Antofagasta plc's (LON:ANTO) Intrinsic Value Is Potentially 37% Above Its Share Price

In this article, we will estimate the intrinsic value of Antofagasta plc (LON: ANTO) by discounting the expected future cash flows to their present value. One way to achieve this is to use the DCF (Discounted Cash Flow) model. Models like this may seem beyond the understanding of a layperson, but are fairly easy to follow.
Remember, however, that there are many ways to appreciate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, you can read in detail the reasons behind this calculation in the Simply Wall St analytical model.
Check out our latest analysis for Antofagasta
The model
We will be using a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first phase is generally a higher growth phase that flattens out towards the terminal value and is recorded in the second phase of "steady growth". First, we need to estimate the cash flows for the next ten years. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of contraction and that companies with increasing free cash flow will slow their growth rate over this period. We do this to reflect that growth tends to slow down more in the early years than in later years.
In general, we assume that a dollar today is more valuable than a dollar in the future. Hence, we need to discount the sum of these future cash flows to get a present value estimate:
10-year free cash flow forecast (FCF)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Leverage FCF ($, million)
$ 519.9 million
$ 608.0 million
US $ 1.00b
$ 1.22 billion
$ 1.39 billion
$ 1.52 billion
$ 1.63 billion
$ 1.71 billion
$ 1.79 billion
$ 1.84 billion
Source for growth rate estimation
Analyst x7
Analyst x4
Analyst x1
Analyst x1
Est @ 13.25%
Est @ 9.64%
Est @ 7.11%
Est @ 5.35%
Est @ 4.11%
Est @ 3.24%
Present Value ($, Million) Discounted 8.9%
US $ 477
US $ 513
US $ 776
$ 871
US $ 906
$ 912
US $ 897
US $ 868
$ 830
$ 787
("Est" = FCF growth rate, estimated by Simply Wall St)
Present Value of 10 Year Cash Flow (PVCF) = $ 7.8 billion
The second level is also known as Terminal Value. This is the company's cash flow after the first stage. The Gordon growth formula is used to calculate the terminal value using a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.2%. We discount the terminal cash flows to today's value at a cost of equity of 8.9%.
End value (TV) = FCF2030 × (1 + g) ÷ (r - g) = $ 1.8 billion × (1 + 1.2%) ÷ (8.9% - 1.2%) = $ 24 billion USD
Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = $ 24 billion ÷ (1 + 8.9%) 10 = $ 10 billion
The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, which results in the total net present value, which in this case is $ 18 billion. In the final step, we divide the equity value by the number of shares issued. Compared to the current UK share price of £ 10.4, the company appears to be undervalued at a 27% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula - garbage in, garbage out.
dcf
Important assumptions
The most important inputs for a discounted cash flow are now the discount rate and of course the actual cash flows. If you do not agree with this result, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclical nature of an industry or the future capital requirements of a company, so it does not give a complete picture of a company's potential performance. Given that we consider Antofagasta to be potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or the weighted average cost of capital, WACC) responsible for debt. In this calculation we used 8.9% based on a leverage beta of 1.107. Beta is a measure of the volatility of a stock compared to the overall market. We get our beta from the industry-standard average beta of globally comparable companies with a set limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Looking ahead:
While this is important, the DCF calculation shouldn't be the only metric you consider when studying a company. A foolproof valuation is not possible with a DCF model. Rather, it should be seen as a guide to "what assumptions must be made for this stock to be undervalued or overvalued?" For example, changes in the company's cost of equity or the risk-free rate can significantly affect the valuation. What is the reason that the share price is below the intrinsic value? For Antofagasta we have put together three essential elements that you should evaluate:
Risks: For example, we've spotted a warning sign for antofagasta that you should be aware of before investing here.
Future outcome: how is ANTO's growth rate compared to its competitors and the broader market? Learn more about analyst consensus number for the years to come by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity, and good past performance are fundamental to a strong business. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you might not have considered!
PS. Simply Wall St updates its DCF calculation for each UK share daily. So if you want to find out the intrinsic value of any other stock, just search here.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.

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