manager - risk capital analysis wmc resources ltd to value an exploration... · multiplier...

How to Value an Exploration ProjectHow to Value an Exploration Project 1

RichardRichard SchoddeSchoddeManager Manager -- Risk Capital AnalysisRisk Capital AnalysisWMC Resources LtdWMC Resources Ltd

Minerals Exploration Branch Conference Minerals Exploration Branch Conference China Mining AssociationChina Mining AssociationKunmingKunming : 13 December 2002: 13 December 2002

How to Value an How to Value an Exploration ProjectExploration Project


OverviewOverview

1/ Why do we need Valuations ?

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

3/ Recent Trends in the Valuation of Exploration Projects in Australia Examples 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 your exploration 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 ValminValmin Code of PracticeCode of Practice

3/ Recent Trends in the Valuation of Exploration 3/ Recent Trends in the Valuation of Exploration Projects in Australia Projects in Australia Examples of the types of valuations used for projects Examples of the types of valuations used for projects

4/ Important Valuation Issues for Foreign 4/ Important Valuation Issues for Foreign Companies working in ChinaCompanies working in ChinaSuggestions on how to improve the value of your Suggestions on how to improve the value of your exploration projectexploration project


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 exploration project

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

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

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

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

nn Set the relative contributions for each of the partners in a Set the relative contributions for each of the partners in a Joint Venture projectJoint Venture project

nn Help confirm that a proposed exploration project is of Help confirm that a proposed exploration project is of value (value (ieie that the benefits exceed the cost of doing the that the benefits exceed the cost of doing the exploration)exploration)


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 numbers Improves 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 internationally Advantages to China from using an internationally accepted valuation system are it : accepted valuation system are it :


International Valuation ApproachesInternational Valuation Approaches

n United States : Uses the Uniform Standards of Professional Appraisal (USPAP) … mainly designed for valuing Real Estate, not mineral projects

n Australia : VALMIN Code, was developed by the Australasian Institute of Mining and Metallurgy in 1995… is presently the only valuation standard in the world specifically designed for mineral assets

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

n South Africa : South African Institute of Mining and Metallurgy is currently developing SAMVAL. It is based on elements of VALMIN and CIMVal

nn United States :United States : Uses the Uniform Standards of Uses the Uniform Standards of Professional Appraisal (Professional Appraisal (USPAPUSPAP) … mainly designed for ) … mainly designed for valuing Real Estate, not mineral projectsvaluing Real Estate, not mineral projects

nn Australia :Australia : VALMINVALMIN Code, was developed by the Code, was developed by the Australasian 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 world specifically designed for mineral assetsspecifically designed for mineral assets

nn Canada :Canada : Canadian Institute of Mining will release itsCanadian Institute of Mining will release itsCIMValCIMVal in 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 and South African Institute of Mining and Metallurgy is currently developing Metallurgy is currently developing SAMVALSAMVAL. It is based on . It is based on elements of elements of VALMINVALMIN andand CIMValCIMVal


VALMIN CodeVALMIN Code

VALMIN Code provides general rules on the :

n Purpose and type of reports to be producedn Qualifications required for the valuern Preferred valuation methodologies usedn Content and structure of the reportn Obligations of the company requesting the valuationn Responsibilities of the valuer

VALMINVALMIN Code 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 producednn Qualifications required for theQualifications required for the valuervaluernn Preferred valuation methodologies usedPreferred valuation methodologies usednn Content and structure of the reportContent and structure of the reportnn Obligations of the company requesting the valuationObligations of the company requesting the valuationnn Responsibilities of theResponsibilities of the valuervaluer


Four Requirements of the VALMIN CodeFour Requirements of the VALMIN Code1/ Transparency

n Study needs to explain how the valuation was done, and the methods and assumptions used (so that other people can replicate the results)

2/ Materialityn The valuation must include all of the important

information about the project3/ Competence

n The valuer must have a high level of expertise in the commodity being evaluated

4/ Independence n The valuer must not receive any beneficial interest in

the outcome of the study n 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 other and the methods and assumptions used (so that other people can replicate the results)people can replicate the results)

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

information about the projectinformation about the project3/ Competence3/ Competence

nn TheThe valuervaluer must have a high level of expertise in the must have a high level of expertise in the commodity being evaluatedcommodity being evaluated

