how to value an exploration project

8/10/2019 How to Value an Exploration Project

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How to Value an Exploration ProjectHow to Value an Exploration Project

RichardRichard SchoddeSchoddeManagerManager -- Risk Capital AnalysisRisk Capital Analysis

WMC Resources LtdWMC Resources Ltd

Minerals Exploration Branch ConferenceMinerals Exploration Branch ConferenceChina Mining AssociationChina Mining Association

KunmingKunming : 13 December 2002: 13 December 2002

How to Value anHow to Value an

Exploration ProjectExploration Project


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How to Value an Exploration ProjectHow to Value an Exploration Project 2

OverviewOverview

1/ Why do we need Valuations ?

2/ How should the Valuation be done ?Recommend using a standardised approach.In Australia we use the ValminCode of Practice

3/ Recent Trends in the Valuation of ExplorationProjects in AustraliaExamples of the types of valuations used for projects

4/ Important Valuation Issues for Foreign

Companies working in ChinaSuggestions on how to improve the value of yourexploration project

1/ Why do we need Valuations ?1/ Why do we need Valuations ?

2/2/ How should the ValuationHow should the Valuation be done ?be done ?Recommend using aRecommend using a standardisedstandardised approach.approach.In Australia we use theIn Australia we use the ValminValminCode of PracticeCode of Practice

3/ Recent Trends in the Valuation of Exploration3/ Recent Trends in the Valuation of ExplorationProjects in AustraliaProjects in AustraliaExamples of the types of valuations used for projectsExamples of the types of valuations used for projects

4/ Important Valuation Issues for Foreign4/ Important Valuation Issues for ForeignCompanies working in ChinaCompanies working in ChinaSuggestions on how to improve the value of yourSuggestions on how to improve the value of yourexploration projectexploration project


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1/ Why do we need Valuations ?1/ Why do we need Valuations ?

Valuations are important because they :

n Are used to determine the sale price of an explorationproject

n Set the relative contributions for each of the partners in aJoint Venture project

n

Help confirm that a proposed exploration project is ofvalue (ie that the benefits exceed the cost of doing theexploration)

Valuations are important because they :Valuations are important because they :

nn Are used to determine the sale price of an explorationAre used to determine the sale price of an exploration

projectproject

nn Set the relative contributions for each of the partners in aSet the relative contributions for each of the partners in a

Joint Venture projectJoint Venture project

nn Help confirm that a proposed exploration project is ofHelp confirm that a proposed exploration project is of

value (value (ieie that the benefits exceed the cost of doing thethat the benefits exceed the cost of doing theexploration)exploration)


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The importance of Using aStandardised System for Valuations

The importance of Using aStandardised System for Valuations

n Improves the confidence in the numbers

generated are reliable

n Encourages foreign investment in the industry

n Enables Chinese companies to work overseas

nn Improves the confidence in the numbersImproves the confidence in the numbers

generated are reliablegenerated are reliable

nn Encourages foreign investment in the industryEncourages foreign investment in the industry

nn Enables Chinese companies to work overseasEnables Chinese companies to work overseas

Advantages to China from using an internationallyAdvantages to China from using an internationallyaccepted valuation system are it :accepted valuation system are it :


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International Valuation ApproachesInternational Valuation Approaches

n United States : Uses the Uniform Standards of

Professional Appraisal (USPAP) mainly designed forvaluing Real Estate, not mineral projects

n Australia : VALMINCode, was developed by theAustralasian Institute of Mining and Metallurgy in 1995

is presently the only valuation standard in the worldspecifically designed for mineral assets

n Canada : Canadian Institute of Mining will release itsCIMValin 2003 (it is largely based on the VALMIN Code)

n South Africa : South African Institute of Mining andMetallurgy is currently developing SAMVAL . It is based onelements of VALMINand CIMVal

nn United States :United States : Uses the Uniform Standards ofUses the Uniform Standards of

