The Mining Valuation Handbook: Mining and Energy Valuation for Investors and Management, 4th Edition

Chapter 17: Determining the appropriate discount rate

Fundamental analysis plays a key role in determining such issues as the ‘correct’ value of a share price, the ‘correct’ purchase price for a mineral resource, or making the ‘correct’ decision on whether to develop a new project or not. The fundamental value is determined by discounting future cash flows. The cash flows need to be those cash flows that can be put back into the pockets of the investors. The portion of the cash flow, if any, that is required to keep the project going is not included, therefore it is the discretionary cash flow that is important. Once the discretionary cash flows have been determined, both negative (investment) and positive (return), then they are discounted ...