4/ Independence 4/ Independence nn TheThe valuervaluer must not receive any beneficial interest in must not receive any beneficial interest in

the outcome of the study the outcome of the study nn The price set must be at “fair market value”The price set must be at “fair market value”


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

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

the particular methodology used

n The choice of methodology depends on the available data and the exploration stage for the project

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

nn The The VALMIN VALMIN Code does not specify which valuation Code does not specify which valuation methodology should be used. It leaves the decision methodology should be used. It leaves the decision to theto the valuervaluer. . nn However, theHowever, the valuervaluer must state the reasons why he chose must state the reasons why he chose

the particular methodology usedthe particular methodology used

nn The choice of methodology depends on the The choice of methodology depends on the available data and the exploration stage for the available data and the exploration stage for the project project

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


Common Valuation MethodologiesCommon Valuation Methodologies1/ Multiples of Exploration Expenditure Method

n Value depends on how much money has been spent in the 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 in Value depends on how much money has been spent in

the 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 Venture The 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 project Involves 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 flows Value 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 on exploration in the past plus future expenditures. The total figure is adjusted by a factor related to the prospectivity of the area

Value is determined by how much was spent on Value is determined by how much was spent on exploration in the past plus future expenditures. exploration in the past plus future expenditures. The total figure is adjusted by a factor related to The total figure is adjusted by a factor related to thethe prospectivityprospectivity of the area of the area

This factor is called theProspectivity Enhancement Factor (PEM).

note :note :nn Only include those past expenditures that are reasonable and Only 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 to Only 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 FactorsTheThe ProspectivityProspectivity Enhancement Multiplier( PEM) can range from Enhancement 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). Further exploration 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 significant geochemical intersectionsx2.0

Have direct evidence of an interesting target. Further work is warranted to evaluate the target

x1.5

Existing data is sufficient to warrant further explorationx1.0

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

Simplified Example


Joint Venture MethodJoint Venture Method

Value is directly related to how much the Joint Venture partner will spend on exploration to earn his interest in the project.

Value is directly related to how much the Joint Value is directly related to how much the Joint Venture partner will spend on exploration to earn Venture partner will spend on exploration to earn his 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 (Owner’s Equity Share) to Original Owner

Note :Note : Need to adjust the value for delay in when the money Need to adjust the value for delay in when the money is spent (timeis spent (time--valuevalue--ofof--money) as well as the likelihood money) as well as the likelihood that 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% Probability of the project going to completion and (say) a 18% discount for delayed payments

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

60%and …

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


Geoscience MethodGeoscience Method

Was originally developed by Kilburn in 1990 to systematically assess the physical attributes of the exploration property using a scoring system

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

Was originally developed by Kilburn in 1990 to Was originally developed by Kilburn in 1990 to systematically assess the physical attributes of the systematically assess the physical attributes of the exploration property using a scoring system exploration property using a scoring system

The score is adjusted for local market conditions The score is adjusted for local market conditions and then multiplied against a standard cost and 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 refers to the typical average cost incurred to acquire a tenement and pay all Government charges for the for next 12 months


Kilburn Rating CriteriaKilburn Rating Criteria

Generally favourable Lithology on 25% of the Lease area

Extensive previous exploration gave poor results

0.5

Several Ore Grade Drill Intersections

Historic production >500,000 ounces

Historic production >1 million ounces

5.0



3.5

Generally Favourable Lithology with structures

Several well defined targets

Several old workings on the leases

Several old workings in district

2.0

Generally Favourable Lithology (70% Lease)

No Targets outlinedNo known mineralisationon the leases

No known mineralisationin district

1.0

Generally favourable Lithology (50% Lease)

0.9

Unfavourable Lithology0.1

GeologicalFactor

AnomalyFactor

On-PropertyFactor

Off-PropertyFactor

Rating

Simplified Example


Geoscience Method : Worked Example

Geoscience Method : Worked Example

Company A has 220 km2 of exploration leases, in a district with known historical production 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 and much of the host rocks are under cover. Some drill targets have been defined

X 0.5x 1.5x2.0x3.5

Generally favourable Lithology on 25% of the Lease area

Some Targets outlinedSeveral old workings on 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 the exploration 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 Yardstick Method –where the project is valued in terms of recent sales on a $/ounce basis

