Use the cash flow model template (provided in the Subject Room) and the reference material to assist you to answer the questions below.
Didipio is currently being operated as if the proposed ban on mining will either be repealed or that OGC's appeal against its closure is successful. You should assume for the purposes of the assignment that production continues at the budgeted rate and that the company is successful in its appeal.
As you know feasibility study plans are the result of intensive study and that day to day operation of a mine and processing plant is the only way to truly judge and modify expectations of future performance. Didipio operations are a case in point in that processing of the open pit ore will finish earlier than anticipated in the feasibility study due to better mill performance. You will therefore need information available in the NI43-101, its update, the company's quarterly reports, presentations and factbooks as well as assumptions provided herein.
(a) Build a discounted cash flow (DCF) model for the period 1 Jan 2017 to 31 Dec 2030 to determine the net present value (NPV) using the Excel template model provided.
Use the relevant reference material to identify the appropriate input assumptions for the DCF model. It is critical that you carefully read the directions below before commencing on the DCF model.
Important note: You must recognise that much of the financial information disclosed by the company is limited and consequently you are reliant on using best estimates/industry standards or even ambiguous market releases to prepare a reasonable valuation. (33 marks)
(b) The senior analyst reviews your work. He is pleased with your effort, but states that a valuation range should be considered given volatility in commodity prices, political risk and the uncertainty with several input assumptions. He asks you to construct a one-way sensitivity table for ‘commodity prices' and ‘discount rates' using Section 2.2, ‘Valuation Sensitivity' in the ‘Valuation' tab of the model template.
Note: Only complete the sections shown with a yellow or grey background. The resulting tables must include formulas. (4 marks)
(c) To construct the commodity price sensitivity table, the revenue line at the free cash flow line was modified directly. While this approach provides a quick solution, it is not exactly correct to measure the impact/change on NPV in this way. What was not considered using this approach?