CA$0.4	CA$0.4	CA$0.4	CA$0.4	CA$0.4	CA$0.4	CA$0.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$4.0m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 6.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CA$803k× (1 + 2.2%) ÷ (6.6%– 2.2%) = CA$19m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$19m÷ ( 1 + 6.6%)¹⁰= CA$9.8m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$14m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.2, the company appears about fair value at a 20% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Dynasty Gold as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.6%, which is based on a levered beta of 1.077. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Dynasty Gold, there are three pertinent items you should look at:

1. Risks: For example, we've discovered 4 warning signs for Dynasty Gold (3 make us uncomfortable!) that you should be aware of before investing here.

2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.