Stock Analysis

A Look At The Intrinsic Value Of Alamos Gold Inc. (TSE:AGI)

TSX:AGI
Source: Shutterstock

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Alamos Gold fair value estimate is CA$19.99
  • With CA$18.31 share price, Alamos Gold appears to be trading close to its estimated fair value
  • Analyst price target for AGI is US$19.57 which is 2.1% below our fair value estimate

Does the May share price for Alamos Gold Inc. (TSE:AGI) 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. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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 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.

See our latest analysis for Alamos Gold

The Calculation

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 start off with, we need to estimate 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.

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

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF ($, Millions) US$94.2m US$130.4m US$136.0m US$373.0m US$411.0m US$438.9m US$462.1m US$481.7m US$498.6m US$513.6m
Growth Rate Estimate Source Analyst x6 Analyst x5 Analyst x3 Analyst x1 Analyst x1 Est @ 6.79% Est @ 5.29% Est @ 4.24% Est @ 3.51% Est @ 3.00%
Present Value ($, Millions) Discounted @ 8.2% US$87.0 US$111 US$107 US$272 US$277 US$274 US$266 US$257 US$246 US$234

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.1b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.2%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$514m× (1 + 1.8%) ÷ (8.2%– 1.8%) = US$8.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$8.2b÷ ( 1 + 8.2%)10= US$3.7b

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$5.9b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$18.3, the company appears about fair value at a 8.4% 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.

dcf
TSX:AGI Discounted Cash Flow May 16th 2023

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 Alamos Gold 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 8.2%, which is based on a levered beta of 1.075. 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 Alamos Gold

Strength
  • Currently debt free.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
Opportunity
  • Annual earnings are forecast to grow faster than the Canadian market.
  • Current share price is below our estimate of fair value.
Threat
  • Annual revenue is forecast to grow slower than the Canadian market.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Alamos Gold, there are three fundamental elements you should further examine:

  1. Risks: Be aware that Alamos Gold is showing 1 warning sign in our investment analysis , you should know about...
  2. Future Earnings: How does AGI'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 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!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX 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.