Is Lundin Mining Corporation (TSE:LUN) Expensive For A Reason? A Look At The Intrinsic Value
In this article I am going to calculate the intrinsic value of Lundin Mining Corporation (TSX:LUN) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in May 2018 so be sure check the latest calculation for Lundin Mining here.
Is LUN fairly valued?
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. Firstly, I use the analyst consensus estimates of LUN’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 17.87%. This resulted in a present value of 5-year cash flow of US$1.07B. Want to know how I calculated this value? Take a look at our detailed analysis here.
The graph above shows how LUN’s top and bottom lines are expected to move in the future, which should give you some color on LUN’s outlook. Next, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of US$2.18B.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$3.25B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$5.70, which, compared to the current share price of CA$8.53, we find that Lundin Mining is quite expensive and not available at a discount at this time.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and 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 LUN, I’ve put together three essential aspects you should look at:
Financial Health: Does LUN 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 LUN’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 LUN? 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 TSX every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass 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.