This method uses the sales price of other other This method uses the sales price of other other projects in the area to determine the value of the projects in the area to determine the value of the exploration 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 be Many 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 therefore length” and therefore

not be a fair pricenot be a fair price

One variation on this is the One variation on this is the Yardstick MethodYardstick Method ––where the project is valued in terms of recent where the project is valued in terms of recent sales on a $/ounce basissales on a $/ounce basis


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

Selling Price of various Undeveloped Gold Deposits 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

limited data

Weighted Average Price

Sale Price : US$/OunceSale Price : US$/OunceExcludes Operating Mines

US$6/oz


Income (or NPV) MethodIncome (or NPV) Method

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

The cash flow is then adjusted for capital expenditures 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-stage projects where a feasibility study has been completed

Value is based on the likely income that will be Value is based on the likely income that will be generated from the mine when it is developedgenerated from the mine when it is developed

The cash flow is then adjusted for capital The cash flow is then adjusted for capital expenditures and tax payments and the resulting expenditures and tax payments and the resulting cash flow is discounted back to a cash 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 economic Need to have defined an economic orebodyorebody. . Consequently, it can only be applied to advancedConsequently, it can only be applied to advanced--stage stage projects where a feasibility study has been completedprojects where a feasibility study has been completed


Other Valuation MethodsOther Valuation Methods

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

n Empirical Methodn The Valuer’s “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 Valuer’sValuer’s “Best” Guess“Best” Guess

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

for the probability of success for the probability of success

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


3/ Recent Trends in the Valuation of Exploration Projects in Australia

3/ Recent Trends in the Valuation of Exploration Projects in Australia

n Australia has a large exploration and mining industry. Have ~20 qualified people working on valuing exploration projects

n Companies are required to use the VALMIN Code for transactions that involve the issue of shares on the Stock Exchange

nn Australia has a large exploration and mining Australia has a large exploration and mining industry. Have ~20 qualified people working on industry. Have ~20 qualified people working on valuing exploration projectsvaluing exploration projects

nn Companies are required to use the Companies are required to use the VALMINVALMIN Code Code for transactions that involve the issue of shares for transactions that involve the issue of shares on the Stock Exchangeon the Stock Exchange


Analysis Analysis

0

2

4

6

8

10

12

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

No ValuationWith 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 ValuationWith Valuation

Source : ASX

Number of New Exploration CompaniesNumber of New Exploration Companies

Since VALMIN was introduced in July 1995, 107 new Since VALMIN was introduced in July 1995, 107 new Mineral Exploration Companies have been listed on the Mineral Exploration Companies have been listed on the Australian Stock Exchange … several of these used Australian Stock Exchange … several of these used independentindependent valuersvaluers to assess their exploration projects.to assess their exploration projects.

No Data


Exploration ProjectsExploration Projects

0

20

40

60

80

100

0

20

40

60

80

100Number of ProjectsNumber of Projects

Identify Identify AnomaliesAnomalies

Resource Resource DrillingDrilling

Drill Drill TargetTarget

Feasibility Feasibility StudyStudy

Based on a review of 150 exploration projects for 18 new Mineral Exploration Companies, it is clear that most projects are at an early stage of exploration

Early Stage Early Stage Late StageLate Stage


Valuation Method UsedValuation Method Used

0

20

40

60

80

100Combination of Methods

Income (NPV)

Joint Venture

Comparative Sales

Empirical (ie Valuer's Guess)

Yardstick (ie $/Ha or $/oz)

Geotechnical Ranking

Multiples of Exploration Expenditure

0

20

40

60

80

100Combination of Methods

Income (NPV)

Joint Venture

Comparative Sales





Number of ProjectsNumber of Projects





Early Stage Early Stage Late StageLate Stage


Valuation Method Used Dependson the Stage of Exploration

Valuation Method Used Dependson the Stage of Exploration

0%

20%

40%

60%

80%

100%

Combination of Methods

Income (NPV)

Joint Venture

Comparative Sales





0%

20%

40%

60%

80%

100%

Combination of Methods

Income (NPV)

Joint Venture

Comparative Sales





Percentage BasisPercentage Basis






Value varies widely with the size of the Lease area

Value varies widely with the size of 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 10000Lease Area (kmLease Area (km22))

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

11

0.010.01

0.10.1

100100

1010

(Yuan Million)(Yuan Million)


However, Early Stage Projects tend to have Lower Values

However, Early Stage Projects tend 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


Lease Area (kmLease Area (km22))

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

11

0.010.01

0.10.1

100100

1010



At a Given Stage of Exploration, Different Commodities have Similar Values

At a Given Stage of Exploration, Different Commodities 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



Value (A$ Million)Value (A$ Million)EARLY STAGE : Identify Anomalies

11

0.010.01

0.10.1

100100

1010



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)



Value is Loosely Related to the Level of Historical Expenditures

Value is Loosely Related to the Level of 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


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

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

x0.2

x5 Ratio of Value/Cost

Note : Excludes unproductive Expenditures


How Accurate are the Independent Valuations ?

How Accurate are the Independent Valuations ?

The accuracy of the Independent Valuations was assessed by comparing it against the value the Stock Market placed on the Company soon after its 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 after its shares were first listed on the Stock Exchange.

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

$0

$2

$4

$6

$8Example

Expected Value of Company at time of Capital Raising

Market Value of company one month after Listing

Cash Cash

Independent Valuation of Projects

Market Value of Projects

$3.0m $2.8m

$3.0m$2.2m

$5.0m Market Value of the Company


Independent Valuation versus Market Value

Independent Valuation versus Market Value

$0

$5

$10

$15

$20

$0 $5 $10 $15 $20

$0

$5

$10

$15

$20

$0 $5 $10 $15 $20

1 MONTH AFTER LISTING

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

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

Based on 16 newly listed Companies

between 1997-2002

Independent Value = 1.40x Market Value

x1

Note: Each Company typically has4 to 10 exploration projects


4/ Important Valuation Issues for Foreign Companies working in China

4/ Important Valuation Issues for Foreign Companies working in China

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

n Required to setup Joint Ventures with local Companies n Are unfamiliar with how to do business in Chinan Not familiar with the local valuation methods used

nn Have limited access to geological data to form a good Have limited access to geological data to form a good view on theview on the prospectivityprospectivity

nn Required to setup Joint Ventures with local Companies Required to setup Joint Ventures with local Companies nn Are unfamiliar with how to do business in ChinaAre unfamiliar with how to do business in Chinann Not familiar with the local valuation methods usedNot familiar with the local valuation methods used

Resolving these issues will lead to better prices for exploration projects

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


SummarySummaryn Must recognise that valuations are not precisen To gain confidence, it is important that the industry use a

standardised approach. Australia’s 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 relevant information, 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 stage at 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. Australia’s approach. Australia’s VALMIN VALMIN Code is the Code is the most comprehensive one availablemost comprehensive one available

nn Which ever set of rules are used, it is critical that the Which ever set of rules are used, it is critical that the methodology used is transparent, includes all relevant methodology used is transparent, includes all relevant information, and is evaluated by experts who are information, and is evaluated by experts who are independentindependent

nn Several valuation techniques are available. Which one to Several valuation techniques are available. Which one to use depends on the quality of data available and what stage use depends on the quality of data available and what stage at the exploration projectat the exploration project


Summary ….Summary ….

n In Australia, early-stage projects are usually valued using the Multiples of Exploration Expenditures Method or theGeoscience Method. Advanced-stage projects are best valued using the Income (NPV) Method

n Benchmarking studies indicate that the Australianvaluers 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 using stage projects are usually valued using the the Multiples of Exploration ExpendituresMultiples of Exploration Expenditures Method or theMethod or theGeoscienceGeoscience Method. AdvancedMethod. Advanced--stage projects are best stage projects are best valued using the valued using the Income (NPV)Income (NPV) Method Method

nn Benchmarking studies indicate that the AustralianBenchmarking studies indicate that the Australianvaluersvaluers 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 typically testing stage is typically only worth A$0.1 to $1m. Similar projects in China should only worth A$0.1 to $1m. Similar projects in China should have an even lower valuehave an even lower value


ConclusionsConclusions

n Most exploration projects are not worth muchn The low value for early-stage projects is due to the high

risk nature of explorationn The value is further reduced if the exploration costs

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

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

risk nature of explorationrisk nature of explorationnn The value is further reduced if the exploration costs The value is further reduced if the exploration costs

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

nn The value / attractiveness of an exploration project in The value / attractiveness of an exploration project in China can beChina can be maximisedmaximised by providing high quality data by providing high quality data on theon the prospectivityprospectivity and by ensuring that the business and by ensuring that the business rules are transparentrules are transparent

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