VALUATION METHODS

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VALUATION METHODS FOR MINERAL PROJECTS
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Resources
Reserves

• STANDARD METHODS
• Prospectivity Enhancement Multiplier (PEM)
• Comparative Value Method
• Royalties/Farm-in Agreements

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STANDARD METHODS
1. Prospectivity Enhancement Multiplier (PEM)

• Based on the principle of Past Expenditure
• A premium (or discount) multiplier is applied to
  the total cost of exploration to date, depending
  on whether the exploration has enhanced the
  prospectivity of the ground or not
• Multiplier typically ranges from 0.5 3.0
• Historical expenditures must be declared as
  audited
• Issue Subjective choice of multiplier value.

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STANDARD METHODS
2. Comparative Value Method

• Value is based upon recent arms length
  transactions of a similar nature
• Based on a monetary value per unit of resource in
  the ground or per unit area of defined
  mineralisation
• Issue Often insufficient similar publicly
  quoted transactions to make a meaningful
  comparison.

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STANDARD METHODS
3. Royalties or Farmin Agreements

• The initial committed expenditure establishes a
  base value for the property
• The staged expenditure is discounted to
  determined the value a buyer is placing on the
  vendors interest
• The funding partner predetermines the ratchet
  effect of exploration success (PEM). This is a
  legal document and thus the value is firmly
  entrenched
• The level of discounting is an opinion based on
  the probability that the buyer will actually
  commit the funds
• Issue Aspects of the method are subjective.

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STANDARD METHODS EXPECTED VALUE METHOD
Confidence
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EXPECTED VALUE METHOD

• Statistically defines the probability of
  successful outcome of expenditure and
• Based upon geological knowledge, cost and time.
• Issue Highly subjective.

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DCF STANDARD METHODS
Confidence
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DISCOUNTED CASHFLOW METHOD (DCF)

• Where possible a cashflow model should be
  generated
• This method takes into account the uniqueness of
  each resource
• Value is calculated from future cashflows
  generated from the mining of the mineral
  resource
• Cashflow assumptions are based on the likely
  costs of construction, production and sales for a
  mine of a similar nature
• Discount rate is applied to the cashflows
  according to the risk profile
• Issues - The accuracy of the input assumptions
  and
• - The selection of a suitable discount
  rate which is a highly contentious issue
• Question Should inferred resources be included?

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DCF OPTION PRICING
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OPTION PRICING MODEL

• Typically used for Wits gold properties
• Method is applied when the current viability of
  exploiting the resource is negative by using the
  DCF
• Reflection of the potential for the resource to
  be developed into a viable mine at some time in
  the future when the commodity price is
  favourable
• The owner of the resource has the option to list
  the project on a stock exchange and realise the
  value the market would place on it
• Use the option pricing theory to calculate the
  commodity price at which the full risk adjusted
  NPV of the mine is greater than 0.

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THE BOTTOMLINE
Where possible, use a number of different
valuation methods to increase the voracity of
your results
Venmyn