A Look At The Intrinsic Value Of Inter-Rock Minerals Inc. (CVE:IRO)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Inter-Rock Minerals fair value estimate is CA$0.70
• Inter-Rock Minerals' CA$0.70 share price indicates it is trading at similar levels as its fair value estimate
• The average discount for Inter-Rock Minerals' competitorsis currently 60%

Today we will run through one way of estimating the intrinsic value of Inter-Rock Minerals Inc. (CVE:IRO) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Inter-Rock Minerals

The Method

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF ($, Millions)	US$810.7k	US$710.4k	US$652.6k	US$618.9k	US$599.8k	US$590.0k	US$586.4k	US$586.9k	US$590.4k	US$596.0k
Growth Rate Estimate Source	Est @ -18.43%	Est @ -12.37%	Est @ -8.13%	Est @ -5.17%	Est @ -3.09%	Est @ -1.63%	Est @ -0.62%	Est @ 0.10%	Est @ 0.60%	Est @ 0.95%
Present Value ($, Millions) Discounted @ 6.5%	US$0.8	US$0.6	US$0.5	US$0.5	US$0.4	US$0.4	US$0.4	US$0.4	US$0.3	US$0.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$4.6m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 1.8%. We discount the terminal cash flows to today's value at a cost of equity of 6.5%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$596k× (1 + 1.8%) ÷ (6.5%– 1.8%) = US$13m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$13m÷ ( 1 + 6.5%)¹⁰= US$6.8m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$11m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.7, the company appears around fair value 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.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Inter-Rock Minerals 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 6.5%, which is based on a levered beta of 0.800. 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.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Inter-Rock Minerals, we've put together three fundamental aspects you should assess:

1. Risks: As an example, we've found 1 warning sign for Inter-Rock Minerals that you need to consider before investing here.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock 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.