Equity analysis

for mining
expert

18 SEPT 2019
VALUASI TAMBANG
WORKSHOP EDUWOO
PREPARED BY SANDRO H. SIRAIT
SANDRO H. SIRAIT
Sandro Sirait
linkedin.com/in/sandrosirait
Whatsapp: :+6285736061497
SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19
•S1 TEKNIK PERTAMBANGAN ITB (2009-2013)
•Internship/projects at PT Freeport Indonesia and
PT Cibaliung (subsidiary of PT Antam Tbk) (2011-
2013)
•Presenter in CINEST, Japan 2013
•Equity analyst in PT Trimegah Sekuritas Indonesia
Tbk (2015-2019)
•CFA (Chartered financial analyst) level 1 (2016)
•Top 3 best analyst by Asia Money in 2017
•Speaker in Djakarta Mining Club, a mining
professional networking club (2019)
•Mining analyst in McKinsey (Oct’19)
2
I. Introduction

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 3

What you will learn?
You will be able to analyse and value
the equity of mining companies

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 4

Why do you need to learn this?
To help you making better investment
decision as an expert, manager, and
investor

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 5

Equity analyst?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 6

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 7
What skills to acquire?
Accounting Finance

Industry Business

Valuation

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 8

II. Basic concept

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 9

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 10
Learn the principle then use the
right tool at the right context

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 11

What is equity?
Company’s perspective:
Equity = total asset – total liabilities

Investor’s perspective:
•An investment instrument
•Shares of ownership of a company

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 12

What is equity?
balance sheet wise

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 13

Equity has the highest risk and
return among other assets

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 14

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 15
How to make money as an
equity investor?
Capital gain
• Buy low sell high (long)
• Borrow high buy low then sell
(short selling)

Dividend
• Profit sharing from company

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 16

Example?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 17

 Example?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 18

Chart share price movement
and psychology of investors

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 19

What is
dividend?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 20

 Example?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 21

 What drives
the share
price
movement?
SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 22
SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 23
Financial vs Business cycle

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 24

Financial vs Business cycle (ii)

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 25

It is all about: Value vs price
Worksheet: which one is the cheapest and the most expensive?

Market EV EV/ EV/

Price P/E PBV
Stock Cap (Rp EBITDA Reserves
(Rp/sh) (x) (x)
(Rp bn) bn) (x) (x)

ITMG 13,400

ADRO 1,400

PTBA 2,600

INDY 1,500

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 26

Market capitalization?
How to calculate market
capitalization
Market cap = Price per share x Number of shares

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 28

EV=enterprise value?
EV= equity value (market cap) + net debt + minority interest
net debt= debt – cash
minority interest= minority portion of subsidiaries
ADRO’s balance sheet
ADRO’s balance
sheet
June 2019

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 30

ADRO’s balance sheet
ADRO’s balance
sheet
June 2019

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 31

ADRO’s balance sheet
ADRO’s balance
sheet
June 2019

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 32

III. Equity
valuation

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 33

Fair value vs market value?
Two perspectives in valuation: forward looking and historical
Trailling/historical vs Forward (which year?)
Valuation: 3 key methods
Asset
Income Market
based/cost
approach approach
approach

DCF
Book value P/E,
(discounted
EV/EBITDA
cashflow)

Liquidation Dividend
value Recent MnA
growth model

Replacement Dividend yield EV/reserves

value
Capitalized Other
earnings multiples

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 35

Mining stage and valuation

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 36

Valuation: absolute approach
Cost/balance sheet approach

• Book value, liquidation, replacement cost

DCF (discounted cash flow)

• Using WACC to discount equity’s future free cash

flow (FCFE) + terminal value (if any)

Dividend discount model

• Using company’s dividend and growth prospects

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 37

Valuation: absolute approach
Cost/balance sheet approach
Value of Assets Value of
Book Liabilities
Liquidation Book
Replacement Market
Value of Equity
Book Value
Liquidation
Value
Replacement
Value
Valuation: absolute approach
Book or equity value
Quiz:
Is this historical or forward looking?
Valuation: absolute approach
DCF Valuation

Quiz: Is it FCFF vs FCFE?

Free cash flow to firm vs Free cash flow to equity
Valuation: absolute approach
Dividend discount model
V0 =current value;
D1 D2 D3 Dt=dividend at
V0     ... time t;
1  k 1  k  1  k 
2 3 k = required rate of
return (cost of

D0 1  g 
equity/CAPM)
D1
V0   The DDM says the
stock price should
kg kg equal the present
value of all
expected future
dividends into
perpetuity.
Quiz: Is it relevant for mining companies? g=dividend growth
rate
Valuation: relative valuation
P/E (price to earnings)
EV/EBITDA
EV/Reserves
PBV
Dividend yield
PEG (PE growth)

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 42

PE is the most commonly used
valuation multiple

PRICE EARNINGS RATIO

P/E (price to earnings) ratio
USING PRICE PER SHARE USING MARKET CAP

P/E= price per share / EPS P/E= market cap/ net profit
(earnings per share)

ADRO ADRO
Price= Market cap=
EPS= Earnings/net profit=
PE= PE=

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 45

 P/E (price to
earnings) ratio
ADRO’s income
statement, June 19
Which one is the net
profit we can use?
If we use this, is it
historical or forward
looking?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 46

P/E (price to earnings) ratio
ADRO’s income
statement, June 19
Which one is the net
profit we can use?
If we use this, is it
historical or forward
looking?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 47

P/E (price to earnings) ratio
Discussion:

What are the strength and weakness of using PE?

