Gold Mine DCF Technical
“Walk me through the DCF for a gold mine.”
This question popped up a couple times during my investment banking recruiting process. It is popular for a couple reasons:
It is not in the Mergers and Inquisitions 400 Investment Banking Interview Questions guide. Most bankers realize that folks in business school have a large block of time to dedicate to recruiting and students are proactively memorizing the questions in the guide. Questions that prospective bankers can’t give a memorized answer to are valued.
This point is more amorphous but I think the question gets to the bottom of, are you regurgitating or are you thinking? Hypothetically, a thinking student would realize the finite nature of a single commodity producing plot.
The answer to this question lies in the terminal value. You run through your projected cash flows like any other DCF question (free cash flow, WACC, present value of future cash flows, etc.) Then, when you get to your terminal value, you carefully note that using a perpetuity method such as Gordon Growth would be inappropriate. A gold mine has a finite amount of gold after all. Conceptually, a perpetuity method would no make sense. Then you go ahead with a comps focused terminal value.
Frankly, I think this question is a bit silly due to any reasonable discount rate rendering cash flows past a certain number of years minuscule to the point of irrelevance. I think this is beside the point, but a prospective banker could show stronger industry knowledge by discussing reclamation costs, the M&A market for individual mines, or some sort of mineable reserve discussion.
Metals and mining banker perspectives are very welcome!