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

Key Insights

• Minera Frisco. de's estimated fair value is Mex$3.01 based on 2 Stage Free Cash Flow to Equity
• Minera Frisco. de's Mex$2.87 share price indicates it is trading at similar levels as its fair value estimate
• The average premium for Minera Frisco. de's competitorsis currently 55%

In this article we are going to estimate the intrinsic value of Minera Frisco, S.A.B. de C.V. (BMV:MFRISCOA-1) by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Minera Frisco. de

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. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (MX$, Millions)	Mex$3.02b	Mex$3.15b	Mex$3.33b	Mex$3.53b	Mex$3.75b	Mex$4.01b	Mex$4.29b	Mex$4.59b	Mex$4.93b	Mex$5.29b
Growth Rate Estimate Source	Est @ 3.29%	Est @ 4.55%	Est @ 5.43%	Est @ 6.04%	Est @ 6.47%	Est @ 6.78%	Est @ 6.99%	Est @ 7.14%	Est @ 7.24%	Est @ 7.31%
Present Value (MX$, Millions) Discounted @ 23%	Mex$2.5k	Mex$2.1k	Mex$1.8k	Mex$1.5k	Mex$1.3k	Mex$1.2k	Mex$1.0k	Mex$872	Mex$759	Mex$662

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = Mex$14b

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 7.5%. We discount the terminal cash flows to today's value at a cost of equity of 23%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = Mex$5.3b× (1 + 7.5%) ÷ (23%– 7.5%) = Mex$36b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= Mex$36b÷ ( 1 + 23%)¹⁰= Mex$4.6b

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 Mex$18b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of Mex$2.9, the company appears about fair value at a 4.6% 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.

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. 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 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 23%, which is based on a levered beta of 1.692. 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

Moving On:

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. 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 Minera Frisco. de, there are three pertinent elements you should explore:

1. Risks: Case in point, we've spotted 1 warning sign for Minera Frisco. de you should be aware of.
2. Future Earnings: How does MFRISCO A-1'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. 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.