Intrinsic value of Dominion Diamond Corporation - DDC

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$16.68

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$16.68

 
Intrinsic value

$5.20

 
Up/down potential

-69%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of DDC stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -21.26
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  974
  993
  1,016
  1,042
  1,072
  1,104
  1,140
  1,179
  1,221
  1,266
  1,315
  1,367
  1,422
  1,481
  1,544
  1,610
  1,681
  1,756
  1,835
  1,918
  2,006
  2,099
  2,197
  2,301
  2,410
  2,524
  2,645
  2,772
  2,906
  3,047
  3,195
Variable operating expenses, $m
 
  155
  159
  163
  167
  172
  178
  184
  190
  197
  205
  213
  222
  231
  241
  251
  262
  274
  286
  299
  313
  327
  342
  358
  375
  393
  412
  432
  453
  475
  498
Fixed operating expenses, $m
 
  813
  833
  854
  875
  897
  920
  943
  966
  990
  1,015
  1,040
  1,066
  1,093
  1,120
  1,149
  1,177
  1,207
  1,237
  1,268
  1,299
  1,332
  1,365
  1,399
  1,434
  1,470
  1,507
  1,545
  1,583
  1,623
  1,663
Total operating expenses, $m
  963
  968
  992
  1,017
  1,042
  1,069
  1,098
  1,127
  1,156
  1,187
  1,220
  1,253
  1,288
  1,324
  1,361
  1,400
  1,439
  1,481
  1,523
  1,567
  1,612
  1,659
  1,707
  1,757
  1,809
  1,863
  1,919
  1,977
  2,036
  2,098
  2,161
Operating income, $m
  11
  26
  25
  26
  29
  35
  42
  52
  64
  78
  95
  113
  134
  157
  183
  211
  242
  276
  312
  352
  394
  440
  490
  543
  600
  661
  726
  796
  870
  949
  1,034
EBITDA, $m
  270
  292
  297
  305
  316
  330
  348
  368
  391
  417
  446
  479
  514
  553
  596
  642
  692
  745
  803
  865
  931
  1,002
  1,078
  1,159
  1,245
  1,336
  1,434
  1,538
  1,648
  1,765
  1,889
Interest expense (income), $m
  4
  1
  3
  5
  7
  10
  13
  16
  19
  23
  27
  32
  36
  41
  47
  52
  58
  64
  71
  78
  86
  94
  102
  111
  120
  130
  140
  151
  162
  174
  187
Earnings before tax, $m
  -16
  24
  22
  21
  22
  25
  30
  36
  45
  55
  67
  82
  98
  116
  136
  159
  184
  211
  241
  273
  309
  347
  388
  432
  480
  531
  586
  645
  708
  775
  847
Tax expense, $m
  36
  7
  6
  6
  6
  7
  8
  10
  12
  15
  18
  22
  26
  31
  37
  43
  50
  57
  65
  74
  83
  94
  105
  117
  130
  143
  158
  174
  191
  209
  229
Net income, $m
  -46
  18
  16
  15
  16
  18
  22
  27
  33
  40
  49
  60
  71
  85
  100
  116
  134
  154
  176
  200
  225
  253
  283
  316
  350
  388
  428
  471
  517
  566
  618

