By Graham Stacey - Venmyn

The Johannesburg Branch of the SAIMM recently hosted a great presentation by Ken Lomberg of Coffey Mining on the subject of platinum Juniors active in the Bushveld Complex. One key message from Ken’s presentation was the number of organisations currently exploring in the Bushveld and consequently the number of projects at the advanced exploration and inferred mineral resource estimation stage of development. While the platiniferous reefs of the Bushveld are well understood, exploration and development costs are substantial and Juniors are largely equity financed through one or other securities exchanges. Issues of company valuation at the inferred resource level are therefore critical to understanding the value of an investment in a Junior exploration company.

In the South African context, item 23 of the SAMREC Code states that ‘Inferred Mineral Resources may only be included in mine design, mine planning, and/or economic studies provided that a mine plan existsand a statement of Mineral Reserves, which states that Inferred Mineral Resources have been used’. The valuation implication is that a discounted cash flow valuation method may not be used to derive the value of a project for which only Inferred Mineral Resources have been classified. Comparative methods provide a good yardstick with which to compare the value of a project with recent transactions and other listed companies, but a discounted cash flow (DCF) valuation result may not be published under item 23.

The Special committee of the Canadian Institute of Mining, Metallurgy and Petroleum on Valuation of Mineral Properties (CIMVAL) Standards and Guidelines makes provision for the valuation of Inferred Mineral Resources by carrying out a Preliminary Assessment. In short, a Qualified Person (QP) may conduct a preliminary economic assessment on Inferred Mineral Resources provided it is stated that those resources are considered too speculative geologically to have economic considerations applied to them that would enable them to be categorized as Mineral Reserves. So a conceptual mine plan may be developed and various assumptions and contingencies applied in recognition of the low level of confidence associated with the resource and a DCF valuation carried out. It would clearly be irresponsible of the QP to publish the DCF result in isolation as it would probably be misleading. However, when contextualised against comparable transactions and similar listed companies, the DCF valuation can be explained and the investment community reading the report has a good basis from which to assess the relative merits of a project (timing of production, depth of shafts, costs of production, capital costs, process technology, etc.)

All Junior exploration companies will run their own financial/valuation models to better understand the drivers behind future commercial development of their projects. As an independent project valuator, I would suggest that DCF valuations of Inferred Mineral Resources would provide the investment community with an additional measurement tool, provided that the appropriate criteria used in the valuation are clearly stated.

Should you have any comments, please contact Graham Stacey at or +27 11 783 9903.