Agnico Mines Ltd The case solution
Company’s Operation’s valuation:
Valuation of the company’s operations is performed using free cash flows resulting from its operations. Terminal values occurring after 7thyear foretasted cash flows are added into present value of 7 years foretasted cash flows. 7 years cash forecast is based on income statement and balance sheet, adjusting the sales revenue for the annual growth rate of 11%
First years cash flows are based on 8 months cash flows as the valuation started on 30th April, from second year the cash flows are based on 12 month forecast. To arrive at the foretasted cash flow Exhibit 9 and 10 have been used from the case scenario.Calculations are performed in excel spread sheet.
Terminal Value:
Terminal values are calculated after seven years of forecast period. Terminal values are arrived by deducting adjusted taxes and adding amortization to net operating profits and then adjusting for the growth and weighted average cost of capital. Data from exhibit 9 of case scenario is used for calculation of terminal values. Calculation of terminal values are performed in excel spread sheet.
Tax Assets Valuation:
While performing tax asset valuation, development expenses and losses carry forward should be accounted for in order to reduce the tax liability of company in long run. Development expenses and losses carry forward are taken from appendix given in the case scenario. Amount of tax shield is expected to last for at least six years, which is tax rate and losses carry forward is as per the case scenario. Further it has been discounted using pre tax cost of debt because of the fact that risk of debt is similar or equal to the tax losses carry forward therefore the company wants to make sure the availability of enough profits to be adjusted against tax.
The value of the tax shield that can easily be adjusted against the above carry forward losses has been calculated in the excel spread sheet, resulting in further increase in value of firm form its operations.
Real Option Valuation:
Valuation of un-mine gold is based on Black-Schole model. Since the AEM Ltd has no direct competitor in the market therefore it can easily influence the gold prices in the market. Value of expected gold production is dependent on the strike price of gold and that strike price itself is based on cost related to the production and extraction of gold.
The discount rate used is based on the in leveraged cost of equity using beta asset. Equity value for calculation of cost of equity has been calculated using the debt to equity ratio. The growth rate of the company is assumed to be zero as discussed in the case scenario. The risk free rate and standard deviation of the asset has been taken from the Exhibit 7 of the case.
Valuation of un-mine gold has been calculated using the call option as the norms of the mining industry state that un-mined gold reserves are better valued using the options.
AEM Ltd has decided to get the mining property on 16 years lease and as a result it has to explore and extract the gold within the 16 years period. As per the explanation of the case scenario, since the current gold prices are based on present value of future gold prices so the gold prices cannot be foretasted.
The Value of the Firm:
Total value of the firm is based on the following components;
Development expense carry forwarded, value of excess cash and marketable securities, after tax underfunded pension, present value of tax shield on carry forwards, free cash flow from operations, non operating assets and value of the un-mined gold reserves. Calculation is performed in excel spread sheet.....................
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