Excel cases / Value a gold mine: the NAV of Kestrel Ridge
Value a gold mine: the NAV of Kestrel Ridge
Build the NAV of a gold project from its feasibility study, then judge the share price.
The brief
You are an analyst in the mining team of an investment bank. Kestrel Ridge Gold, a listed company with a single asset, has just published the feasibility study for its Kestrel Ridge open-pit gold mine in Western Australia. Construction has not started.
Your managing director wants two answers by tonight: what is the project worth, and is the share cheap? Build the project NAV from the study’s assumptions, then compare it with the share price.
The assumptions
| Proven and probable reservesMt of ore | 20.0 |
| Reserve gradeg/t gold | 1.50 |
| Metallurgical recovery% of contained gold | 90% |
| Mill throughputMt of ore per year | 2.0 |
| Strip ratiot of waste per t of ore | 4.0 |
| Mining cost$ per tonne moved (ore and waste) | 3.00 |
| Processing cost$ per tonne of ore | 18.00 |
| Site general and administrative$ per tonne of ore | 4.00 |
| State royalty% of revenue | 2.5% |
| Sustaining capex$m per year of production | 15.0 |
| Initial capex$m, spent in year 0 | 350.0 |
| Closure cost$m, the year after production ends | 30.0 |
| Corporate tax rate% of taxable income | 30% |
| Gold price$ per ounce, flat in real terms | 2,500 |
| Discount ratereal | 5.0% |
| Company net cash$m | 50.0 |
| Shares outstandingmillion | 400 |
| Share price$ per share | 0.55 |
- Production is the same every year, with no ramp-up.
- Prices and costs are in real terms: no inflation.
- Cash flows fall at the end of each year.
- Initial capex is depreciated straight-line over the mine life; sustaining capex is deducted for tax in the year it is spent.
- Closure is not tax-deductible. There is no working capital and no debt at project level.
The steps
Contained gold
How many ounces of gold do the reserves contain?
Hint
Tonnes times grade gives grams. A troy ounce weighs 31.1035 g.
Mine life
For how many years will the plant run?
Hint
Divide the reserves by the tonnes the plant treats each year.
Yearly production
How many ounces does the mine produce each year?
Hint
Take the ore treated in a year and its grade, then apply recovery: the plant keeps only 90% of the gold.
Revenue
What is the yearly revenue?
Hint
Ounces sold times the gold price. Assume all the gold produced is sold in the same year.
Site costs
What do the mine, the plant and site overheads cost each year, before the royalty?
Hint
The mining cost applies to all the rock moved. With 4 t of waste per tonne of ore, the mine moves 5 t for every tonne the plant treats.
All-in sustaining cost
What is the all-in sustaining cost per ounce?
Hint
AISC adds the royalty and sustaining capex to the site costs, then divides by the ounces produced. Leave head-office costs aside here.
Tax
How much tax does the mine pay in a year of production?
Hint
Start from EBITDA (revenue less royalty and site costs). Deduct depreciation, $350m over the 10-year life, and sustaining capex, deductible here in the year it is spent.
Free cash flow
What is the free cash flow of a production year?
Hint
Start from EBITDA, take off tax and sustaining capex. Depreciation is not cash leaving the company.
Project NAV
What is the project’s net present value at 5%?
Hint
The flows are −$350m in year 0, the free cash flow from year 1 to 10, and −$30m of closure in year 11. Careful: Excel’s NPV function discounts from its first cell, so add year 0 separately.
IRR
What is the project’s internal rate of return?
Hint
The rate at which the NPV is zero. In Excel, use IRR on the whole row of flows, year 0 included.
P/NAV
What is Kestrel Ridge Gold’s price to NAV?
Hint
Company NAV is the project NAV plus net cash. Divide by the number of shares, then compare with the share price.