Commodity prices in Valuation models
I am building a valuation model for company that sells minerals. Which is the common/best practices to get the prices to insert in the revenue model? Please tell me is not Bloomberg.
I tried to value futures of the underlaying as a temporary measure.
Can speak to metals/mining from a banking perspective. We usually have two price deck scenarios - (a) consensus from Bloomberg, FactSet, research reports (e.g., research on Barrick will typically have the covering firm's gold price assumptions) and (b) our commodity research guys have their own price deck.
We'll usually see a 2-3 year outlook and a "long term" price which is basically flat beyond the forecast horizon.
Hope this helps.
And in your experience, how many years do you forecast? 5 or 10?
I am currently doing 10, but given your POV, it looks that I am over forecasting.
(It’s for my Master Thesis, no experience with commodities companies)
Depends, is this a mine or something more downstream like a processor?
Lithium Compounds manufacture. They also have the mines and brine pools.
You would project till the mine is depleted. This could be 15 years, could be 30 years, but you do till depletion.
Probably makes the most sense to take a sell-side model and rejig some of the assumptions. You probably won't have a confident reason to change production numbers, but you can play around with costs (i.e. run up initial Capex by 20%), and playing around with the commodity price deck.
As Rabbit mentioned, you'll use consensus price deck (average out estimates from other ER guys). There will usually be specific estimates for 2-3 years, then flat run-rated LT price, which will usually be lower than spot rates. You always want to be super conservative in this as commodity rates are super volatile, so best to model out at rock bottom style pricing and see if you still make money at that price.
Which company?
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