Agnico-Eagle Mines Ltd

FINC6001 Assignment

Introduction

Agnico-Eagle Mines Ltd is a gold producer which expert in metals mining business from Canada. In this Assignment, firstly, the DCF method will be employed to estimate the value of AEM and its equity. Secondly, the discussion of estimation of the value of the tax loss-related items and the impact of other valuation items will be illustrated. Finally, we will estimate the value of AEM’s real option by applying Black and Scholes model.

Content

Estimate the value of AEM and its equity from operations using the DCF method.

[pic 1]

                            (Table 1)

In order to estimate the value of AEM, first of all, we should estimate the present value of operating cash flows of 2002-2008 since the year of 2001 is considers as basic year. The DCF analysis is defined as discounts the future cash flow to arrived at a present value which is used to evaluate the potential for investment. From the Exhibit 9, the operating cash flows of 2002-2008 are -12942, -16658, 2663,-570, -566, -640 and -635. And as the data provided in Exhibit 10, the weighted average cost of capitals which is recognized as discount rate of 2002-2008 are 10.23%, 10.28%, 10.34%, 10.36%, 10.36%, 10.36%, 10.36%. The discount rate from the 2005 and the future would be stable at 10.36% because the marginal tax rate is solid at 37.8%. By applying the DCF method, the formula is as shown below: [pic 2]

As the data of cash flow and discount rate has been put into the formula, the net present value (NPV) discounted back to 2001 of 2002-2008 are -11740.91, -13697.12, 1982.31. -384.26, -345.75, -354.25, -318.49. Thus, the total value should be -24858.4613.

Secondly, the terminal value is taken into consideration since it refer to the value of an entire company at a specified future valuation data.

[pic 3]

As indicated in Exhibit 9, we choose the data of 2008 since it is the latest year and it will be useful to estimate the future. The NOPLATPA is the net operating profit less adjusted taxes plus amortization which is 14206 and the growth rate of NOPLATPA is 4.0%, furthermore, the weighted average cost of capital of 2008 is 10.36%. Thus, the result of terminal value is 142608.4942. However, the terminal vale should be discounted back to 2001 and hence the number is 71525.9363.

The total amount of discounted terminal value and the NPV of cash flows of 2002-2008 would be the firm value which is 46667.475. In addition, the value of equity of AEM equal to the firm value substract the market value of debt. From the exhibit 11, the market value of debt included $166750 of long term and $2052 of current interest, so that the value of equity is -122134.525. It may imply that the business is not following a deliberate operating strategy.

2. Discuss the estimation of the value of the tax loss–related items, as well as the impact of the other valuation items shown in case Exhibit 11