An Intrinsic Calculation For Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) Suggests It's 35% Undervalued

Key Insights

• Compañía de Minas BuenaventuraA's estimated fair value is US$23.71 based on 2 Stage Free Cash Flow to Equity
• Current share price of US$15.39 suggests Compañía de Minas BuenaventuraA is potentially 35% undervalued
• Our fair value estimate is 66% higher than Compañía de Minas BuenaventuraA's analyst price target of US$14.24

In this article we are going to estimate the intrinsic value of Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) by estimating the company's 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Compañía de Minas BuenaventuraA

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$132.8m	US$213.2m	US$304.9m	US$398.8m	US$487.5m	US$566.8m	US$635.2m	US$693.3m	US$742.4m	US$784.3m
Growth Rate Estimate Source	Est @ 85.43%	Est @ 60.49%	Est @ 43.03%	Est @ 30.81%	Est @ 22.25%	Est @ 16.26%	Est @ 12.07%	Est @ 9.14%	Est @ 7.08%	Est @ 5.64%
Present Value ($, Millions) Discounted @ 11%	US$120	US$174	US$225	US$265	US$293	US$308	US$311	US$307	US$297	US$283

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

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$784m× (1 + 2.3%) ÷ (11%– 2.3%) = US$9.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$9.5b÷ ( 1 + 11%)¹⁰= US$3.4b

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 US$6.0b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$15.4, the company appears quite good value at a 35% 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Compañía de Minas BuenaventuraA 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 11%, which is based on a levered beta of 1.215. 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 Compañía de Minas BuenaventuraA

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. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Compañía de Minas BuenaventuraA, we've put together three additional elements you should look at:

1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with Compañía de Minas BuenaventuraA .
2. Future Earnings: How does BVN'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 American 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.