Here is how I valued CGR............... ....................... ..................
Assumptions, for better or worse:
- CGR hits high end of Annual Production Target - 54,000 (already missed on 1Q so this is conservative)
- POG for 2013 is 1524/oz, equal to the current 60-dMA, the average for 2Q so far is 1477/oz
- COGS at 957 per ounce, This is generous, since 1Q reported 1245/oz, but think they can improve on 998 last year. At one point last year, when they were averaging 1057, CGR thought they could improve by 100/oz this year.
- G&A at 9.5M this year based on 4 times 1Q13 number, they said in CC they had already made cuts starting in November last year!
- Depreciation of 18.2M, higher than 11M in 2012, but in line with 4-times 1Q13 figure. Could be conservative since ounces produced was down, below target - i.e. more ounces, more sunk costs (CapEx, deferred stripping, etc.) to be depreciated against those ounces.
- Tax rate 35%
- Sustaining Capital = 15.2 M. Conservative when they report plans to spend 31.9M total Capital in 2013. The other 9M is development capital.
- escalate POG by 10% each year. Puts POG at 2028 in 2016 and 2231 in 2017 - no analyst does this they are likely using a smaller, if any escalation, many see LT POG at 1250!
- escalate production by 15% per year - high end of "promised" growth range.
- escalate COGS by 10% per year, average growth rate 2007-2013 has been 13%
- escalate G&A by 3% as salaries rise each year.
- Held depreciation steady as sunk costs are charged against production ounces. Could actually increase especially with a budget of 31.9M of Capital Spend. That money gets charged somewhere.
- Held CapEx at current level. If POG stays low, CGR will cut this drastically, but then revenues will be cut too.
Cash Flows
So It looks like at best CGR has Cash Flow from Ops of -1.978M this year, at best. Could be worse depending on how that 31.9 M of Capital Spend gets distributed between the BS and IS, or IF I should have added it to the CF calc overall. If CGR hits the projected production target for 2014 (62K opy) and POG averages 1676 and COGS can be held to 1053/ounce and G&A, Depreciation and CapEx don't explode, then CGR turns to +1.9M in 2014.
Next I ran an NPV of these optimistic CF figures using a discount rate of 10%. The incremental cost of borrowing for CGR is 10.47% since this is the rate of their last loan (incremental borrowed dollar) which closed in April. When I look at a peer group (1) of companies I find an average ROA of 14.74% and average ROE of 20%. Further using CAPM I find an average cost of capital for the group at 9.85%. Since this includes some well run companies with low CoC, the 10% discount rate appears a safe assumption. So finally taking the discounted cash flow for CGR and dividing by the number of shares outstanding I get a share price of 17-cents.
Now, this projection is flawed in that it is a ST projection. With the assignment of a terminal value, I can see a value of 34 to 40-cents per share based on cash flows.
So right now I suspect the only ones buying CGR are retailers, traders or hedge funds that are speculating. Clearly the company is now being run for its creditors and as such it is purely a peculation on POG. Seeing how the track record of management has been poor - missing production and cost targets consistently....
OK.
Any comments on projections? Suggestions on the assumptions? Adjustments to figures?
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1. To simplify the Weighted Average Cost of Capital (WACC) calculations, I selected a peer group that has Zero debt or debt to market cap ratios below 0.07, average of group was 0.02. |
