Ever do a search on target price analysis for stocks?  It appears that professional money managers almost always set target prices, but individual investors almost never do. 

The link at the bottom gives a method for determining a target price:

• estimate the sales in the target year
• estimate the profit margin
• calculate the earnings and convert to earnings per share
• compute target prices based on likely P/E ratios

Northern Orion is a copper and gold producing company through its 1/8th interest in the highly profitable Alumbrera mine, giving Northern Orion about $150 million of operating cash per year.  In Q2/06 the cash flow for a 1/8th mine was a whopping $56 million when copper prices peaked, so the $150 million figure is about 2/3rds of the peak amount.  There have been marginal improvements to the mine (8% increase through the mill).  This mine has about 10 years of life left.  Additionally, Northern Orion has $180 million in the bank, outstanding warrants that when cashed would generate another $160 million, and a fully diluted market cap of less than $900 million.

Northern Orion is in the process of applying for permits for building a mine on its other property, Agua Rica.  This is the gem of Northern Orion, and this is what makes it a gem:

• 100% owned by Northern Orion.
• Drill defined metal inventory of 21.8 billion pounds of copper, 13 million ounces of gold, and 1.7 billion pounds of molybdenum.
• A feasibility study that prices out the cost of building a new mine, the cost of production and the rate of production for a 23 year mine.

At today's metal prices of $625 for gold, $3.10 for copper and $25 for molybdenum, the value of the minable metals is a whopping $118 billion.  Somebody check my math.  This is 131 times the market cap.

At long term bearish price estimates of $425 for gold, $1.50 for copper and $7 for molybdenum you get $45 billion, about 50 times the market cap.

But that doesn't give a target price.

Northern Orion has strong financials.  The mine will cost about $2 billion to build, and is projected to be built in 3 years, giving production for 2010.  In that 3 years Northern Orion will have about an extra $200 million from operations, along with the $180 million in the bank and the $160 million from warrants, or about 1/2 billion dollars.  The financials are strong enough that it is likely financing without share dilution can be arrange.

Cash flow from the new mine:

	Bearish	$ Millions	Mid-Priced	$ Millions	Today's Prices	$ Millions
Copper (368 m lbs)	$1.50	$552.0	$2.25	$828.0	$3.10	$1,140.8
Gold (135,000 oz)	$425	$57.4	$500	$67.5	$625	$84.4
Molybdenum (15.4 m lbs)	$7	$107.8	$12	$184.8	$25	$385.0
Total		$717.2		$1,080.3		$1,610.2

Production costs are $220 million per year.

Bearish Price Target: $12.40

So, just how bad is bearish? 

Total cash flow including Alumbrera would be about $790 million, less the production costs would be $570 million to pay taxes and and a $1.5 billion dollar loan.  With interest charges of $150 million the first year and taxes of $168 million, it would take about 5 years to pay back the loan.  After that earnings after taxes would be around $350 million, and earnings per share would be $1.55/share.  At a PE of 8 (12.5% earnings), that would give an 8 year, debt-free, target price of $12.40 US, an average increase of 15% per year or overall about 210%.  Not stellar, but you wouldn't exactly be losing your money either.  Market cap: $2.8 billion.

The Middle Road: $18.90

Total cash flow including the Alumbrera mine would be about $1,220 million, which after production costs would leave $1 billion for taxes and loan repayment.  The loan would be paid off in just over 2 years.  After taxes, there would be about $600 million for earnings, or about $2.70/share.  These prices would be somewhat vunerable to see earnings decline, so I'd go for a P/E of 7 (14% earnings) instead of 8, for a target price of $18.90 in 5 years, or an average increase of 36% per year, or an overall increase of about 370%.  Market cap: $4.2 billion.

Today's Prices: $28.60

At today's prices the mine would be paid back in just over a year.  With Alumbrera, total cash flow would be about $1.75 billion  The earnings after taxes would be over $1 billion.  The earnings per share would be about $4.75.  I'd only give it a P/E of 6 (17% earnings), so a target price of $28.60 in 4 years, about 615% increase.  Market cap: $6.3 billion.

The Long Term

Northern Orion will have excellent cash flow for exploration, acquiring replacement properties, and financing new development, but it will never again have the opportunity for stellar growth relative to its size like it has now.  With the long life of the mine they have the opportunity to take their time acquiring new properties at economical prices.

http://www.winninginvesting.com/how_to_set_target_prices.htm
http://www.northernorion.com/s/AguaRica.asp