Valuing Mining Companies - Sydney - Financial - Corporate Finance

Course Background

At the end of the course, participants will have a sound understanding of:

How decisions about the structure of the balance sheet are made
How to model cash flows that are used in valuation
The effect of the timing of cash flows on value
What sensitivity analysis can do in developing an assessment of risk
How to measure the cost of capital
How valuation ratios can be used to value mineral reserves
How to use valuation ratios when there are no earnings
How to use comparative company financials for valuation
How to measure beta
How the finite life of a mining project impacts valuation
How option valuation methodology can be used for project appraisal
The value of the option to expand, defer or close
The particular valuation techniques for reserve based businesses

Summary of course content

Equity valuation by discounting dividends
Costs of debt and costs of equity
Impact of tax and financial distress costs
Capital asset pricing model
Calculating beta and the risk premium
Measuring the required capex
Preparing the cash flows
Methodologies using EBIT, EBITA, EBITDA, EBITDAX
Alternative multiple-based valuation ratios
The valuation of flexibility
The option to defer
Valuing reserves in the ground using comparables
Using the option valuation methodology for mine expansion

Who should attend?

The course will be of value to professionals in the following areas:

Executives and managers
Professionals in all functions seeking to enhance their financial knowledge
Investment and commercial bankers (especially those with a single product specialisation needing to understand alternatives)
Equity and fixed income investment managers
Investment analysts
Credit analysts
Treasury managers and staff
Lawyers
Accountants
Company brokers and advisers

Supporting publications:

DAY ONE: DCF valuation techniques

Investment appraisal techniques

Shareholder value as a key management objective
Strategic financial objectives
Appraising investment projects
Alternative measures of value
Payback period, discounted payback period, NPV, IRR
Introductory sensitivity analysis
Using Excel shortcuts
Organising the spread sheet to minimise errors
Spread sheet disciplines
Monte Carlo simulation techniques in sensitivity analysis

Equity valuation by discounting dividends

Dividend discount models
Gordon growth model
Multi-stage dividend discount models
Weaknesses in these models
Using the growth perpetuity to value cash flows

Cost of capital

Capital Structure Theory: Modigliani and Miller
Enterprise value concept
Impact of tax and financial distress costs
Cost of debt and equity
Weighted Average Cost of Capital (WACC)

Case study: calculating the benefit of the tax shield of debt

Capital Asset Pricing Model (CAPM)

How CAPM works
How CAPM can be used to identify the cost of equity
The impact of gearing on the cost of equity
Relationship to capital structure
Model inputs and sensitivity
Calculating beta and the risk premium
Sources of error in the model

DAY TWO: Cash flow modelling

Identifying the key drivers in the business model

Forecast of sales: the assumptions
Identifying the cost structure
Computing the working capital needed
Measuring the required capex
Analysing capex between maintenance and development
Preparing cash flows
Terminal value assumptions and growth in particular
Testing the reasonableness of the terminal value assumption
Non-operating assets and impact on valuation
Obtaining an equity value using WACC

Applying WACC in practice

Review of WACC as a valuation tool
Preparation of free cash flows
Alternative terminal value calculations
Iteration using "goal/seek"
Selecting the right beta
Creating the sensitivity matrix

Case study: valuation involving preparation of cash flows, calculation of WACC, estimating enterprise value and hence equity value

Deriving the financial statements from the cash flow projections

Computing depreciation
The tax function and deferred taxation
Working capital
Seasonal factors and working capital
Monthly cash flow forecasting
Debt financing as an overlay
The revolving working capital facility
Deriving the P&L accounts and balance sheets from the cash flow projections
Modifying WACC to account for changes in capital structure
Hedging the output price

Multiples based valuation methodologies

The key valuation ratios
"Proof" of the validity of multiples-based valuation tools
Characteristics of the earnings forecast
Comparable company analysis
Enterprise ratios and their advantages over conventional ratios
Methodologies using EBIT, EBITA, EBITDA, EBITDAX
Alternative multiple-based valuation ratios
Price/book, price/sales, price/pop and other ratios
Accounting scams – the Xerox case
Weaknesses in the model
Reconciling a multiple-based valuation to WACC

Case study: Freeport Phelps Dodge valuation

DAY THREE: Option valuation methodology

Valuing reserves in the ground using comparables

Identifying value from companies with comparable assets
Using project financing techniques to evaluate mineral reserves
The impact of commodity price hedging on values

Real options

Projects as options
The valuation of flexibility
Introduction to option valuation methodology
Payoff charts
Put and call option parity
The binomial model
Black and Scholes
Volatility measurement

The option to defer

The value and cost of delay
Impact of the time horizon: limited exploitation license life
Using option valuation methodology to value the delay option
Valuing reserves in the ground before extraction
Value in uneconomic discoveries as an option
Volatility of the underlying commodity

Other option elements: expansion and closure

Using the option valuation methodology for mine expansion
Valuing the option to walk away
Using existing market values to obtain valuation benchmarks
Using a combined approach to valuing producing assets and discoveries

Course summary and close

Paul Richards
Paul Richards graduated from Cambridge University in mathematics and has a Masters degree in business administration from London Business School. He is also a CFA charter holder, an Associate of the Chartered Institute of Bankers, a Member of the Association of Corporate Treasurers and a Fellow of UKSIP.

Paul has more than 20 years investment banking experience specialising in domestic and international corporate finance at UBS (Warburg), HSBC and Map Securities (part of Skandia Insurance and Mapfre, Spain). He was also the chief executive of the London merchant banking operation of Credit Industriel et Commercial, a major French banking group.

As a result of this experience, Paul has extensive first hand experience of: Mergers and acquisitions; IPOs; bond issues; secondary market issues; privatisation; debt syndications; corporate treasury; equity valuation; investment analysis; security and derivative valuation; private equity; modelling; corporate governance; and compliance.

His consulting and training clients have included a wide range of organisations such as Bowring, Financial Services Authority, Association of Corporate Treasurers and he has also been involved in expert witness work. Paul won the 2004 Wincott Foundation Prize for his article "Lessons in shareholder value" on the boom and bust in new economy stocks, published in Professional Investor (the journal of the UK Society of Investment Professionals - the UK member society of the CFA Institute). He has taught MBAs and Masters to Finance students at Cass and Cranfield Business Schools for more than 12 years in a range of financial disciplines; and has trained staff at major City houses and in banks on different continents.
Courses run by this instructor
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