an overview of valuation of mineral properties
DESCRIPTION
AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES. KEITH N. SPENCE Global Mining Corporation PDAC, Board of Directors Co - Chairman CIMVAL- Canadian Institute of Mining, Metallurgy & Petroleum. CHINA MINING, Beijing, November 14, 2007. Valuation vs. Evaluation. - PowerPoint PPT PresentationTRANSCRIPT
AN OVERVIEW OF VALUATION OF MINERAL
PROPERTIES
KEITH N. SPENCEGlobal Mining Corporation
PDAC, Board of Directors
Co - ChairmanCIMVAL- Canadian Institute of Mining, Metallurgy & Petroleum
CHINA MINING, Beijing, November 14, 2007
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GLOBAL MINING CORPORATION
Valuation vs. Evaluation
Valuation - estimation of the value or worth of the mineral property. Question: How much is a property worth in dollars ?
Evaluation - economic assessment of the mineral property generally for an investment decision, for example, a feasibility study. Question: Go or No go Decision ?
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GLOBAL MINING CORPORATION
Items to be Discussed The international Scene Reasons for a Valuation Definition of Value Valuation Tenets Types of Properties Valuation Approaches stage based valuation Primary Valuation Methods A word about Reserves and Resources Use of Mineral Resources in Income Approach Secondary Valuation Methods / Rules of Thumb Valuation Reports Some Issues with valuations Conclusion
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GLOBAL MINING CORPORATION
The International Scene
CIMVal Standards & Guidelines (TSX –Toronto Stock Exchange –Appendix G) - Canada
Australian VALMIN Code
South African proposed SAMVal Code
US Minerals Appraisals/Valuations - a patchwork of regulations
International Valuations Standards (IVS) - IVSC -Extractive Industries Guidance Note – nearing
completion
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Reasons for a Valuation
Mergers and acquisitions Non arm’s length transactions IPO pricing Stock exchange listing support Support of audited financial statements Fairness opinions for a sale or purchase of a mining
property Litigation Government expropriation Insurance claims
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Definition of Value Fair Market Value (FMV) is the standard of value.
Key elements of FMV are as follows: Both seller and buyer are willing and not under compulsion to act
The transaction is at arm’s length
Both seller and buyer are informed or have reasonable knowledge of the relevant facts
Valuation should be based on a given point in time
Other types of value include; replacement value, salvage value, book value, depreciated value, net asset value, assessed value, insured value, etc.
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Valuation Tenets
Materiality - inclusion or omission of information
that might result in different conclusion of value Transparency - information used (or excluded), the
assumptions, methodology etc, must be set out clearly, along with the rationale
Independence -the valuator must to be independent of the commissioning
entity
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Valuation Tenets Cont’d Competence -the valuator must be appropriately qualified to
conduct the required valuation”
Reasonableness -other appropriately qualified and experienced valuators would value the property at approximately
the same range
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Types of Properties Valuation depends on the stage of development of the
property
Exploration Properties Early stage exploration properties
Mineral resource properties Advanced stage exploration properties Properties with identified mineral resources Pre-feasibility stage projects Marginal development properties Past producing mines
Development properties Feasibility study completed Development planned or under construction Contain mineral reserves and mineral resources
Production properties
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Valuation Approaches
Three generally accepted approaches:
Income approach - based on principle of anticipation of benefits (usually DCF)
Market approach – based on principle of substitution
( Market Comparables)
Cost approach – based on principle of contribution to value
Valuation approach depends on the stage of exploration or development of the property
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stage based valuation
VALUATION APPROACH
EXPLORATION
PROPERTIES
MINERALRESOURCE
PROPERTIES
DEVELOPMENT
PROPERTIES
PRODUCTION
PROPERTIES
Income No In some cases
Yes Yes
Market Yes Yes Yes Yes
Cost Yes In some cases
No No
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Primary Valuation Methods
Income Approach Discounted Cash Flow Method - very widely used Option Pricing Method/Real Option Method – not widely used but
gaining in acceptance. Utilizing Black Scholes seminal work, that mining projects can be valued based on a series of options/decisions
Market Approach Comparable Transactions Method – widely used Option Agreement Terms – widely used
Cost Approach Appraised Value Method – widely used but not accepted by all
regulators Geoscience Factor Method – not widely used
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A word about Reserves and Resources
CIM, JORC & SAMREC Reserve Classifications Referenced
Mineral Resource - a mineral deposit for which quantity (tonnes) and quality (grade) can be estimated. But not demonstrated to be economic.
Measured - highest confidence category Indicated Inferred - lowest confidence category
Mineral Reserve - that part of the mineral resource that can be extracted economically.
Proven - higher confidence category Probable - lower confidence category
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Use of Mineral Resources in Income ApproachGenerally Acceptable Practices
CIM, JORC & SAMREC Reserve Classifications Referenced
Use of all proven and probable mineral reserves
Use of measured and indicated mineral resources in the following circumstances
Mineral resources are current Mineral reserves are mined ahead of resources in DCF Confirmation that the mineral resources in the DCF are likely
to be economically viable in the future Recognize higher risk of using mineral resources by
appropriate Adjustments
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Use of Mineral Resources in Income Approach Cont’d
Use of inferred mineral resources With great care Not if they are the dominant resource category Any use must be justified in and treated appropriately for the
substantially higher risk and uncertainty Reserves and other resource categories are mined ahead of
inferred resources in the DCF model Inferred resources should not be used to make the property
economically viable
Use of potential or hypothetical “resources” is not acceptable
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Secondary Valuation Methods & Rules of thumb
Rules of thumb - A good cross-check on a Valuation to test its “reasonableness”
$ per oz or lb in the ground
Value per unit of property area – used for large exploration properties
Market capitalization of company holding the mineral property – more applicable to valuation of single property junior companies
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Valuation Reports – best practice
A Valuator is ultimately responsible for: preparation of the Valuation Report and its
conclusions adhering to the principles of materiality,
transparency and reasonableness including technical input
An approved technical report can be appended to the valuation report
All mineral reserve and mineral resource estimates must be disclosed and discussed in the valuation report
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Valuation Reports –Best Practice Cont’d
List factors, critical issues, key risks and assumptions Discuss all valuations within the last 24 months Certificates of Qualifications of the valuator Statement that the valuation complies with the Standards
and Guidelines which he or she is governed by, in their entirety
Site visit should be undertaken or explain why not Use More than one Approaches/Methods
Provides Checks & Balance Valuation is Best Reported as a Range of Values Effective date of the valuation
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Some Issues with Valuations
Use of unacceptable or dubious methods
Misapplication of acceptable methods
No explanation or justification for methods used
Lack of transparency
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Conclusion
Need for International Valuation Standards & Consistency
Valuation is Stage Based
Market Comparables applicable for all stages
How Reserves/Resources are used is the key Factor in Valuation
Thank You !!
AN OVERVIEW OF VALUATION OF MINERAL
PROPERTIES
KEITH N. SPENCEGlobal Mining Corporation
PDAC, Board of Directors
Co - ChairmanCIMVAL- Canadian Institute of Mining, Metallurgy & Petroleum
CHINA MINING, Beijing, November 14, 2007