toronto denver london vancouver quebec city

www.rpacan.comRock Solid Resources. Proven Advice.

Valuation of Mineral Properties

FINEX ‘12Deborah A. McCombe, P.Geo.

Executive Vice President & Principal Geologist

RPA October 31, 2012

Toronto Denver London Vancouver Quebec City

www.rpacan.comRock Solid Resources. Proven Advice. 2

Overview

• Setting the stage• Property value vs. stock price• Mineral property life cycle• Types of mineral properties• Valuation methods

• Valuation of mineral properties• Option agreement terms analysis• Market comparable transactions• $ value per unit metal

• Valuation examples


What is Being Valued?

• Important to distinguish between valuation of mineral property and valuation of a company (and the company’s share price)

• Components of mining company share price:• Mineral properties• Other assets and liabilities (e.g. cash and debt) • Commodity markets and general market sentiment• Quality of management• Market recognition and liquidity

• Focus of this presentation:

• Fair Market Value of mineral properties• Non-producing properties of junior companies


Fair Market Value or Market Value

• FMV or MV used for most purposes• Value that would have been paid• Open and unrestricted market• Between informed and prudent parties• Acting at arms length

• Effective date of valuation critical• Mining and exploration cyclical• Value changes as property is advanced


Exploration Property ValuesChange Over Time, Depending on Results

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

0 1 2 3 4 5 6

Year

Val

ue

in $

Property A

Property B


Mineral Property Life Cycle

Stage Properties Value

Early exploration Many Low

Drilling

Detailed Investigation

Feasibility Study

Production Few High

Closure


The Exploration Process

• Exploration is vital to replace depleted mines

• Exploration proceeds in stages designed to screen properties for promising potential

• Each stage is designed for go/no go decision

• Each stage is progressively more expensive

• Property value changes with time, depending on results of each exploration stage

• Only a very small number of exploration properties become profitable mines


Types of Mineral Properties

• Producing mineral properties (senior and some junior companies• Producing mines• Development planned or under construction• Mineral reserves ± mineral resources

• Non-producing mineral properties (senior and junior companies)• Early stage exploration properties• Drilling stage exploration properties• Properties with identified mineral resources• Prefeasibility or feasibility stage projects• Marginal development properties • Past producing mines


So Why is a Non-Producing Mineral Property Worth Anything?

• Non-producing properties represent potential for eventual mineral production through • Exploration discovery• Enhancement of existing mineral resources• Improved circumstances, (e.g. new roads or higher metal

prices)• New ownership

• A market exists for non-producing mineral properties• With mineral resources• Without mineral resources• Deals are commonly option or farm-in agreements


Valuation Approaches

• Income Approach• Based on expectation of income• Discounted cash flow method and variations

• Market Approach• Based on principle of substitution• Sales comparison/comparable transactions

• Cost Approach• Cost of equivalent property• Appraised value method• Multiple of exploration expenditures• Geoscience factor


Valuation Approaches forDifferent Types of Mineral Properties

Valuation Approach

Valuation Method

Development Properties

Marginal Development

Properties

Exploration Properties

Income Discounted Cash Flow

Yes Maybe No

Real Options Yes Yes No

Cost Appraised Value

No Yes Yes

Geoscience Factor

No Maybe Yes

Market Comparable Transactions

Yes Yes Yes

Option Agreement Terms

Yes Yes Yes


Comparable Transactions Analysis for Valuation of Individual Properties• No true comparables – mineral properties are unique

• Market size is small with relatively few transactions

• Can use transactions on a number of similar properties to obtain a range of values

• Complex property deals need analysis to obtain a value of the property

• Can adjust comparable transaction values by property area or by metal contained in resource

• Transaction date is very important since market activity and value change over time


Selection of Comparable Transactions

• Use similar characteristics to those of subject property:• Commodity or group of commodities, e.g. gold• Political jurisdiction• Location, access, infrastructure• Property size• Geological setting • Mineral deposit type• Stage of exploration and exploration potential• Exploration results and targets• Activity on neighbouring properties• Similar resource tonnage and grade, if any


Option Agreement Terms Analysis

• Analysis needed for valuation of market transactions

• Most non-producing mineral property transactions are option or earn-in agreements to earn an interest in the property

• The option or earn-in period may last several years; three to four is common

• Earn-in terms include cash, stock, work commitments and royalties

• Usually first year is firm and subsequent years optional

• Option agreement terms analysis:• Schedule of payments and work commitments• Estimate probability of realization of future commitments

• Date of the agreement is the valuation date


Option Agreement Terms Analysis Example

• Published description of the deal:

• Hot Commodity Resources can earn a 60% interest in the Rocky River Rare Earths property of Owl Enterprises by making payments totalling $600,000 and expending a total of $2,500,000 on exploration over four years. The first year requires $50,000 cash on signing and an expenditure commitment of $250,000. Further optional annual payments and work commitments are shown in the following analysis table.


