METALS COST INFLATION
Figure 6: Energy % of Total Cost 100%
20% 40% 60% 80%
0%
Energy as% of Total Cost - Average Energy as% of Total Cost -Marginal
On this basis we estimate that average
cost of equity capital for the industry is around 14% and smaller mining companies could have values which easily exceed 18% by our estimates. Companies who have low borrowing
Sources: Brook Hunt, Deutsche Bank
as compared to early in the last decade when (during the tech bubble) ERP hit historic lows).
Cost of Equity Capital To arrive at the estimated cost of equity capital for metals/
materials companies we use the capital asset pricing model (CAPM). The beta of various mining companies can vary considerably, but using an average of monthly data from 2000 we arrive at a value of about 1.3 (excludes gold).
costs can obviously optimise the overall cost of capital by using debt. However, given the prospects for tighter margins going forward and that at some point we will see a reversal of the structural decline of the risk-free rate, we would argue that the overall cost of capital is likely to rise going forward. The threat to asset managers of course is that this upward trend comes at a time in which downward pressure on real returns is likely in our view. •
Daniel Brebner, CFA & Xiao Fu are Research Analysts with Deutsche Bank AG, London.
The views expressed here are personal. E:
daniel.brebner@
db.com www.db.com
Aluminium Zinc Copper Nickel Gold Iron Ore
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