Professional Appraisal (Professional Appraisal (USPAPUSPAP) mainly designed for) mainly designed forvaluing Real Estate, not mineral projectsvaluing Real Estate, not mineral projects

nn Australia :Australia : VALMINVALMINCode, was developed by theCode, was developed by theAustralasian Institute of Mining and Metallurgy in 1995Australasian Institute of Mining and Metallurgy in 1995

is presently the only valuation standard in the world is presently the only valuation standard in the worldspecifically designed for mineral assetsspecifically designed for mineral assets

nn Canada :Canada : Canadian Institute of Mining will release itsCanadian Institute of Mining will release itsCIMValCIMValin 2003 (it is largely based on the VALMIN Code)in 2003 (it is largely based on the VALMIN Code)

nn South Africa :South Africa : South African Institute of Mining andSouth African Institute of Mining andMetallurgy is currently developingMetallurgy is currently developing SAMVALSAMVAL . It is based on. It is based onelements ofelements of VALMINVALMINandand CIMValCIMVal


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VALMIN CodeVALMIN Code

VALMINCode provides general rules on the :

n Purpose and type of reports to be produced

n

Qualifications required for the valuern Preferred valuation methodologies used

n Content and structure of the report

n Obligations of the company requesting the valuation

n Responsibilities of the valuer

VALMINVALMINCode provides general rules on the :Code provides general rules on the :

nn Purpose and type of reports to be producedPurpose and type of reports to be produced

nn

Qualifications required for theQualifications required for the valuervaluernn Preferred valuation methodologies usedPreferred valuation methodologies used

nn Content and structure of the reportContent and structure of the report

nn Obligations of the company requesting the valuationObligations of the company requesting the valuation

nn Responsibilities of theResponsibilities of the valuervaluer


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Four Requirements of the VALMIN CodeFour Requirements of the VALMIN Code

1/ Transparencyn Study needs to explain how the valuation was done,

and the methods and assumptions used (so that otherpeople can replicate the results)

2/ Materialityn The valuation must include all of the important

information about the project

3/ Competencen The valuer must have a high level of expertise in the

commodity being evaluated

4/ Independencen The valuer must not receive any beneficial interest in

the outcome of the studyn The price set must be at fair market value

1/ Transparency1/ Transparencynn Study needs to explain how the valuation was done,Study needs to explain how the valuation was done,

and the methods and assumptions used (so that otherand the methods and assumptions used (so that otherpeople can replicate the results)people can replicate the results)

2/ Materiality2/ Materialitynn The valuation must include all of the importantThe valuation must include all of the important

information about the projectinformation about the project

3/ Competence3/ Competencenn TheThe valuervaluermust have a high level of expertise in themust have a high level of expertise in the

commodity being evaluatedcommodity being evaluated

4/ Independence4/ Independencenn TheThe valuervaluermust not receive any beneficial interest inmust not receive any beneficial interest in

the outcome of the studythe outcome of the studynn The price set must be at fair market valueThe price set must be at fair market value


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2/ How should the Valuation be done ?2/ How should the Valuation be done ?

n The VALMIN Code does not specify which valuationmethodology should be used. It leaves the decisionto the valuer.n However, the valuer must state the reasons why he chose

the particular methodology used

n The choice of methodology depends on theavailable data and the exploration stage for theproject

n Recommend using alternate methodologiesn Use them to validate the preferred value

nn TheThe VALMINVALMIN Code does not specify which valuationCode does not specify which valuation

methodology should be used. It leaves the decisionmethodology should be used. It leaves the decisionto theto the valuervaluer..nn However, theHowever, the valuervaluermust state the reasons why he chosemust state the reasons why he chose

the particular methodology usedthe particular methodology used

nn The choice of methodology depends on theThe choice of methodology depends on theavailable data and the exploration stage for theavailable data and the exploration stage for theprojectproject

nn Recommend using alternate methodologiesRecommend using alternate methodologiesnn Use them to validate the preferred valueUse them to validate the preferred value



Common Valuation MethodologiesCommon Valuation Methodologies

1/ Multiples of Exploration Expenditure Methodn

Value depends on how much money has been spent inthe past and/or how much will be spent on the project

2/ Joint Venture Methodn The value is related to how much the Joint Venture

partner is planning to spend on the project

3/ Geoscience Method (Kilburn Method)n Involves assessing the technical factors of the project

4/ Comparable Market Value Methodn Value is set by what other similar projects sell for

5/ Income Methodn Value is calculated from the likely future cash flows

generated from the project

1/ Multiples of Exploration Expenditure Method1/ Multiples of Exploration Expenditure Methodnn