Option Agreement Terms Analysis Example- Option to Earn a 60% Interest

Year of

Agt. Commitment

Payment Schedule

Expl. Exp

Schedule

Prob. of

Realiz’n.

Value

Component

1 Firm $50K $250K 100% $300K

2 Optional $100K $500K 50% $300K

3 Optional $150K $750K 25% $225K

4 Optional $300K $1,000K 10% $130K

Totals for 60% Int. $600K $2,500K $955K

Value of 100% Interest in the Property (rounded) $1,600K


Comparable Transactions Analysis

• Compile information on properties with similarities to the subject property

• Options agreement terms analysis to estimate value of comparable properties

• Express values of market comparable properties in terms of: • Overall property value• Value per hectare• $ per oz Au or $ per unit metal in resource

• Considerations in analysis of comparable values:• Examine mean and median values • Eliminate outliers• Consider which properties are more similar to the subject

• Determine an appropriate range of values to apply to the subject property


Analysis of Comparable Transactions Example 1: South American Gold Property

Property Transaction Date

Size in hectares

Property Value $M

$/hectare

A 2007 15,200 3.61 238

B 2007 11,500 2.18 190

C 2008 30,300 4.72 156

D 2007 49,700 5.91 119

E 2008 35,000 1.48 42

Mean 3.58 149

Median 3.61 156

Eliminate Property E:

Mean 1.53 176

Median 1.09 173

Recommended range to apply to subject $150 to $200/hectare

Market value of 20,000 hectare subject property $3.0 to $4.0 million


Analysis of Comparable Transactions Example 2: Southwest USA Gold PropertyProperty Transaction

DateSize in

hectaresProperty Value $M

$/hectare

F 2008 1,882 4.83 2,566

G 2007 6,985 9.82 1,406

H 2008 1,147 1.35 1,177

I 2007 1,236 1.22 987

J 2008 2,433 1.18 485

Mean 3.68 1,324

Median 1.35 1,177

Eliminate F and J:

Mean 4.13 1,190

Median 1.35 1,177

Recommended range to apply to subject $1,000 to $1,400/hectare

Market value of 2,000 hectare subject property $2.0 to $2.8 million


Valuation by $ per Unit Metal inMineral Resource• Use comparable properties for valuation

• Same commodity, e.g., gold, uranium, copper• Same political jurisdiction• Similar geological setting• Similar mineral deposit type• Similar size and grade of resource• Similar stage of exploration or development

• Determine $/unit metal for market comparables• Analyze transaction terms to get property value• Calculate units of metal in mineral resource estimate

• Calculate $ per unit metal, e.g., $/oz Au, $/lb U3O8 or $/lb Cu

• Analyze $/unit metal values to determine an appropriate range of values for the subject property


Analysis of Comparable Transactions Example 3: West African Gold Property

Transaction Date

Property Value

$ M

Contained Gold

M oz

$/oz Gold Au Price on Trans Date

$/oz Au

$/oz as % of Au Price

2009 200.0 4.04 49.53 1,180 4.20%

2008 54.5 1.26 43.19 960 4.50%

2008 31.3 0.92 33.98 864 3.93%

2009 240.0 8.41 28.54 1,062 2.69%

2009 565.0 22.57 25.03 1,040 2.41%

2009 4.8 0.25 19.64 917 2.14%

2008 31.5 2.74 11.48 915 1.26%

2009 2.0 0.32 6.17 889 0.69%

Mean 27.19 2.73%

Median 26.79 2.55%

Recommended range to apply to subject property $24-$30/oz or 2.2%-3.0% of Au price

Market value of 1.5M oz property in late 2009 ($1,150/oz) $36M to $45M or $38M to $52M


Analysis of Comparable Transactions Example 4: Western USA Uranium Property

Transaction Date

Property Value

$ M

Contained U3O8 M lbs

$/lb U3O8 Price on Trans Date

$/lb U3O8

$/lb as % of U Price

2008 16.9 6.1 2.79 60 4.65%

2010 259.5 136.8 1.90 62 3.06%

2010 20.0 15.7 1.27 42 3.03%

2009 13.7 15.6 0.88 43 2.04%

2010 30.1 66.5 0.45 60 0.75%

2008 2.8 6.5 0.42 78 0.54%

Mean 1.29 2.35%

Median 1.08 2.54%

Recommended range to apply to subject property $0.90 to $1.30/lb or 1.8%-2.8% of U price

Market value of 30M lb property in late 2010 ($58/lb) $27M to $39M or $31M to $49M


Comparable Transactions Analysis Using Metal Transaction Ratio• Valuation of properties with more than one metal in

the mineral resources (polymetallic deposits)

