NOTE: This project is purely to apply concepts that I have learned from courses and certifications completed and not a formal, independent analyst opinion of any kind.
Find the model here. Any feedback is welcome.
Overview
This is simply an addendum to the prior project, the three statement model for Sandfire Resources.
Please note this does not utilise a life of mine model, I’m either using growth rates and ratios based on historical financials or making up certain assumptions to have numbers to play with.
- Calculated unlevered free cash flows using the projected three statement model.
- Cash flows are adjusted for the portion of the year post-valuation date being date of completion of the model – 04 January 2026. Mid year convention not incorporated in this model.
- Unlevered free cash flows then discounted back using a hypothetical WACC (made up).
- Terminal value calculated using the perpetual growth method using the WACC and an arbitrary growth rate (historical growth rate).
- Estimated enterprise value is used to determine an EV / EBITDA ratio based on the first year of projected EBITDA (NTM).
- Five comparable companies (other ASX copper producers, no further consideration beyond that for this project) were taken, their latest financial releases used to determine comparable EV / EBITDA multiples. Noted understood technically Sandfire should be included in the peer group and peer group EV/EBITDAs calculated in a lazy way.
- Sensitivity analysis performed on the WACC and long term growth rates used to determine ranges to graph alongside range of multiples from the peer group.
Interpretation:
- At a WACC of 8%, assumed future EBITDA growth rate of ~6%, projected next twelve months’ EBITDA, EV/EBITDA is 36.68.
- Flexing the WACC and growth rate +/- 2% results in a potential EV/EBITDA range of ~24 to ~72.
- The comparable peer group based on implied enterprise value and EBITDA from their latest released financials have EV/EBITDA ratios ranging from 3.66 to 32.70.
- Based on this discounted cash flow analysis Sandfire has a much higher EV/EBITDA ratio to its peer group.
- The high ratio as determined from the model is attributable to the high assumed long term growth rate. Note plugging the growth rate on row 151 with 3% for every projected year brings the resulting ranges much closer to the peer group.
- In this case, rather than being overvalued, the discrepancy in EV/EBITDA ranges is due to the aggressive projected growth.
Takeaways:
- Understood DCFs are highly sensitive to inputs, but this really emphasized it seeing it in practice from a model I built from scratch. Some of the numbers are made up for the purposes of this exercise but had significant impacts on the results. Notably the sensitivity data table spitting out multiples ranging from 12.70 to 1,104.37 based on a few percentage point changes in the WACC and growth rate.