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G Mining Ventures Corp. (CVE:GMIN) Shares Could Be 37% Below Their Intrinsic Value Estimate

Key Insights

  • G Mining Ventures' estimated fair value is CA$1.94 based on 2 Stage Free Cash Flow to Equity

  • G Mining Ventures' CA$1.22 share price signals that it might be 37% undervalued

  • Analyst price target for GMIN is US$1.96 which is similar to our fair value estimate

How far off is G Mining Ventures Corp. (CVE:GMIN) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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Check out our latest analysis for G Mining Ventures

The Model

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

-US$107.5m

US$148.5m

US$93.4m

US$66.5m

US$53.5m

US$46.5m

US$42.5m

US$40.1m

US$38.8m

US$38.1m

Growth Rate Estimate Source

Analyst x3

Analyst x2

Analyst x2

Est @ -28.77%

Est @ -19.58%

Est @ -13.15%

Est @ -8.65%

Est @ -5.49%

Est @ -3.29%

Est @ -1.74%

Present Value ($, Millions) Discounted @ 7.5%

-US$100

US$129

US$75.2

US$49.9

US$37.3

US$30.1

US$25.6

US$22.5

US$20.3

US$18.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$308m

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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$38m× (1 + 1.9%) ÷ (7.5%– 1.9%) = US$690m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$690m÷ ( 1 + 7.5%)10= US$335m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$643m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CA$1.2, the company appears quite undervalued at a 37% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 G Mining Ventures 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 7.5%, which is based on a levered beta of 1.125. 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.

SWOT Analysis for G Mining Ventures

Strength

  • Debt is not viewed as a risk.

Weakness

  • Shareholders have been diluted in the past year.

Opportunity

  • Expected to breakeven next year.

  • Trading below our estimate of fair value by more than 20%.

Threat

  • Has less than 3 years of cash runway based on current free cash flow.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For G Mining Ventures, we've put together three further elements you should look at:

  1. Risks: Case in point, we've spotted 2 warning signs for G Mining Ventures you should be aware of, and 1 of them can't be ignored.

  2. Future Earnings: How does GMIN's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. 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!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.