Lundin Gold Inc. (TSE:LUG) Shares Could Be 32% Above Their Intrinsic Value Estimate
Key Insights Using the 2 Stage Free Cash Flow to Equity, Lundin Gold fair value estimate is CA$82.89 Lundin Gold's...
Key Insights Using the 2 Stage Free Cash Flow to Equity, Lundin Gold fair value estimate is CA$82.89 Lundin Gold's CA$109 share price signals that it might be 32% overvalued Our fair value estimate is 27% lower than Lundin Gold's analyst price target of US$113 Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Lundin Gold Inc. (TSE:LUG) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. Crunching The Numbers We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate.
In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the
future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 10-year free cash flow (FCF) estimate 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF ($, Millions) US$1.06b US$1.03b US$852.2m US$797.0m US$767.8m US$754.6m US$752.1m US$756.8m US$766.7m US$780.2m Growth Rate Estimate Source Analyst x9 Analyst x8 Analyst x4 Est @ -6.48% Est @ -3.67% Est @ -1.71% Est @ -0.34% Est @ 0.63% Est @ 1.30% Est @ 1.77% Present Value ($, Millions) Discounted @ 7.3% US$
986 US$896 US$689 US$601 US$539 US$494 US$458 US$430 US$406 US$385 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$5.9b Story Continues After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$780m× (1 + 2.9%) ÷ (7.3%– 2.9%) = US$18b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$18b÷ ( 1 + 7.3%)10= US$8.9b The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$15b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CA$109, the company appears reasonably expensive at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy.
Do keep this in mind. TSX:LUG Discounted Cash Flow February 12th 2026 The Assumptions We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Lundin Gold as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt.
In this calculation we've used 7.3%, which is based on a levered beta of 1.054. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. View our latest analysis for Lundin Gold SWOT Analysis for Lundin Gold Strength Earnings growth over the past year exceeded the industry. Currently debt free. Dividends are covered by earnings and cash flows. Weakness Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
Expensive based on P/E ratio and estimated fair value. Opportunity Annual earnings are forecast to grow faster than the Canadian market. Threat Revenue is forecast to grow slower than 20% per year. Moving On: Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different.
What is the reason for the share price exceeding the intrinsic value? For Lundin Gold, there are three further aspects you should explore: Risks: For example, we've discovered 1 warning sign for Lundin Gold that you should be aware of before investing here. Future Earnings: How does LUG's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business.
Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice.
It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.