Key Insights

Mineral Resources' estimated fair value is AU$122 based on 2 Stage Free Cash Flow to Equity Mineral Resources is estimated to be 44% undervalued based on current share price of AU$68.30 The AU$70.46 analyst price target for MIN is 42% less than our estimate of fair value

How far off is Mineral Resources Limited (ASX:MIN) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Mineral Resources

Is Mineral Resources Fairly Valued?

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. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Levered FCF (A$, Millions)  -AU$1.10b AU$1.06b AU$1.67b AU$1.77b AU$1.93b AU$2.05b AU$2.15b AU$2.23b AU$2.31b AU$2.38b Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x6 Analyst x3 Analyst x3 Est @ 6.17% Est @ 4.94% Est @ 4.08% Est @ 3.48% Est @ 3.06% Present Value (A$, Millions) Discounted @ 9.1%  -AU$1.0k AU$888 AU$1.3k AU$1.2k AU$1.2k AU$1.2k AU$1.2k AU$1.1k AU$1.1k AU$996

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$9.2b

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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = AU$2.4b× (1 + 2.1%) ÷ (9.1%– 2.1%) = AU$35b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$35b÷ ( 1 + 9.1%)10= AU$14b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$24b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of AU$68.3, the company appears quite good value at a 44% 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. ASX:MIN Discounted Cash Flow December 20th 2023

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Mineral Resources 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 9.1%, which is based on a levered beta of 1.406. 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 Mineral Resources

Strength

Debt is well covered by earnings and cashflows.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.

Shareholders have been diluted in the past year.

Opportunity

Annual earnings are forecast to grow faster than the Australian market.

Trading below our estimate of fair value by more than 20%.

Threat

Dividends are not covered by earnings.

Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Mineral Resources, there are three further items you should further examine:

Risks: As an example, we've found 5 warning signs for Mineral Resources (1 is significant!) that you need to consider before investing here. Future Earnings: How does MIN'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. 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 is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Australian 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.