In this article I am going to calculate the intrinsic value of Golden Star Resources Ltd. (TSE:GSC) by taking the expected future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Golden Star Resources by following the link below.
View our latest analysis for Golden Star Resources
The calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF ($, Millions) | $49.00 | $74.55 | $81.00 | $72.50 | $64.88 |
| Source | Analyst x4 | Analyst x2 | Analyst x1 | Est @ -10.5% | Est @ -10.5% |
| Present Value Discounted @ 17.45% | $41.72 | $54.04 | $50.00 | $38.10 | $29.03 |
Present Value of 5-year Cash Flow (PVCF)= US$213m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.3%. We discount this to today’s value at a cost of equity of 17.4%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = US$65m × (1 + 2.3%) ÷ (17.4% – 2.3%) = US$439m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$439m ÷ ( 1 + 17.4%)5 = US$197m
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$410m. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of CA$5.13. Relative to the current share price of CA$4.14, the stock is about right, perhaps slightly undervalued at a 19% discount to what it is available for right now.