Estimate of the intrinsic value of Namibia Critical Metals Inc. (CVE:NMI)

Key findings

• The estimated fair value of Namibia Critical Metals is CA$0.038 based on 2-step free cash flow to equity.
• With a share price of CA$0.04, Namibia Critical Metals appears to be trading close to its estimated fair value
• Compared to the industry average discount of -255%, Namibia Critical Metals’ competitors appear to be trading at a higher premium to fair value.

Today we will go through one way to estimate the intrinsic value of Namibia Critical Metals Inc. (CVE:NMI) by projecting future cash flows and then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you still have questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis on Namibia Critical Metals.

Step by step through the calculation

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally, the first stage is higher growth and the second stage is a period of lower growth. First, we need to get estimates for the next ten years of cash flows. Since we don’t have analyst estimates for free cash flow, we extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we discount the value of these future cash flows to their estimated value in today’s dollars:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = CA$2.5 million

The second period is also called the terminal value. This is the company’s cash flow after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year Treasury yield (2.1%) 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 7.1%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CA$514,000 × (1 + 2.1%) ÷ (7.1% – 2.1%) = CA$10 million

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= CA$10 million ÷ ( 1 + 7.1 %)¹⁰= CA$5.2 million

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is CA$7.7 million. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CA$0.04, the company appears to be around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it’s better to consider this a rough estimate that isn’t accurate to the last cent.

The assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Namibia Critical Metals 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 takes debt into account. In this calculation, we used 7.1%, which is based on a leveraged beta of 1.099. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Namibia Critical Metals

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While a company’s valuation is important, it should not be the only metric you consider when researching a company. The DCF model is not a perfect stock valuation tool. It should be viewed more as a guide to “what assumptions need to hold for this stock to be under/overvalued.” For example, making a small adjustment to the terminal value growth rate can dramatically change the overall result. For Namibia Critical Metals, we have compiled three basic aspects for you to consider:

1. Risks: You should be aware 5 warning signs for critical metals in Namibia (3 should not be ignored!) that we uncovered before considering investing in the company.
2. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might be missing out on!
3. More top analyst tips: Want to know what the analysts think? Take a look at our interactive list of analyst recommended stocks and find out which stocks they think could have attractive future prospects!

PS The Simply Wall St app runs a discounted cash flow valuation for every stock on the TSXV every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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