Key Insights

The projected fair value for Ramelius Resources is AU$4.00 based on 2 Stage Free Cash Flow to Equity Ramelius Resources' AU$3.38 share price indicates it is trading at similar levels as its fair value estimate Our fair value estimate is 22% higher than Ramelius Resources' analyst price target of AU$3.28

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Ramelius Resources Limited (ASX:RMS) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Step By Step Through The Calculation

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (A$, Millions)  AU$124.2m AU$44.9m AU$460.4m AU$423.4m AU$403.6m AU$394.1m AU$391.3m AU$393.0m AU$397.9m AU$405.0m Growth Rate Estimate Source Analyst x2 Analyst x3 Analyst x2 Est @ -8.03% Est @ -4.69% Est @ -2.35% Est @ -0.71% Est @ 0.44% Est @ 1.24% Est @ 1.80% Present Value (A$, Millions) Discounted @ 7.1%  AU$116 AU$39.2 AU$375 AU$322 AU$287 AU$262 AU$243 AU$228 AU$215 AU$205

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$2.3b

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 3.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.1%.

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$405m× (1 + 3.1%) ÷ (7.1%– 3.1%) = AU$11b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$11b÷ ( 1 + 7.1%)10= AU$5.4b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$7.6b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$3.4, the company appears about fair value at a 15% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.ASX:RMS Discounted Cash Flow September 8th 2025

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Ramelius Resources 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 7.1%, which is based on a levered beta of 0.937. 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.

See our latest analysis for Ramelius Resources

SWOT Analysis for Ramelius Resources

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.

Shareholders have been diluted in the past year.

Opportunity

Annual revenue is forecast to grow faster than the Australian market.

Good value based on P/E ratio and estimated fair value.

Threat

Annual earnings are forecast to decline for the next 3 years.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. For Ramelius Resources, there are three pertinent items you should further research:

Risks: Case in point, we've spotted  3 warning signs for Ramelius Resources you should be aware of, and 2 of them shouldn't be ignored. Future Earnings: How does RMS'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 ASX 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.

View Comments