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  432
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  2,925
  2,541
  2,599
  2,666
  2,741
  2,824
  2,915
  3,015
  3,122
  3,238
  3,362
  3,495
  3,637
  3,788
  3,949
  4,119
  4,299
  4,490
  4,693
  4,906
  5,131
  5,369
  5,620
  5,885
  6,163
  6,457
  6,765
  7,091
  7,433
  7,793
  8,171
Adjusted assets (=assets-cash), $m
  2,493
  2,541
  2,599
  2,666
  2,741
  2,824
  2,915
  3,015
  3,122
  3,238
  3,362
  3,495
  3,637
  3,788
  3,949
  4,119
  4,299
  4,490
  4,693
  4,906
  5,131
  5,369
  5,620
  5,885
  6,163
  6,457
  6,765
  7,091
  7,433
  7,793
  8,171
Revenue / Adjusted assets
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
  0.391
Average production assets, $m
  1,772
  1,807
  1,849
  1,896
  1,950
  2,009
  2,074
  2,144
  2,221
  2,303
  2,391
  2,486
  2,587
  2,694
  2,808
  2,929
  3,058
  3,194
  3,337
  3,489
  3,650
  3,819
  3,997
  4,185
  4,383
  4,592
  4,812
  5,043
  5,286
  5,542
  5,812
Working capital, $m
  781
  386
  395
  406
  417
  430
  443
  459
  475
  492
  511
  532
  553
  576
  601
  626
  654
  683
  714
  746
  780
  817
  855
  895
  937
  982
  1,029
  1,078
  1,131
  1,185
  1,243
Total debt, $m
  46
  38
  65
  96
  131
  170
  212
  259
  309
  363
  421
  483
  549
  620
  695
  775
  859
  948
  1,042
  1,142
  1,247
  1,358
  1,476
  1,599
  1,729
  1,866
  2,010
  2,162
  2,322
  2,490
  2,667
Total liabilities, $m
  1,195
  1,187
  1,214
  1,245
  1,280
  1,319
  1,361
  1,408
  1,458
  1,512
  1,570
  1,632
  1,698
  1,769
  1,844
  1,924
  2,008
  2,097
  2,191
  2,291
  2,396
  2,507
  2,625
  2,748
  2,878
  3,015
  3,159
  3,311
  3,471
  3,639
  3,816
Total equity, $m
  1,730
  1,354
  1,385
  1,421
  1,461
  1,505
  1,554
  1,607
  1,664
  1,726
  1,792
  1,863
  1,939
  2,019
  2,105
  2,195
  2,292
  2,393
  2,501
  2,615
  2,735
  2,862
  2,996
  3,136
  3,285
  3,441
  3,606
  3,779
  3,962
  4,154
  4,355
Total liabilities and equity, $m
  2,925
  2,541
  2,599
  2,666
  2,741
  2,824
  2,915
  3,015
  3,122
  3,238
  3,362
  3,495
  3,637
  3,788
  3,949
  4,119
  4,300
  4,490
  4,692
  4,906
  5,131
  5,369
  5,621
  5,884
  6,163
  6,456
  6,765
  7,090
  7,433
  7,793
  8,171
Debt-to-equity ratio
  0.027
  0.030
  0.050
  0.070
  0.090
  0.110
  0.140
  0.160
  0.190
  0.210
  0.240
  0.260
  0.280
  0.310
  0.330
  0.350
  0.370
  0.400
  0.420
  0.440
  0.460
  0.470
  0.490
  0.510
  0.530
  0.540
  0.560
  0.570
  0.590
  0.600
  0.610
Adjusted equity ratio
  0.521
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533
  0.533

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -46
  18
  16
  15
  16
  18
  22
  27
  33
  40
  49
  60
  71
  85
  100
  116
  134
  154
  176
  200
  225
  253
  283
  316
  350
  388
  428
  471
  517
  566
  618
Depreciation, amort., depletion, $m
  259
  266
  272
  279
  287
  296
  305
  316
  327
  339
  352
  366
  380
  396
  413
  431
  450
  470
  491
  513
  537
  562
  588
  615
  645
  675
  708
  742
  777
  815
  855
Funds from operations, $m
  166
  284
  288
  294
  303
  314
  327
  342
  359
  379
  401
  425
  452
  481
  513
  547
  584
  624
  667
  713
  762
  815
  871
  931
  995
  1,063
  1,136
  1,213
  1,294
  1,381
  1,473
Change in working capital, $m
  -61
  8
  9
  10
  11
  13
  14
  15
  16
  18
  19
  20
  22
  23
  24
  26
  27
  29
  31
  32
  34
  36
  38
  40
  42
  45
  47
  49
  52
  55
  58
Cash from operations, $m
  227
  268
  279
  284
  292
  301
  313
  327
  343
  361
  382
  405
  430
  458
  488
  521
  556
  595
  636
  680
  728
  779
  833
  891
  953
  1,019
  1,089
  1,163
  1,242
  1,326
  1,415
Maintenance CAPEX, $m
  0
  -261
  -266
  -272
  -279
  -287
  -295
  -305
  -315
  -327
  -339
  -352
  -366
  -380
  -396
  -413
  -431
  -450
  -470
  -491
  -513
  -537
  -562
  -588
  -615
  -645
  -675
  -708
  -742
  -777
  -815
New CAPEX, $m
  -284
  -35
  -42
  -48
  -53
  -59
  -65
  -71
  -76
  -82
  -88
  -95
  -101
  -107
  -114
  -121
  -128
  -136
  -144
  -152
  -160
  -169
  -178
  -188
  -198
  -209
  -220
  -231
  -243
  -256
  -269
Cash from investing activities, $m
  -317
  -296
  -308
  -320
  -332
  -346
  -360
  -376
  -391
  -409
  -427
  -447
  -467
  -487
  -510
  -534
  -559
  -586
  -614
  -643
  -673
  -706
  -740
  -776
  -813
  -854
  -895
  -939
  -985
  -1,033
  -1,084
Free cash flow, $m
  -90
  -27
  -28
  -35
  -41
  -45
  -47
  -49
  -49
  -47
  -45
  -41
  -36
  -30
  -22
  -13
  -3
  9
  23
  38
  54
  73
  93
  115
  139
  165
  194
  224
  257
  293
  331
Issuance/(repayment) of debt, $m
  -15
  22
  27
  31
  35
  39
  43
  46
  50
  54
  58
  62
  66
  71
  75
  80
  84
  89
  94
  100
  105
  111
  117
  123
  130
  137
  144
  152
  160
  168
  177
Issuance/(repurchase) of shares, $m
  1
  0
  32
  40
  46
  50
  53
  55
  56
  55
  53
  50
  46
  40
  33
  24
  15
  3
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -14
  22
  59
  71
  81
  89
  96
  101
  106
  109
  111
  112
  112
  111
  108
  104
  99
  92
  94
  100
  105
  111
  117
  123
  130
  137
  144
  152
  160
  168
  177
Total cash flow (excl. dividends), $m
  -117
  -6
  -1
  -4
  -6
  -6
  -5
  -2
  2
  7
  13
  21
  30
  41
  53
  66
  82
  98
  117
  137
  160
  184
  210
  239
  269
  302
  338
  376
  417
  461
  508
Retained Cash Flow (-), $m
  114
  -26
  -31
  -36
  -40
  -44
  -49
  -53
  -57
  -62
  -66
  -71
  -76
  -81
  -86
  -91
  -96
  -102
  -108
  -114
  -120
  -127
  -134
  -141
  -148
  -156
  -165
  -173
  -182
  -192
  -202
Prev. year cash balance distribution, $m
 