Value depends on how much money has been spent inValue depends on how much money has been spent inthe past and/or how much will be spent on the projectthe past and/or how much will be spent on the project

2/ Joint Venture Method2/ Joint Venture Methodnn The value is related to how much the Joint VentureThe value is related to how much the Joint Venture

partner is planning to spend on the projectpartner is planning to spend on the project

3/3/ GeoscienceGeoscience Method (Kilburn Method)Method (Kilburn Method)nn Involves assessing the technical factors of the projectInvolves assessing the technical factors of the project

4/ Comparable Market Value Method4/ Comparable Market Value Methodnn Value is set by what other similar projects sell forValue is set by what other similar projects sell for

5/ Income Method5/ Income Methodnn Value is calculated from the likely future cash flowsValue is calculated from the likely future cash flows

generated from the projectgenerated from the project



Multiples of Exploration Expenditure MethodMultiples of Exploration Expenditure Method

Value is determined by how much was spent onexploration in the past plus future expenditures.The total figure is adjusted by a factor related tothe prospectivity of the area

Value is determined by how much was spent onValue is determined by how much was spent onexploration in the past plus future expenditures.exploration in the past plus future expenditures.

The total figure is adjusted by a factor related toThe total figure is adjusted by a factor related to

thethe prospectivityprospectivity of the areaof the area

This factor is called theProspectivity Enhancement Factor (PEM).

note :note :nn Only include those past expenditures that are reasonable andOnly include those past expenditures that are reasonable and

productive (productive (ieie exclude expenditures that were ineffective)exclude expenditures that were ineffective)nn Only count those future expenditures which are committed toOnly count those future expenditures which are committed to

the projectthe projectnn Only use a high PEM is the exploration results are compellingOnly use a high PEM is the exploration results are compelling



Typical Adjustment FactorsTypical Adjustment Factors

TheThe ProspectivityProspectivity Enhancement Multiplier( PEM) can range fromEnhancement Multiplier( PEM) can range from

0 to 5 but is usually in the range 0.5 to 3 .0 . The average i0 to 5 but is usually in the range 0.5 to 3 .0 . The average is ~1.8s ~1.8

Have already found a substantial resource (that is likely to lead to a mine). Furtherexploration is likely to lead to an increase in the size and quality of the resource

x3.0

Exploration is well advanced and limited in-fill drilling is likely to define a resourcex2.5

The leases contain a defined drill target with signi ficant geochemical intersectionsx2.0

Have direct evidence of an interesting target. Further work is warranted to evaluatethe targetx1.5

Existing data is suffi cient to warrant further explorationx1.0

Previous exploration indicates that the area has limited potential for a major discoveryx0.5

Multiplier

SimplifiedExample



Joint Venture MethodJoint Venture Method

Value is directly related to how much the Joint

Venture partner will spend on exploration to earnhis interest in the project.

Value is directly related to how much the JointValue is directly related to how much the Joint

Venture partner will spend on exploration to earnVenture partner will spend on exploration to earnhis interest in the project.his interest in the project.

Value of 100% = (Exploration Expenditures)

of Project

(Equity share for JV Partner)and

Remaining Value = (Value of 100% of Project) x (Owners Equity Share)

to Original Owner

Note :Note : Need to adjust the value for delay in when the moneyNeed to adjust the value for delay in when the moneyis spent (timeis spent (time--valuevalue--ofof--money) as well as the likelihoodmoney) as well as the likelihoodthat the JV partner will continue to fund the projectthat the JV partner will continue to fund the project



Joint Venture Method : Worked ExampleJoint Venture Method : Worked Example

Company A is prepared to spend $2m over 4 years to earn a 60% equity share in an

exploration project currently owned by Company B.

