Yahoo Finance Intrinsic Calculation For Detour Gold Corporation (TSE:DGC) Shows Investors Are Overpaying
In this article I am going to calculate the intrinsic value of Detour Gold Corporation (TSE:DGC) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not December 2018 then I highly recommend you check out the latest calculation for Detour Gold by following the link below.
View our latest analysis for Detour Gold
Crunching the numbers
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. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF ($, Millions) | $61.73 | $116.88 | $137.92 | $161.37 | $187.19 |
Source | Analyst x6 | Analyst x6 | Est @ 18%, capped from 20.03% | Est @ 17%, capped from 20.03% | Est @ 16%, capped from 20.03% |
Present Value Discounted @ 16.3% | $53.08 | $86.42 | $87.68 | $88.21 | $87.98 |
Present Value of 5-year Cash Flow (PVCF)= US$403m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.3%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 16.3%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$187m × (1 + 2.3%) ÷ (16.3% – 2.3%) = US$1.4b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$1.4b ÷ ( 1 + 16.3%)5 = US$645m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.0b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of CA$8.02. Relative to the current share price of CA$10.72, the stock is quite expensive and not available at a discount at this time.
The 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Detour Gold as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 16.3%, which is based on a levered beta of 1.822. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For DGC, I’ve put together three relevant factors you should look at:
Financial Health: Does DGC have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does DGC’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of DGC? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