In which situation we can not use or should use PE?
What makes PE lower or higher?
Low PE= cheap; high PE= expensive?
As management, how to lower PE or the earnings?
As investor, how to catch carefully analyse PE?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 48

EV/EBITDA multiple

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 49

 EV/EBITDA
multiple
ADRO’s IS (June 2019)
You already have EV, how about
EBITDA?

EBITDA= EBIT +DA

EBIT= earnings before interest

and taxes
DA= depreciation amortization

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 50

 EV/EBITDA
multiple
How to get the DA?
Fixed assets, mining properties,
somewhere else?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 51

EV/EBITDA multiple
How to know that our DA is
right?

How to check our DA?

Check COGS, operating
expense, what else?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 52

 EV/EBITDA
multiple
ADRO’s CF (June 2019)

How to know that the

EBITDA quality is good?

Look at the cashflow?

So what’s the EV/EBITDA?

Is it historical or forward
looking?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 53

EV/EBITDA multiple
Discussion:

What are the strength and weakness of using EV/EBITDA?

In which situation we can not use or should use EV/EBITDA?
What makes EV/EBITDA lower or higher?
Low EV/EBITDA= cheap; high EV/EBITDA= expensive?
As management, how to lower EV/EBITDA or the earnings?
As investor, how to catch carefully analyse EV/EBITDA?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 54

Case study:
coal, nickel, tin, and gold
Data to be provided during the session

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 55

Valuation: Sum of the parts
(SOTP)
Some companies may have different business segments or type of
assets that may need different valuation approach
Investors may separate valuation per business/assets and combine the
total valuation to get the total value of the company
Investor may combine the DCF, target multiple, and cost basis for
different business unit within the same company
Need to be careful on deciding whether valuing the equity value or the
enterprise value of the company

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 56

Case study: MDKA

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 57

Valuation:
Combination of methods

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 58

Valuation methods: recap
Which valuation method that will work best under following condition:
Condition Best/worst valuation approach

Stable/steady growth or mature

industry
Constantly gives dividend
Loss-making (negative earnings)
company
Highly leveraged
Capital intensive
Early cycle or strong growth
Company with various type of
assets and businesses

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 59

IV. IPO and MnA

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 60

IPO (initial public offering)

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 61

IPO (initial public offering)
Case study:
The company SNDR plans to do IPO. SNDR is a coal mining company that
has been in producing and generating cash flow since 5 years
The management aims to raise Rp 200-300 bn of IPO proceed for 20-
30% of new shares issuance. The IPO proceed would then be used
mostly for project expansion (capex).
Target net profit of the company is IDR 100 / 200 / 250 bn for
2019/20/21F.
Industry info: the average 1-year forward PE of coal miners is 6-8x PE.
What do you think the proper target market capitalization would be for
SNDR? Do you think that the company will achieve the target IPO
proceed?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 62

Valuation and M&A
Goals of Acquisitions
Rationale: Firm A should merge with Firm B if
[Value of AB > Value of A + Value of B + Cost of transaction]
Synergy
◦ Eg Martell takeover by Seagrams to match name and inventory with marketing capabilities

Gain market power

◦ Eg Atlas merger with Varity. (Less important with open borders)

Discipline
◦ Eg Telmex takeover by France Telecom & Southwestern Bell (Privatization)
◦ Eg RJR/Nabisco takeover by KKR (Hostile LBO)

Taxes
◦ Eg income smoothing, use accumulated tax losses, amortize goodwill

Financing
◦ Eg Korean groups acquire firms to give them better access to within-group financing than
they might get in Korea's undeveloped capital market
Valuation and M&A
Value Changes In Acquisition
Financial structure 10 Taxes on sale of assets
improvements 10
30 30 Takeover premium & costs
Profit on sale
of assets
50 Gain in
Synergies and/ 50 shareholder
or operating value
improvements
75
Value of
acquired
company as
a separate
entity
250
Value of
acquiring 175
company
without
acquisition

Initial value Final value of

plus gains combined company
Valuation and M&A
Case study
ADRO ACQUIRED KESTREL UNTR ACQUIRED MARTABE GOLD
COKING COAL MINE MINE
Total acquisition value is USD mn Total acquisition value is USD mn
for % shares. for % shares.
Funding scheme would be % debt. Funding scheme would be % debt.
Kestrel’s expected Martabe’s expected
Revenue/EBITDA/net profit in Revenue/EBITDA/net profit in
2019 are USD / / mn 2019 are USD / / mn
What data do you need to analyse What data do you need to analyse
whether the transaction is positive whether the transaction is positive
for ADRO? for UNTR?

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 65

THANK YOU!!!

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 66

Appendix

SANDRO H. SIRAIT - EDUWOO WORKSHOP - SEPT'19 67

 Required Return
CAPM gives the required return, k:

k  rf    E (rM )  rf 

Rm= market risk

Rf = Risk free
k is the market capitalization rate.

If the stock is priced correctly, k should equal

expected return.
18-68
 Estimating Dividend Growth Rates

g  ROE x b
g = growth rate in dividends
ROE = Return on Equity for the firm
b = plowback or retention percentage rate
(1- dividend payout percentage rate)

18-69
Price-Earnings Ratio and
Growth
P/E increases:
◦ As ROE increases
◦ As plowback increases, as long as ROE>k

P0 1 b

E1 k  ROE x b

18-70
P/E and Growth Rate
Wall Street rule of thumb: The growth rate is roughly equal
to the P/E ratio.

“If the P/E ratio of Coca Cola is 15, you’d expect the
company to be growing at about 15% per year, etc. But if
the P/E ratio is less than the growth rate, you may have
found yourself a bargain.”

Quote from Peter Lynch in One Up on Wall Street.

18-71
 P/E Ratios and Stock Risk
When risk is higher, k is higher; therefore, P/E is
lower.
P 1 b

E kg

18-72