Assume 33% Probabi li ty of the project going to completion and (say) a 18% discount fordelayed payments

Value of 100% = ($2m) x 33% x (1-0.18) = $0.90mof Project ------

60%

and

Remaining Value = ($0.90m) x 40% = $0.36m

to Company B



Geoscience MethodGeoscience Method

Was originally developed by Kilburn in 1990 tosystematically assess the physical attributes of theexploration property using a scoring system

The score is adjusted for local market conditionsand then multiplied against a standard cost($ per km2) for a typical exploration project

Was originally developed by Kilburn in 1990 toWas originally developed by Kilburn in 1990 to

systematically assess the physical attributes of thesystematically assess the physical attributes of the

exploration property using a scoring systemexploration property using a scoring system

The score is adjusted for local market conditionsThe score is adjusted for local market conditions

and then multiplied against a standard costand then multiplied against a standard cost

($ per km($ per km22) for a typical exploration project) for a typical exploration project

This value is called the Basic Acquisition Cost (BAC), and refersto the typical average cost incurred to acquire a tenement andpay all Government charges for the for next 12 months



Kilburn Rating CriteriaKilburn Rating Criteria

Generally favourable

Lithologyon 25% of the

Lease area

Extensive previous

exploration gave poor

results

0.5

Several Ore GradeDrill Intersections

Historic production>500,000 ounces

Historic production>1 million ounces

5.0



3.5

Generally Favourable

Lithologywith structures

Several well defined

targets

Several old workings on

the leases

Several old workings in

district2.0

Generally Favourable

Lithology (70% Lease)

No Targets outlinedNo knownmineralisation

on the leases

No knownmineralisation

in district1.0


Lithology (50% Lease)

0.9

Unfavourable Lithology0.1

GeologicalFactor

AnomalyFactor

On-PropertyFactor

Off-PropertyFactor

Rating

SimplifiedExample



Geoscience Method :Worked Example

Geoscience Method :Worked Example

Company A has 220 km2 of exploration leases, in a district with known historicalproduction of 200,000oz of gold. While there are several old workings on the lease,historical production was small. Also only 50% of leases has a favourable lithology andmuch of the host rocks are under cover. Some drill targets have been defined

X 0.5x 1.5x2.0x3.5


Lithologyon 25% of the

Lease area

Some Targets outlinedSeveral old workingson the leases


GeologicalFactor

AnomalyFactor

On-PropertyFactor

Off-PropertyFactor

Technical Factor = 3.5 x 2.0 x 1.5 x 0.5 = 5.25

Market Factor = 1.0

Value of Leases = 5.25 x 1.0 x A$335 /km2 x 220 km2 = $387,000

In Australia the BAC for anExploration Lease is A$335/km2



Comparable Market Value MethodComparable Market Value Method

This method uses the sales price of other other

projects in the area to determine the value of theexploration project

There are several problems with this method :n The mineral potential of your leases may be differentn Many sales do not involve cash. Instead they may be

Joint Ventures or Royalties which are difficult to valuen The sale might not be at arms-length and therefore

not be a fair price

One variation on this is the Yards t ick Methodwhere the project is valued in terms of recentsales on a $/ounce basis

This method uses the sales price of other otherThis method uses the sales price of other other

projects in the area to determine the value of theprojects in the area to determine the value of theexploration projectexploration project

There are several problems with this method :There are several problems with this method :nn The mineral potential of your leases may be differentThe mineral potential of your leases may be differentnn Many sales do not involve cash. Instead they may beMany sales do not involve cash. Instead they may be

Joint Ventures or Royalties which are difficult to valueJoint Ventures or Royalties which are difficult to valuenn The sale might not be at armsThe sale might not be at arms--length and thereforelength and therefore

not be a fair pricenot be a fair price

One variation on this is theOne variation on this is the Yards t ick MethodYards t ick Methodwhere the project is valued in terms of recentwhere the project is valued in terms of recentsales on a $/ounce basissales on a $/ounce basis



Selling Price of various Undeveloped GoldDeposits around the World : 1993-2002

Selling Price of various Undeveloped GoldDeposits around the World : 1993-2002

$0

$50

$100

$150

$200

1993 1995 1997 1999 2001 2003

$0

$50

$100

$150

$200

1993 1995 1997 1999 2001 2003

limiteddata

Weighted Average Price

Sale Price : US$/OunceSale Price : US$/Ounce

Excludes Operating Mines

US$6/oz


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Income (or NPV) MethodIncome (or NPV) Method

Value is based on the likely income that will begenerated from the mine when it is developed

The cash flow is then adjusted for capitalexpenditures and tax payments and the resulting

cash flow is discounted back to a Net Present Value

Advantage : It gives a reliable and robust valuation

Disadvantage: Need to have defined an economic orebody.Consequently, it can only be applied to advanced-stageprojects where a feasibility study has been completed

Value is based on the likely income that will beValue is based on the likely income that will begenerated from the mine when it is developedgenerated from the mine when it is developed

The cash flow is then adjusted for capitalThe cash flow is then adjusted for capitalexpenditures and tax payments and the resultingexpenditures and tax payments and the resulting

cash flow is discounted back to acash flow is discounted back to a Net Present ValueNet Present Value

Advantage :Advantage : It gives a reliable and robust valuationIt gives a reliable and robust valuation

Disadvantage:Disadvantage: Need to have defined an economicNeed to have defined an economic orebodyorebody..Consequently, it can only be applied to advancedConsequently, it can only be applied to advanced--stagestageprojects where a feasibility study has been completedprojects where a feasibility study has been completed


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Other Valuation MethodsOther Valuation Methods

n

Rule of Thumb Methodn Assign an arbitrary value ( xx$/km2)

n Empirical Methodn The Valuers Best Guess

n Statistical / Probabilistic Methodn Assess likely size and value of prize and adjust the value

for the probability of success

n Decision Tree Analysis Methodn Is a variation on the Statistical Method. Uses a range of

possible outcomes (from failure to a major success)

nn Rule of Thumb MethodRule of Thumb Methodnn Assign an arbitrary value (Assign an arbitrary value ( xxxx$/km$/km22))

nn Empirical MethodEmpirical Methodnn TheThe ValuersValuers Best GuessBest Guess

nn Statistical / Probabilistic MethodStatistical / Probabilistic Methodnn Assess likely size and value of prize and adjust the valueAssess likely size and value of prize and adjust the value

for the probability of successfor the probability of success

nn Decision Tree Analysis MethodDecision Tree Analysis Methodnn Is a variation on the Statistical Method. Uses a range ofIs a variation on the Statistical Method. Uses a range of

possible outcomes (from failure to a major success)possible outcomes (from failure to a major success)


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3/ Recent Trends in the Valuation ofExploration Projects in Australia

3/ Recent Trends in the Valuation ofExploration Projects in Australia

n Australia has a large exploration and miningindustry. Have ~20 qualified people working onvaluing exploration projects

n Companies are required to use the VALMINCodefor transactions that involve the issue of shareson the Stock Exchange

nn Australia has a large exploration and miningAustralia has a large exploration and mining

industry. Have ~20 qualified people working onindustry. Have ~20 qualified people working on

valuing exploration projectsvaluing exploration projects

nn Companies are required to use theCompanies are required to use the VALMINVALMINCodeCodefor transactions that involve the issue of sharesfor transactions that involve the issue of shareson the Stock Exchangeon the Stock Exchange


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AnalysisAnalysis

0

2

4

6

8

10

12

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

No Valuation

With Valuation

0

2

4

6

8

10

12

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

No Valuation

With Valuation

Source : ASX

Number of New Exploration CompaniesNumber of New Exploration Companies

Since VALMIN was introduced in July 1995, 107 newSince VALMIN was introduced in July 1995, 107 new

Mineral Exploration Companies have been listed on theMineral Exploration Companies have been listed on theAustralian Stock Exchange several of these usedAustralian Stock Exchange several of these used

independentindependent valuersvaluers to assess their exploration projects.to assess their exploration projects.

No Data


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Exploration ProjectsExploration Projects

0

20

40

60

80

100

0

20

40

60

80

100

Number of ProjectsNumber of Projects

IdentifyIdentifyAnomaliesAnomalies

ResourceResourceDrillingDrilling

DrillDrillTargetTarget

FeasibilityFeasibilityStudyStudy

Based on a review of 150 exploration

projects for 18 new Mineral ExplorationCompanies, it is clear that most projectsare at an early stage of exploration

Early StageEarly Stage Late StageLate Stage


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Valuation Method UsedValuation Method Used

0

20

40

60

80

100

Combination of Methods

Income (NPV)

Joint Venture

Comparative Sales

Empiri cal (ie Valuer's Guess)

Yardstic k (ie $/Ha or $/oz)

Geotechnical Ranking

Multiples of Exploration Expenditure

0

20

40

60

80

100


Income (NPV)

Joint Venture

Comparative Sales

Empiri cal (ie Valuer's Guess)




Number of ProjectsNumber of Projects

IdentifyIdentifyAnomaliesAnomalies

ResourceResourceDrillingDrilling

DrillDrillTargetTarget

FeasibilityFeasibilityStudyStudy

Early StageEarly Stage Late StageLate Stage


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Valuation Method Used Dependson the Stage of Exploration

Valuation Method Used Dependson the Stage of Exploration

0%

20%

40%

60%

80%

100%


Income (NPV)

Joint Venture

Comparative Sales

Empirical (ie Valuer's Guess)




0%

20%

40%

60%

80%

100%


Income (NPV)

Joint Venture

Comparative Sales

Empirical (ie Valuer's Guess)




Percentage BasisPercentage Basis

IdentifyIdentify

AnomaliesAnomaliesResourceResource

DrillingDrillingDrillDrill

TargetTargetFeasibilityFeasibility

StudyStudy

V l i id l ith th iV l i id l ith th i


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Value varies widely with the sizeof the Lease area

Value varies widely with the sizeof the Lease area

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000

Lease Area (kmLease Area (km22))

Value (A$ Million)Value (A$ Million)

11

0.010.01

0.10.1

100100

1010

(Yuan Million)(Yuan Million)

H E l St P j tH E l St P j t


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However, Early Stage Projectstend to have Lower Values

However, Early Stage Projectstend to have Lower Values

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000

Identify AnomaliesDrill TargetsResource DrillingFeasiblity Study

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000




11

0.010.01

0.10.1

100100

1010


At Gi St f E l ti Diff t


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At a Given Stage of Exploration, DifferentCommodities have Similar Values

At a Given Stage of Exploration, DifferentCommodities have Similar Values

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000

DiamondsGoldNickelPlatinumBase MetalsMulti-MetalsOther

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000




EARLY STAGE : Identify Anomalies

11

0.010.01

0.10.1

100100

1010



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Project Value for Various CommoditiesProject Value for Various Commodities

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000


0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1000 10000


STAGE : Drill Targets

11

0.010.01

0.10.1

100100

1010

(Yuan Million)(Yuan Million)Value (A$ Million)Value (A$ Million)


V l i L l R l t d t th L lV l i L l R l t d t th L l


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Value is Loosely Related to the Levelof Historical Expenditures

Value is Loosely Related to the Levelof Historical Expenditures

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100


0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100

Identify AnomaliesDrill TargetsResource Drilli ngFeasiblity Study

Historical Expenditures (A$ Million)Historical Expenditures (A$ Million)

Value (A$Million)Value (A$Million)x1

x0.2

x5Ratio of

Value/Cost

Note : Excludes unproductive Expenditures

H A t thHow Accurate are the


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How Accurate are theIndependent Valuations ?

How Accurate are theIndependent Valuations ?

The accuracy of the Independent Valuations was assessed by comparing

it against the value the Stock Market placed on the Company soon afterits shares were first listed on the Stock Exchange.

The accuracy of the Independent Valuations was assessed by comparing

it against the value the Stock Market placed on the Company soon afterits shares were first listed on the Stock Exchange.

Market Value of Exploration Projects = Share Price x Number of Shares Cash

$0

$2

$4

$6

$8

Example

Expected Value of Company

at time of Capital Raising

Market Value of company

one month after Listing

Cash Cash

IndependentValuation ofProjects

Market Valueof Projects

$3.0m $2.8m

$3.0m$2.2m

$5.0m Market Value of

the Company

I d d t V l tiIndependent Valuation


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Independent Valuationversus Market Value

Independent Valuationversus Market Value

$0

$5

$10

$15

$20

$0 $5 $10 $15 $20

$0

$5

$10

$15

$20

$0 $5 $10 $15 $20

1 MONTHAFTER LISTING

Market Value (A$m)Market Value (A$m)

Independent Valuation (A$m)Independent Valuation (A$m)

Based on 16 newlylisted Companies

between 1997-2002

Independent Value =1.40x Market Value

x1

Note: Each Company typically has

4 to 10 exploration projects

4/ I t t V l ti I f4/ Important Valuation Issues for


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4/ Important Valuation Issues forForeign Companies working in China

