Capricorn Metals Ltd

ASX:CMM

Capricorn Metals Ltd

ASX:CMM
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Forum Topics CMM CMM Discount rate for Mount Gibson PFS
edgescape
12 months ago

Capricorn has used a discount rate of 5% (NPV5%) for their Mt Gibson PFS which I think is a bit too low.

Well I think it should be much higher at around at least 8% given we are in a high interest rate environment.

Another fact is that they do plan to use all free cash flow from Karlawinda to develop Mt Gibson instead of raising equity or using the 200m debt facility set up with Macquarie (but it is there in case)

So has Capricorn got it wrong or am I missing something?

I have a few theories floating around in my head why 5% is used but not really ready to share yet.

So it will be helpful if someone here can share some thoughts on whether the Mt Gibson valuation is overstated. May also explain the 8% decline today as well.

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edgescape
12 months ago

A basic link on calculating discount rate for a project

https://propertymetrics.com/blog/npv-discount-rate/

I think if you remove equity altogether, adjust a few ratios between cash vs debt and make a few assumptions on the macquarie debt facility interest, I can get a discount rate of around 5-6% (cash is 0% obviously)

There is also an audiocast on openbriefing about the PFS

https://openbriefing.com/OB/Capricorn-Metals-Ltd/2023/4/19/Capricorn-Metals-Investor-Presentation/5120.aspx

None of the analyst questioned the discount rate being used.

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edgescape
12 months ago

Something I just found out from further research is that a project is funded fully by free cash flow can use the policy rate.

As free cash flow is essentially risk free funding so it assumes you can take the risk free rate by default (whatever the RBA rate would be now or the future)

During the Capricorn days before Mark Clark, NPV8 was used for Karlawinda as they were probably going to fund by debt and equity although I am not sure as I was not invested in CMM during that turbulent time.

It is interesting reading back on the 2018 announcement that the NPV8 was only $556m - Clark and Massey really hit the ball out of the park!

I'll try and do a updated valuation with the Mt Gibson PFS in the next 2 weeks.

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