Canada markets open in 2 hours 54 minutes
  • S&P/TSX

    21,058.18
    -146.98 (-0.69%)
     
  • S&P 500

    4,482.73
    -50.03 (-1.10%)
     
  • DOW

    34,715.39
    -313.26 (-0.89%)
     
  • CAD/USD

    0.7988
    -0.0011 (-0.14%)
     
  • CRUDE OIL

    83.96
    -1.59 (-1.86%)
     
  • BTC-CAD

    48,583.52
    -4,433.50 (-8.36%)
     
  • CMC Crypto 200

    916.74
    -78.52 (-7.89%)
     
  • GOLD FUTURES

    1,834.60
    -8.00 (-0.43%)
     
  • RUSSELL 2000

    2,024.04
    -38.75 (-1.88%)
     
  • 10-Yr Bond

    1.8330
    0.0000 (0.00%)
     
  • NASDAQ futures

    14,712.00
    -129.00 (-0.87%)
     
  • VOLATILITY

    26.66
    +2.81 (+11.78%)
     
  • FTSE

    7,521.90
    -63.11 (-0.83%)
     
  • NIKKEI 225

    27,522.26
    -250.67 (-0.90%)
     
  • CAD/EUR

    0.7048
    -0.0019 (-0.27%)
     

An Intrinsic Calculation For Americas Gold and Silver Corporation (TSE:USA) Suggests It's 39% Undervalued

  • Oops!
    Something went wrong.
    Please try again later.
·6 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • USAS

In this article we are going to estimate the intrinsic value of Americas Gold and Silver Corporation (TSE:USA) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Americas Gold and Silver

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 start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$34.7m

US$100.4m

US$64.1m

US$46.2m

US$37.4m

US$32.6m

US$29.8m

US$28.1m

US$27.2m

US$26.6m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x1

Est @ -27.95%

Est @ -19.1%

Est @ -12.91%

Est @ -8.57%

Est @ -5.54%

Est @ -3.42%

Est @ -1.93%

Present Value ($, Millions) Discounted @ 7.5%

US$32.3

US$86.9

US$51.7

US$34.6

US$26.1

US$21.1

US$18.0

US$15.8

US$14.2

US$13.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$313m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.5%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$27m× (1 + 1.5%) ÷ (7.5%– 1.5%) = US$456m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$456m÷ ( 1 + 7.5%)10= US$222m

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$535m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$3.2, the company appears quite good value at a 39% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
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. 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 Americas Gold and Silver 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 1.134. 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.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. What is the reason for the share price sitting below the intrinsic value? For Americas Gold and Silver, there are three relevant items you should consider:

  1. Risks: Take risks, for example - Americas Gold and Silver has 3 warning signs we think you should be aware of.

  2. Future Earnings: How does USA'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.

This article by Simply Wall St is general in nature. 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.

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

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting