AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES

1
AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES
KEITH N. SPENCE Global Mining Corporation PDAC,
Board of Directors Co - Chairman CIMVAL-
Canadian Institute of Mining, Metallurgy
Petroleum
CHINA MINING, Beijing, November 14, 2007
2
Valuation vs. Evaluation

• Valuation - estimation of the value or worth of
  the mineral property. Question How much is a
  property worth in dollars ?
• Evaluation - economic assessment of the mineral
  property generally for an investment decision,
  for example, a feasibility study. Question Go or
  No go Decision ?

3
Items to be Discussed

• The international Scene
• Reasons for a Valuation
• Definition of Value
• Valuation Tenets
• Types of Properties
• Valuation Approaches
• stage based valuation
• Primary Valuation Methods
• A word about Reserves and Resources
• Use of Mineral Resources in Income Approach
• Secondary Valuation Methods / Rules of Thumb
• Valuation Reports
• Some Issues with valuations
• Conclusion

4
The International Scene

• CIMVal Standards Guidelines (TSX Toronto Stock
  Exchange Appendix G) - Canada
• Australian VALMIN Code
• South African proposed SAMVal Code
• US Minerals Appraisals/Valuations
• - a patchwork of regulations
• International Valuations Standards (IVS)
• - IVSC -Extractive Industries Guidance Note
  nearing completion

5
Reasons for a Valuation

• Mergers and acquisitions
• Non arms length transactions
• IPO pricing
• Stock exchange listing support
• Support of audited financial statements
• Fairness opinions for a sale or purchase of a
  mining property
• Litigation
• Government expropriation
• Insurance claims

6
Definition of Value

• Fair Market Value (FMV) is the standard of value.
• Key elements of FMV are as follows
• Both seller and buyer are willing and not under
  compulsion to act
• The transaction is at arms length
• Both seller and buyer are informed or have
  reasonable knowledge of the relevant facts
• Valuation should be based on a given point in
  time
• Other types of value include replacement value,
  salvage value, book value, depreciated value, net
  asset value, assessed value, insured value, etc.

7
Valuation Tenets

• Materiality
• - inclusion or omission of information
  that might result in different conclusion
  of value
• Transparency
• - information used (or excluded), the
  assumptions, methodology etc, must be set
  out clearly, along with the rationale
• Independence
• -the valuator must to be independent of the
  commissioning entity

8
Valuation Tenets Contd

• Competence
• -the valuator must be appropriately
  qualified to
  conduct the
  required valuation
• Reasonableness
• -other appropriately qualified and
  experienced
• valuators would value the property at
  approximately the same range

9
Types of Properties

• Valuation depends on the stage of development of
  the property
• Exploration Properties
• Early stage exploration properties
• Mineral resource properties
• Advanced stage exploration properties
• Properties with identified mineral resources
• Pre-feasibility stage projects
• Marginal development properties
• Past producing mines
• Development properties
• Feasibility study completed
• Development planned or under construction
• Contain mineral reserves and mineral resources
• Production properties

10
Valuation Approaches

• Three generally accepted approaches
• Income approach - based on principle of
  anticipation of benefits (usually DCF)
• Market approach based on principle of
  substitution
• ( Market Comparables)
• Cost approach based on principle of
  contribution to value
• Valuation approach depends on the stage of
  exploration or development of the property

11
stage based valuation
12
Primary Valuation Methods

• Income Approach
• Discounted Cash Flow Method - very widely used
• Option Pricing Method/Real Option Method not
  widely used but gaining in acceptance. Utilizing
  Black Scholes seminal work, that mining projects
  can be valued based on a series of
  options/decisions
• Market Approach
• Comparable Transactions Method widely used
• Option Agreement Terms widely used
• Cost Approach
• Appraised Value Method widely used but not
  accepted by all regulators
• Geoscience Factor Method not widely used

13
A word about Reserves and Resources

• CIM, JORC SAMREC Reserve Classifications
  Referenced
• Mineral Resource - a mineral deposit for which
  quantity (tonnes) and quality (grade) can be
  estimated. But not demonstrated to be economic.
• Measured - highest confidence category
• Indicated
• Inferred - lowest confidence category
• Mineral Reserve - that part of the mineral
  resource that can be extracted economically.
• Proven - higher confidence category
• Probable - lower confidence category

14
Use of Mineral Resources in Income Approach

• Generally Acceptable Practices
• CIM, JORC SAMREC Reserve Classifications
  Referenced
• Use of all proven and probable mineral reserves
• Use of measured and indicated mineral resources
  in the following circumstances
• Mineral resources are current
• Mineral reserves are mined ahead of resources in
  DCF
• Confirmation that the mineral resources in the
  DCF are likely to be economically viable in the
  future
• Recognize higher risk of using mineral resources
  by appropriate Adjustments

15
Use of Mineral Resources in Income Approach Contd

• Use of inferred mineral resources
• With great care
• Not if they are the dominant resource category
• Any use must be justified in and treated
  appropriately for the substantially higher risk
  and uncertainty
• Reserves and other resource categories are mined
  ahead of inferred resources in the DCF model
• Inferred resources should not be used to make the
  property economically viable
• Use of potential or hypothetical resources is
  not acceptable

16
Secondary Valuation Methods Rules of thumb

• Rules of thumb - A good cross-check on a
  Valuation to test its reasonableness
• per oz or lb in the ground
• Value per unit of property area used for large
  exploration properties
• Market capitalization of company holding the
  mineral property more applicable to valuation
  of single property junior companies

17
Valuation Reports best practice

• A Valuator is ultimately responsible for
• preparation of the Valuation Report and its
  conclusions
• adhering to the principles of materiality,
  transparency and reasonableness including
  technical input
• An approved technical report can be appended to
  the valuation report
• All mineral reserve and mineral resource
  estimates must be disclosed and discussed in the
  valuation report

18
Valuation Reports Best Practice Contd

• List factors, critical issues, key risks and
  assumptions
• Discuss all valuations within the last 24 months
• Certificates of Qualifications of the valuator
• Statement that the valuation complies with the
  Standards and Guidelines which he or she is
  governed by, in their entirety
• Site visit should be undertaken or explain why
  not
• Use More than one Approaches/Methods
• Provides Checks Balance
• Valuation is Best Reported as a Range of Values
• Effective date of the valuation

19
Some Issues with Valuations

• Use of unacceptable or dubious methods
• Misapplication of acceptable methods
• No explanation or justification for methods used
• Lack of transparency

20
Conclusion

• Need for International Valuation Standards
  Consistency
• Valuation is Stage Based
• Market Comparables applicable for all stages
• How Reserves/Resources are used is the key
  Factor in Valuation
• 
  Thank You !!

21
AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES
KEITH N. SPENCE Global Mining Corporation PDAC,
Board of Directors Co - Chairman CIMVAL-
Canadian Institute of Mining, Metallurgy
Petroleum
CHINA MINING, Beijing, November 14, 2007