If gold reaches $4,000 per ounce

RO
RockeTeller
RockeTeller
Invested
Community Contributor
Published
18 Oct 24
Updated
18 Oct 24
RockeTeller's Fair Value
CA$17.50
93.0% undervalued intrinsic discount
18 Oct
CA$1.23
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1Y
n/a
7D
0.8%

Author's Valuation

CA$17.5

93.0% undervalued intrinsic discount

RockeTeller's Fair Value

To estimate Steppe Gold’s stock price if gold reaches $4,000 per oz, we'll take into account several key factors including production growth, costs, and valuation multiples. Here's how we can approach it:

### Key Assumptions:

1. Future production (2026 target): 150,000 oz annually from the ATO and Boroo mines.

2. Gold price: $4,000 per oz.

3. AISC: We'll assume an average AISC of $1,000 per oz (considering Boroo’s low cost of $850 and expected improvements).

4. Steppe’s share of production: Steppe retains 75% of production after fulfilling the gold stream deal (assuming no further major dilution).

5. Debt: They have a $150 million loan.

6. Current market cap: ~$150 million.

7. Current share count (FD): 108M shares.

### Step-by-Step Calculation:

1. Revenue at $4,000 gold:

- 150,000 oz * $4,000/oz = $600 million in annual revenue (at 100% production).

- Steppe’s share (75% due to the gold stream deal): $600 million * 0.75 = $450 million in revenue for Steppe.

2. Cost of production:

- 150,000 oz * $1,000/oz AISC = $150 million in annual production costs.

- Steppe’s share: $150 million * 0.75 = $112.5 million in costs.

3. Pre-tax Profit (EBITDA equivalent):

- $450 million (revenue) - $112.5 million (costs) = $337.5 million in pre-tax profit.

4. Estimation of Free Cash Flow (FCF):

- Assuming 70% of pre-tax profit converts to FCF:

- $337.5 million * 0.7 = $236.25 million in annual free cash flow.

5. Valuation multiple:

- Let’s apply a 5-10x FCF multiple, given the high gold price and potential re-rating. We’ll use an 8x multiple for this calculation:

- $236.25 million * 8 = $1.89 billion market cap.

6. Stock price calculation:

- If Steppe Gold achieves a market cap of $1.89 billion, the stock price would increase proportionally based on the share count:

- $1.89 billion / 108 million shares ≈ $17.50 per share.

### Conclusion:

If gold reaches $4,000 per ounce and Steppe Gold successfully expands production to 150,000 oz annually with an average AISC of $1,000, the stock price could potentially rise to around $17.50 per share, assuming no major share dilution and a re-rating of the company.

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Disclaimer

The user RockeTeller has a position in TSX:STGO. Simply Wall St has no position in any of the companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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