Valuing Adanac

Shares of Adanac Molybdenum Corporation (AUA.TO) were off 14.3% today, finishing at 0.06 USD in afternoon trading.

That headline definitely sounds more dramatic than reporting that “the stock dropped by one cent”, but sadly, the two statements are fully equivalent. Adanac spent close to 150 million in an effort to get their Ruby Creek deposit into production, but was then waylaid by the financial crisis and the attendant collapse in mol prices. The company has been reorganized, and the shareholders are scheduled to receive 3% of the equity, meaning that the 6.3 million market cap as of this afternoon’s close actually corresponds to a total company valuation of 210 million USD.

Is that reasonable?

If we the adopt the molybdenum price model developed in the last post, we’re in position to run Monte-Carlo simulations that yield a distribution of possible valuations for the company based on the projected forward trajectories of the molybdenum spot price. According to Adanac’s Oct. 21, 2008 fund-raising presentation pitched just prior to the company’s going bust, the mine will cost ~500 million USD to get up and running and consistently producing. With that capital expenditure, the mol can start flowing in two years time. The Ruby Creek deposit is capable of producing 13 million pounds of mol per year for the first five years, and then 9.5 million pounds per year for years six through nineteen. Costs in the first five years (with a higher grade of ore) are 8.10 USD/lb, increasing to 10.23 USD/lb thereafter. I assign a moderately conservative 12.5% rate, and sum the discounted cash flows for the life of the mine for each Monte-Carlo trajectory to build the distribution of valuations. I also assume that if the price falls below break-even, then they can just shut down the mine with no consequences until the situation improves.

The results are somewhat encouraging. Out of 10,000 trials, the average valuation is 471 million dollars. 38% of the cases come out above a half billion dollars, 21% lie above one billion, 5% are above two billion, and 0.7% lie above three billion. Here’s the histogram of outcomes:

The risks, of course, are legion. Most importantly, as pointed out in the last post, the price model does not adequately incorporate the surges in production by FCX et al. (and the ensuing collapse in prices) that will likely occur in the event of a sustained price spike. Next step is to get that effect into the model and re-run the code. Nevertheless, the current stock price might have some upside potential. I’m going to hold onto my 150 dollar “research grade” position…