  402
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  370
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  9
  24
  39
  57
  76
  98
  121
  146
  173
  203
  235
  269
  306
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  355
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  2
  4
  5
  6
  6
  6
  6
  6
  5
  4
  4
  3
  2
Current shareholders' claim on cash, %
  100
  100.0
  97.1
  93.8
  90.2
  86.5
  82.8
  79.3
  76.0
  73.0
  70.3
  67.9
  65.9
  64.3
  63.0
  62.1
  61.6
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5
  61.5

Dominion Diamond Corporation engages in the mining and marketing of rough diamonds. It operates through Diavik Diamond Mine and Ekati Diamond Mine segments. The company holds an 88.9% ownership interest in the Ekati group of mineral claims, as well as a 65.3% ownership interest in other reserves; and a 40% ownership interest in the Diavik group of mineral claims located at Lac de Gras in Northwest Territories, Canada. It produces, sorts, and sells rough diamonds in North America, Europe, and India. The company was formerly known as Harry Winston Diamond Corporation and changed its name to Dominion Diamond Corporation in March 2013. Dominion Diamond Corporation was founded in 1980 and is headquartered in Yellowknife, Canada.

FINANCIAL RATIOS  of  Dominion Diamond Corporation (DDC)

Valuation Ratios
P/E Ratio -30.9
Price to Sales 1.5
Price to Book 0.8
Price to Tangible Book
Price to Cash Flow 6.3
Price to Free Cash Flow -25
Growth Rates
Sales Growth Rate -21.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 25.1%
Cap. Spend. - 3 Yr. Gr. Rate 30.2%
Financial Strength
Quick Ratio 14
Current Ratio 0.1
LT Debt to Equity 0.9%
Total Debt to Equity 2.7%
Interest Coverage -3
Management Effectiveness
Return On Assets -1.1%
Ret/ On Assets - 3 Yr. Avg. 7.6%
Return On Total Capital -2.5%
Ret/ On T. Cap. - 3 Yr. Avg. 15.4%
Return On Equity -2.6%
Return On Equity - 3 Yr. Avg. 15.8%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 7.2%
Gross Margin - 3 Yr. Avg. 15.4%
EBITDA Margin 25.4%
EBITDA Margin - 3 Yr. Avg. 28.4%
Operating Margin 1.1%
Oper. Margin - 3 Yr. Avg. 9.9%
Pre-Tax Margin -1.6%
Pre-Tax Margin - 3 Yr. Avg. 5.8%
Net Profit Margin -4.7%
Net Profit Margin - 3 Yr. Avg. 22.1%
Effective Tax Rate -225%
Eff/ Tax Rate - 3 Yr. Avg. 264%
Payout Ratio -150%

DDC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the DDC stock intrinsic value calculation we used $974 million for the last fiscal year's total revenue generated by Dominion Diamond Corporation. The default revenue input number comes from 2016 income statement of Dominion Diamond Corporation. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our DDC stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for DDC is calculated based on our internal credit rating of Dominion Diamond Corporation, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Dominion Diamond Corporation.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of DDC stock the variable cost ratio is equal to 15.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $793 million in the base year in the intrinsic value calculation for DDC stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 7.5% for Dominion Diamond Corporation.

Corporate tax rate of 27% is the nominal tax rate for Dominion Diamond Corporation. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the DDC stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for DDC are equal to 181.9%.

Life of production assets of 6.8 years is the average useful life of capital assets used in Dominion Diamond Corporation operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for DDC is equal to 38.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1730 million for Dominion Diamond Corporation - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 83.137 million for Dominion Diamond Corporation is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Dominion Diamond Corporation at the current share price and the inputted number of shares is $1.4 billion.


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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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