• Metal Transaction Ratio (MTR) is the ratio of the transaction value to the gross in situ “dollar content” of all metals in the resource

• Gross in situ “dollar content” uses metal prices as of the transaction date

• Analogous to $ per unit metal expressed as % of metal price


Analysis of Comparable Transactions Example 6: South American Porphyry Copper Property

Transaction Date

Property Value

$ M

Metals in Mineral

Resources

Contained Copper

M lb

Cents/lb Copper

Price on Trans Date

$/lb Cu

$/lb as % of Cu Price

In Situ “Value” of Resources

$M

Metal Transaction

Ratio

2010 733 Cu, Au 7,116 10.30 2.83 3.64% 29,638 2.47%

2007 403 Cu, Au, Ag 8,275 4.87 3.55 1.37% 31,073 1.30%

2007 791 Cu, Mo, Ag 22,088 3.58 3.35 1.07% 123,026 0.64%

2011 80 Cu, Au, Ag 2,927 2.73 4.54 0.60% 14,594 0.55%

2010 72 Cu, Au 2,627 2.73 3.33 0.82% 9,952 0.72%

2010 350 Cu, Mo, Au 21,996 1.59 3.25 0.49% 155,868 0.22%

2009 31 Cu, Au 2,188 1.40 1.48 0.94% 4,175 0.73%

2007 194 Cu, Mo 15,657 1.24 2.40 0.52% 61,832 0.31%

2009 26 Cu, Mo 2,422 1.07 3.14 0.34% 11,596 0.22%

Mean 0.80%

Median 0.64%

Mean without highest MTR 0.59%

Median without highest MTR 0.69%

Recommended MTR range to apply to subject property 0.55% to 0.75%

Market value of subject property with $50,000M in situ metal

$275M to $375M


Mineral Property Market Overview

• Market sample of gold property transactions• 624 transactions on gold properties in Canada• Property value range and statistics• Property value per unit area

• Value per unit metal in resource• $/oz gold transacted• $/lb copper transacted• $/lb uranium oxide transacted• Metal transaction ratio

• Examples


Values of 624 Gold Property Transactions in Canada 2003-09


$ per Hectare Values of 421 Gold Property Transactions in Canada 2003-09


Market Overview Observations

• Wide range of gold property values and $ per unit area values

• Skewed distribution of values with numerous lows and few highs (chart plotted in log intervals)

• Small properties have high $/ha values

• Large properties have low $/ha values

• Use comparable transactions rather than overall market to value individual mineral properties


Valuation by Unit Metal in Resource

• Can be expressed as:• $ per ounce gold (Au)• $ per pound copper (Cu)

• $ per pound uranium oxide (U3O8)

• Widely used yardstick for gold property transactions

• Applied to both properties and companies

• Gold equivalent ounces can include silver

• Sometimes expressed as % of metal price

• Can use Metal Transaction Ratio for polymetallic deposits


US$ per Ounce Au Values29 Transactions 2005-2008

0

2

4

6

8

10

12

<10 10 to 30 30 to 100 >100

No.

of T

rans

actio

ns

US$ per ounce Au Eq

Average = $54Median = $36


Valuation by $ per Ounce Au

• Note large range in $/oz Au values (plotted on log scale)

• Little or no correlation with other factors:• Magnitude of deal in $• Magnitude of deal in total gold ounces• Gold grade of the deposit• Categories of resources and reserves

• Use of overall market average $/oz figures not reliable except as secondary method or rule of thumb to check valuations by other methods

• Use comparable transactions on similar properties to derive an appropriate $/oz gold value for resources


Final Words

• Value of exploration and other non-producing mineral properties lies in their potential for hosting a viable mining operation

• Comparable transactions method works reasonably well using properties similar to the subject property

• Technical experience and judgement is a critical requirement for valuation of non-producing mineral properties

• Mineral property asset value is but one component of the value of a mining company and the share price

www.rpacan.comRock Solid Resources. Proven Advice.

About RPA

• Technical advisors to investors in the mining industry

• Mining companies, banks, law firms, individual investors

• Extensive experience in all aspects of mine exploration,

finance, valuation, development, and operation

• Due diligence, M&A, exchange listings (Toronto, London,

Hong Kong, Australia)

• Offices in Toronto, London, Denver, Vancouver, Quebec

33


Contact us:

Deborah A. McCombe, P.Geo.Tel: +1 (416) 642-1476

+44 (0) 203-440-5775 Email: [email protected]

Toronto Denver London Vancouver Quebec City

toronto denver london vancouver quebec city

Documents

valuation of mineral

mineral resourcesnon

eventual mineral production

mineral propertiesother

nonproducing properties

exploration processexploration

exploration stageonly

properties of junior