Key Insights

Pilbara Minerals' estimated fair value is AU$2.08 based on 2 Stage Free Cash Flow to Equity Current share price of AU$1.67 suggests Pilbara Minerals is potentially trading close to its fair value Our fair value estimate is 7.2% higher than Pilbara Minerals' analyst price target of AU$1.94

In this article we are going to estimate the intrinsic value of Pilbara Minerals Limited (ASX:PLS) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

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Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (A$, Millions)  -AU$89.4m AU$122.6m AU$277.5m AU$319.0m AU$337.0m AU$351.9m AU$365.9m AU$379.3m AU$392.4m AU$405.4m Growth Rate Estimate Source Analyst x9 Analyst x9 Analyst x4 Analyst x1 Analyst x1 Est @ 4.42% Est @ 3.98% Est @ 3.67% Est @ 3.45% Est @ 3.30% Present Value (A$, Millions) Discounted @ 7.2%  -AU$83.4 AU$107 AU$225 AU$242 AU$238 AU$232 AU$225 AU$217 AU$210 AU$202

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$1.8b

Story Continues

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 7.2%.

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$405m× (1 + 2.9%) ÷ (7.2%– 2.9%) = AU$9.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$9.8b÷ ( 1 + 7.2%)10= AU$4.9b

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$6.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of AU$1.7, the company appears about fair value at a 20% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.ASX:PLS Discounted Cash Flow August 1st 2025

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Pilbara Minerals 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 7.2%, which is based on a levered beta of 0.982. 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.

Check out our latest analysis for Pilbara Minerals

SWOT Analysis for Pilbara Minerals

Strength

Debt is well covered by earnings.

Weakness

No major weaknesses identified for PLS.

Opportunity

Has sufficient cash runway for more than 3 years based on current free cash flows.

Current share price is below our estimate of fair value.

Significant insider buying over the past 3 months.

Threat

Debt is not well covered by operating cash flow.

Looking Ahead:

Whilst important, the DCF calculation 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 Pilbara Minerals, we've put together three pertinent items you should look at:

Financial Health: Does PLS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for PLS's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors. 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.

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