Is ROK Resources Inc. (CVE:ROK) Worth CA$0.3 Based On Its Intrinsic Value?

Key Insights

• The projected fair value for ROK Resources is CA$0.20 based on 2 Stage Free Cash Flow to Equity
• ROK Resources' CA$0.25 share price signals that it might be 25% overvalued
• Peers of ROK Resources are currently trading on average at a 32% discount

In this article we are going to estimate the intrinsic value of ROK Resources Inc. (CVE:ROK) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for ROK Resources

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$5.10m	CA$5.10m	CA$3.79m	CA$3.14m	CA$2.78m	CA$2.57m	CA$2.46m	CA$2.39m	CA$2.36m	CA$2.36m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -25.59%	Est @ -17.29%	Est @ -11.48%	Est @ -7.41%	Est @ -4.56%	Est @ -2.57%	Est @ -1.18%	Est @ -0.20%
Present Value (CA$, Millions) Discounted @ 7.7%	CA$4.7	CA$4.4	CA$3.0	CA$2.3	CA$1.9	CA$1.7	CA$1.5	CA$1.3	CA$1.2	CA$1.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$23m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$2.4m× (1 + 2.1%) ÷ (7.7%– 2.1%) = CA$43m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$43m÷ ( 1 + 7.7%)¹⁰= CA$21m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$44m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CA$0.3, the company appears slightly overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at ROK Resources as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.7%, which is based on a levered beta of 1.217. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For ROK Resources, there are three relevant aspects you should further research:

1. Risks: Take risks, for example - ROK Resources has 1 warning sign we think you should be aware of.
2. Future Earnings: How does ROK'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.
3. Other High Quality Alternatives: Do you like a good all-rounder? 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 valuation for every stock on the TSXV every day. If you want to find the calculation for other stocks just search here.

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