Why Syrah Resources is too Expensive

Disclosing the sensitivity of mining project values to discount rate changes is now mandated but little used as an investment tool. Mozambique graphite mine developer Syrah Resources is a case in point. It says its Balama project is worth US$1,125 million. According to the company’s analysis, the project valuation changes by US$130 million for every one percentage point change in the discount rate. The company used 10% but, for an investor putting money into an early stage mine developer, a discount rate of 15% or higher may be appropriate. A 15% discount rate would decrease the Syrah valuation to US$475 million or approximately A$620 million. An investor with a risk profile implying a 15% discount rate would have to pay 6% more at today’s market price than the value placed on the project. The message for investors is twofold. Firstly, ignore absolute values headlining studies as they are too frequently based on analytically flawed discount rates used to lure unsuspecting investors. Secondly, know your own target return/risk tolerance and use that to customise a valuation for personal decision-making.