Atalaya Mining Plc (LON:ATYM)’s intrinsic value is potentially 74% higher than its stock price

In this article, we’re going to estimate the intrinsic value of Atalaya Mining Plc (LON:ATYM) by taking its expected future cash flows and discounting them to their present value. We use the discounted cash flow (DCF) model. It may sound complicated, but it’s actually quite simple!

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you still have burning questions about this type of assessment, take a look at Simply Wall St’s analytics model.

Check out our latest analysis for Atalaya Mining

What is the estimated value?

We use the 2-phase growth model, which simply means that we consider two phases of company growth. In the initial phase, the company may have a higher growth rate and in the second phase, a stable growth rate is usually expected. First, we need to get estimates of cash flows for the next ten years. Where possible we use analyst estimates, but when these are not available we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We expect companies with declining free cash flow to slow their rate of contraction and companies with growing free cash flow to slow their growth rate over this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast.

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Leveraged FCF (€, million)

€91.7 million

€36.1m

€24.7 million

€97.0m

€97.8 million

€98.6 million

€99.4 million

€100.2 million

€101.1 million

€101.9 million

Source of growth rate estimate

Analyst x3

Analyst x2

Analyst x2

Analyst x1

Estimated @ 0.78%

Estimated @ 0.81%

Estimated @ 0.83%

Estimated @ 0.85%

Estimated @ 0.86%

Estimated @ 0.86%

Present Value (€, millions) Discounted @ 8.3%

€84.6

€30.8

€19.4

€70.4

€65.5

€60.9

€56.7

€52.8

€49.1

€45.7

(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = €535 million

We now need to calculate the terminal value, which takes into account all future cash flows after that ten-year period. A very conservative growth rate is used, which cannot exceed a country’s GDP growth, for a number of reasons. In this case, we used the 5-year average of the 10-year government bond yield (0.9%) to estimate future growth. As with the 10-year ‘growth period’, we discount future cash flows to today’s value using an 8.3% cost of equity.

final value (TV)= FCF2031 × (1 + g) ÷ (r – g) = €102 million × (1 + 0.9%) ÷ (8.3% – 0.9%) = €1.4 billion

Present value of terminal value (PVTV)= TV / (1 + r)10= €1.4 billion ÷ ( 1 + 8.3%)10= €618 million

The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, giving the total equity value, which in this case is €1.2 billion. In the final step, we divide the equity value by the number of outstanding shares. Compared to the current share price of £4.0 the company appears quite undervalued at a discount of 43% to the current share price. However, assessments are inaccurate instruments, more like a telescope – move a few degrees and end up in another galaxy. Remember.

DCF

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs, so it does not provide a complete picture of a company’s potential performance. As we view Atalaya Mining as a potential shareholder, the discount rate used is the cost of equity rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for the debt. In this calculation we used 8.3% which is based on a leveraged beta of 1.112. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the industry average of global peers with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

While important, the DCF calculation shouldn’t be the only metric you look at when researching a company. It is not possible to get a foolproof rating with a DCF model. Preferably you would apply different cases and assumptions and see how they would affect the company’s valuation. For example, slightly adjusting the growth rate of the terminal value can dramatically change the overall result. Why is the intrinsic value higher than the current share price? For Atalaya Mining, we have compiled three additional points for you to explore:

  1. risks: For example, we discovered 1 warning sign for Atalaya Mining you should know before you invest here.

  2. management:Have insiders stocked up to take advantage of market sentiment on ATYM’s future prospects? Check out our management and board analysis for insights into CEO pay and governance factors.

  3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of quality stocks to get an idea of ​​what else you might be missing!

hp The Simply Wall St app runs a discounted cash flow valuation for each stock on the AIM every day. If you want to find the calculation for other stocks, just search here.

Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

About Nina Snider

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