With the recent award of a key permit from the State of Arizona, Excelsior Mining (TSX:MIN; OTC:EXMGF) remains on track to begin commercial production at its Gunnison Copper Project in less than a year. What could the company be worth if it stays on schedule to begin shipping product in the second half of 2018? An increase in Enterprise Value (EV) of up to 2,400% is one of the scenarios.
Excelsior is positioned to become the newest and one of the lowest-cost copper producers in North America. Total production is expected to exceed 2.1bln pounds of copper over a 24 year mine life at a total all-in sustaining cash cost of just US$1.23 per pound. At current copper prices this would leave Excelsior with remarkable margin on its production, and potential for billions of dollars in cumulative cash flow.
One way to estimate the value of a company is to look at the sector peer group and compare EBITDA multiples to the company’s market value as expressed by Enterprise Value. The EV/EBITDA ratio is an analysis tool used as a benchmark in many industries.
Analysis of 45 producing base metal companies* ranging from small-cap producers such as Hudbay Minerals (TSX:HBM), Capstone Mining (TSX:CS), and Nevsun Resources (TSX:NSU), to mid-cap producers such as First Quantum Minerals (TSX:CN), and large-cap names like Freeport McMoRan (TSX:FXC) and BHP Billiton (TSX:BHP), suggests an average EV/EBITDA ratio of approximately 12x.
In the case of Excelsior Mining, using free cash flow (FCF) as a substitute for EBITDA allows for sustaining capital costs to be factored into the comparison (FCF = EBITDA – Sustaining Costs). Based on the results of the company’s 2016 Feasibility Study, the chart below shows Excelsior’s free cash flow for the projected 24 year mine life based on a $3.25 copper price.
FCF starts in Stage 1 based on a 25mln pound production rate, which represents initial production from Excelsior’s Johnson Camp Mine processing facility. FCF then rises rapidly as Excelsior shifts into Stage 2 production of 75mln pounds per annum over three years, and finally on to full production of 125mln pounds per year in Stage 3.
Excelsior has always emphasized that this production schedule was created to demonstrate how the company could expand solely out of internal cash flow; the preferred and likely option would see Excelsior move from Stage 1 directly to full production in Year 4.
At full production, Excelsior would be generating around $300mln per annum in FCF. Within the small-cap copper producer peer group, the average EV/EBITDA is 12x; this ratio ranges from approximately 4x to well over 18x among 16 small-cap peers (note that the average EV/EBITDA ratio is 12x across the entire production universe).
If Excelsior were able to enjoy an EV/EBITDA ratio from 4x to 12x, EV in Year 4 could be US$1.2bln on the low end and US$3.6bln based on the industry average.
Today, Excelsior’s EV is less than US$150mln. This suggests potential for an increase of 800% to as high as 2,400%.
Financial market valuations remain as much art as science, but EV analysis seems to indicate that investors believing Excelsior will obtain its final permit – a United States Environmental Protection Agency permit – could have very significant upside to look forward to indeed.
*EV/EBITA ratio calculations provided by Scarsdale Equities