Calculating The Fair Value Of Minera Frisco, S.A.B. de C.V. (BMV:MFRISCOA-1)

Key Insights

• Minera Frisco. de's estimated fair value is Mex$4.02 based on 2 Stage Free Cash Flow to Equity
• Current share price of Mex$3.57 suggests Minera Frisco. de is potentially trading close to its fair value
• The average premium for Minera Frisco. de's competitorsis currently 2,646%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Minera Frisco, S.A.B. de C.V. (BMV:MFRISCOA-1) as an investment opportunity 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Minera Frisco. de

Is Minera Frisco. de 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. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (MX$, Millions)	Mex$2.68b	Mex$2.57b	Mex$2.57b	Mex$2.62b	Mex$2.73b	Mex$2.87b	Mex$3.05b	Mex$3.25b	Mex$3.48b	Mex$3.74b
Growth Rate Estimate Source	Est @ -8.92%	Est @ -3.82%	Est @ -0.26%	Est @ 2.24%	Est @ 3.99%	Est @ 5.21%	Est @ 6.07%	Est @ 6.67%	Est @ 7.09%	Est @ 7.38%
Present Value (MX$, Millions) Discounted @ 16%	Mex$2.3k	Mex$1.9k	Mex$1.6k	Mex$1.4k	Mex$1.3k	Mex$1.2k	Mex$1.1k	Mex$971	Mex$894	Mex$825

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$13b

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 8.1%. We discount the terminal cash flows to today's value at a cost of equity of 16%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = Mex$3.7b× (1 + 8.1%) ÷ (16%– 8.1%) = Mex$49b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$49b÷ ( 1 + 16%)¹⁰= Mex$11b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is Mex$24b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of Mex$3.6, the company appears about fair value at a 11% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

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 Minera Frisco. de 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 16%, which is based on a levered beta of 1.275. 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 Minera Frisco. de

Next Steps:

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. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Minera Frisco. de, we've put together three essential items you should assess:

1. Risks: Every company has them, and we've spotted 1 warning sign for Minera Frisco. de 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 Mexican 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.