Our target price of ZAR200/share for ARM is based on a DCF-derived life of mine NPV valuation. Our DCF analysis uses a weighted average cost of capital (WACC) of 10% for the mining operations and 5% for the PGM business. Our NPV is calculated based on real, long-term equilibrium commodity prices. We believe this is appropriate, given the geographic location of the industrial assets, volatility of the cash flows through the cycle, and project capex, which at times can be front-loaded.

We see the following key risks to our target price:

Geographic risks: The asset base is in South Africa, which has historically seen increasing operating risks (power availability, labour unrest).

Labour unrest: Wage negotiations have been challenging in South Africa, driving the underlying labour cost inflation higher for mining companies.

Commodity and currency risk: The risk of commodity prices moving ahead or behind vs our base case forecasts is a key risk. This risk is somewhat mitigated, given ARM has exposure to different commodities such as iron ore, manganese, coal, PGMs, and gold. Currency fluctuations present a bigger risk, as ARM primarily operates in South Africa.

South Africa power outages: Power supply in South Africa has seen significant disruptions in last several years.

If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. Likewise, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target.