A Look At The Fair Value Of 55 North Mining Inc. (CSE:FFF)

Key Insights

• 55 North Mining's estimated fair value is CA$0.015 based on 2 Stage Free Cash Flow to Equity
• With CA$0.015 share price, 55 North Mining appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -78%, 55 North Mining's competitors seem to be trading at a greater premium to fair value

Does the March share price for 55 North Mining Inc. (CSE:FFF) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for 55 North Mining

Is 55 North Mining Fairly Valued?

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$26.1k	CA$43.1k	CA$62.8k	CA$83.4k	CA$103.1k	CA$120.7k	CA$135.8k	CA$148.5k	CA$159.2k	CA$168.1k
Growth Rate Estimate Source	Est @ 91.70%	Est @ 64.79%	Est @ 45.95%	Est @ 32.76%	Est @ 23.53%	Est @ 17.07%	Est @ 12.54%	Est @ 9.38%	Est @ 7.16%	Est @ 5.61%
Present Value (CA$, Millions) Discounted @ 7.2%	CA$0.02	CA$0.04	CA$0.05	CA$0.06	CA$0.07	CA$0.08	CA$0.08	CA$0.09	CA$0.09	CA$0.08

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$668k

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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$168k× (1 + 2.0%) ÷ (7.2%– 2.0%) = CA$3.3m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$3.3m÷ ( 1 + 7.2%)¹⁰= CA$1.7m

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$2.3m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$0.01, 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.

The 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 55 North Mining 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 7.2%, which is based on a levered beta of 1.124. 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 55 North Mining

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. 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 55 North Mining, there are three essential elements you should explore:

1. Risks: To that end, you should learn about the 5 warning signs we've spotted with 55 North Mining (including 4 which are a bit unpleasant) .
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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the CNSX 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.