A Look At The Fair Value Of Chibougamau Independent Mines Inc. (CVE:CBG)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Chibougamau Independent Mines fair value estimate is CA$0.12
• Current share price of CA$0.12 suggests Chibougamau Independent Mines is potentially trading close to its fair value
• The average premium for Chibougamau Independent Mines' competitorsis currently 203%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Chibougamau Independent Mines Inc. (CVE:CBG) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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 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 Chibougamau Independent Mines

The Calculation

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.

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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$226.6k	CA$279.5k	CA$326.9k	CA$367.7k	CA$402.2k	CA$431.1k	CA$455.5k	CA$476.3k	CA$494.6k	CA$510.9k
Growth Rate Estimate Source	Est @ 32.45%	Est @ 23.34%	Est @ 16.96%	Est @ 12.50%	Est @ 9.37%	Est @ 7.18%	Est @ 5.65%	Est @ 4.58%	Est @ 3.83%	Est @ 3.31%
Present Value (CA$, Millions) Discounted @ 7.3%	CA$0.2	CA$0.2	CA$0.3	CA$0.3	CA$0.3	CA$0.3	CA$0.3	CA$0.3	CA$0.3	CA$0.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$2.6m

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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$511k× (1 + 2.1%) ÷ (7.3%– 2.1%) = CA$9.9m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$9.9m÷ ( 1 + 7.3%)¹⁰= CA$4.9m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CA$7.5m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CA$0.1, the company appears about fair value at a 2.7% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Chibougamau Independent Mines 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 7.3%, which is based on a levered beta of 1.140. 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:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. For Chibougamau Independent Mines, there are three relevant factors you should explore:

1. Risks: To that end, you should learn about the 4 warning signs we've spotted with Chibougamau Independent Mines (including 3 which are potentially serious) .
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 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.