4/ Important Valuation Issues forForeign Companies working in China

n Have limited access to geological data to form a goodview on the prospectivity

n Required to setup Joint Ventures with local Companiesn Are unfamiliar with how to do business in China

n Not familiar with the local valuation methods used

nn Have limited access to geological data to form a goodHave limited access to geological data to form a good

view on theview on the prospectivityprospectivity

nn Required to setup Joint Ventures with local CompaniesRequired to setup Joint Ventures with local Companiesnn Are unfamiliar with how to do business in ChinaAre unfamiliar with how to do business in China

nn Not familiar with the local valuation methods usedNot familiar with the local valuation methods used

Resolving these issues will lead to better pricesfor exploration projects

Foreign Companies are reluctant to put a highForeign Companies are reluctant to put a highvalue on exploration projects because they :value on exploration projects because they :


34/36


SummarySummary

n Must recognise that valuations are not precise

n To gain confidence, it is important that the industry use astandardised approach. Australias VALMIN Code is the

most comprehensive one available

n Which ever set of rules are used, it is critical that the

methodology used is transparent, includes all relevantinformation, and is evaluated by experts who are

independent

n Several valuation techniques are available. Which one to

use depends on the quality of data available and what stageat the exploration project

nn MustMust recogniserecognise that valuations are not precisethat valuations are not precise

nn To gain confidence, it is important that the industry use aTo gain confidence, it is important that the industry use astandardisedstandardised approach. Australiasapproach. Australias VALMINVALMIN Code is theCode is the

most comprehensive one availablemost comprehensive one available

nn Which ever set of rules are used, it is critical that theWhich ever set of rules are used, it is critical that the

methodology used is transparent, includes all relevantmethodology used is transparent, includes all relevantinformation, and is evaluated by experts who areinformation, and is evaluated by experts who are

independentindependent

nn Several valuation techniques are available. Which one toSeveral valuation techniques are available. Which one to

use depends on the quality of data available and what stageuse depends on the quality of data available and what stageat the exploration projectat the exploration project


35/36


Summary .Summary .

n In Australia, early-stage projects are usually valued using

the Mult ip les o f Explorat ion Expendi turesMethod or the

GeoscienceMethod. Advanced-stage projects are best

valued using the Inc om e (NPV)Method

n Benchmarking studies indicate that the Australian

valuers tend to over-value projects by 40%n Early-stage exploration projects tend to have low values.

In Australia a project at the drill-testing stage is typically

only worth A$0.1 to $1m. Similar projects in China should

have an even lower value

nn In Australia, earlyIn Australia, early--stage projects are usually valued usingstage projects are usually valued using

thethe Mult iples of Explo rat ion ExpendituresMult iples of Explo rat ion ExpendituresMethod or theMethod or the

GeoscienceGeoscienceMethod. AdvancedMethod. Advanced--stage projects are beststage projects are best

valued using thevalued using the Inc om e (NPV)Inc om e (NPV)MethodMethod

nn Benchmarking studies indicate that the AustralianBenchmarking studies indicate that the Australian

valuersvaluers tend to overtend to over--value projects by 40%value projects by 40%nn EarlyEarly--stage exploration projects tend to have low values.stage exploration projects tend to have low values.

In Australia a project at the drillIn Australia a project at the drill--testing stage is typicallytesting stage is typically

only worth A$0.1 to $1m. Similar projects in China shouldonly worth A$0.1 to $1m. Similar projects in China should

have an even lower valuehave an even lower value


36/36

ConclusionsConclusions

n Most exploration projects are not worth much

n The low value for early-stage projects is due to the high

risk nature of exploration

n The value is further reduced if the exploration costs

are high, the JV terms are difficult or if the business risk

is highn The value / attractiveness of an exploration project in

China can be maximised by providing high quality data

on the prospectivity and by ensuring that the business

rules are transparent

nn Most exploration projects are not worth muchMost exploration projects are not worth much

nn The low value for earlyThe low value for early--stage projects is due to the highstage projects is due to the high

risk nature of explorationrisk nature of exploration

nn The value is further reduced if the exploration costsThe value is further reduced if the exploration costs

are high, the JV terms are difficult or if the business riskare high, the JV terms are difficult or if the business risk

is highis highnn The value / attractiveness of an exploration project inThe value / attractiveness of an exploration project in

China can beChina can be maximisedmaximised by providing high quality databy providing high quality data

on theon the prospectivityprospectivity and by ensuring that the businessand by ensuring that the business

rules are transparentrules are transparent

how to value an exploration project

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