Valuation

TransactionConsulting

Real EstateAdvisory

Fixed AssetManagement

®

October 2011

Presented by:

Ross Henderson

Adrian Immarrata

Minerals Resource Rent Tax (MRRT)

Valuation considerations for coal and iron ore miners

Overview

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� MRRT overview

� MRRT - how is it to be calculated

� Valuation approaches

� Valuations required for MRRT

� Mining rights and intangible valuations

� Tangible asset valuations

� Other tax impacts

� Conclusion

� Key contacts

MRRT overview

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� A new tax levied against profits of iron ore and coal projects.

� Aimed at providing the Australian people a fair return on non renewable resources which can only be extracted once.

� Expected to commence on 1 July 2012.

� Second exposure draft released and EM published

� Other guidance provided on:

� Valuation procedures - current ATO valuation guidelines

� Market value of starting base assets

� Record keeping for starting base assets

� Market value risk factors

MRRT – How it is to be calculated

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MRRT profit x 22.5%

‘Revenue’ at ‘taxing point ’less: expenditure and allowances

Taxing point When the mineral leaves the ‘run-of-mine (ROM)’ stockpile

‘Market value price ’ x volume

MRRT – How it is to be calculated

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Key inputs

MRRT – How it is to be calculated

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Allowances

� Various deductions from revenue including:

� Royalties� Starting base assets

Starting base asset allowances

� Choice of either book value or market value

� Needs to be as at 1 May 2010

� Opportunity is for companies that have mines as at this date – future additions and start ups will get immediate deductionBook value approach Market value approach

•Accounting book value = asset value •Market value = asset value

• Excludes mining rights •Includes mining rights

• 5 year write off period •Up to 25 year write off period

•Uplifted at LTBR + 7% •No uplift

Valuation methodologies

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� Compliant with VALMIN code and IVS

� Market value defined as:

“the estimated amount for which an asset should exchan ge on the date of the valuation between a willing buyer a nd a willing seller in an arm ’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. ’

� Approaches

� Income approach.

� Market approach

� Cost approach

Valuations required for MRRT

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PP&E valuationestablishes starting base for tangible assets

Resources (intangible) valuationestablishes starting base for resources

Deprecation of tangible

assets

Deprecation of resource

Mining rights and intangible asset valuations

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� For operating mines likely to require income approach (free cash flow) to be determined at the taxing point

� Exploration assets less likely to be based on the income approach and dependent of stage of project

� Revenue at taxing point determined with the assistance of transfer pricing experts

� Costs, capital expenditure and financing costs would be derived from operations and capital structure

Tangible asset valuations

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� Identify and value tangible assets upstream for starting base allowance� Land (rural buffer, residential, village camp, etc.)� Mine and site improvements (Haul roads, dams, access roads, buildings,

etc.)� Plant & equipment (dragline, excavators, trucks, etc.)

� Identify and value tangible asset downstream for asset charge in netback of revenue calculation (either at gross replacement cost of market value)� Crushing� Beneficiation� Handling� Storage� Loading� Transportation� Port

Other tax impacts

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Carbon tax

� Price on carbon to combat the effects of climate change

� To cover four of six greenhouse gases considered under the KyotoProtocol

� Expected to commence on 1 July 2015.

� Legislation has not made passage through parliament therefore significant uncertainty exists

PRRT

� The PRRT has also been revised to include on-shore oil and gas projects.

� Starting base assets can be at market value with an immediate deduction.

Conclusion

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� MRRT still not law but appears more than likely to proceed by the end of the year

� Some miners already beginning implementation of MRRT plan

� Valuations are a major input if using the market value method

� Splitting assets between up and downstream

� Advantage for exploration and development stage mines

MRRT valuation team

Ross Henderson

Ross is the Managing Director for the American Appraisal Industrial Valuation Group for the Oceania region. Ross has more than two decades of experience in asset valuation and consulting services.

He has provided specialist valuation advice to multinationals throughout Australia, Asia, and Europe to aid in preparing taxation, financial, and general valuation strategies.

Adrian Immarrata

Adrian is an Associate Director in the American Appraisal Financial Valuation practice for the Oceania region. Adrian has over 11 years experience in corporate finance and advisory roles, valuing businesses of all sizes for a variety of purposes, including financial reporting, taxation, acquisition and group reconstruction.

He has significant experience of undertaking business and intangible asset valuations to meet the requirements of Australian and International Accounting Standards, as well as ATO requirements.

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