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

Key Insights

• Inter-Rock Minerals' estimated fair value is CA$0.57 based on 2 Stage Free Cash Flow to Equity
• With CA$0.53 share price, Inter-Rock Minerals appears to be trading close to its estimated fair value
• Inter-Rock Minerals' peers seem to be trading at a higher discount to fair value based onthe industry average of 63%

Does the October share price for Inter-Rock Minerals Inc. (CVE:IRO) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Inter-Rock Minerals

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$628.6k	US$524.3k	US$466.3k	US$432.8k	US$413.4k	US$402.8k	US$397.8k	US$396.6k	US$397.9k	US$401.1k
Growth Rate Estimate Source	Est @ -24.51%	Est @ -16.60%	Est @ -11.06%	Est @ -7.18%	Est @ -4.47%	Est @ -2.57%	Est @ -1.24%	Est @ -0.31%	Est @ 0.34%	Est @ 0.80%
Present Value ($, Millions) Discounted @ 5.9%	US$0.6	US$0.5	US$0.4	US$0.3	US$0.3	US$0.3	US$0.3	US$0.3	US$0.2	US$0.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.4m

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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 5.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$401k× (1 + 1.9%) ÷ (5.9%– 1.9%) = US$10m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$10m÷ ( 1 + 5.9%)¹⁰= US$5.8m

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$9.2m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.5, the company appears about fair value at a 6.7% discount to where the stock price trades currently. 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

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 5.9%, 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.

SWOT Analysis for Inter-Rock Minerals

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Inter-Rock Minerals, there are three pertinent aspects you should assess:

1. Risks: Every company has them, and we've spotted 3 warning signs for Inter-Rock Minerals (of which 2 are significant!) you should know about.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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.