Mine Valuation Methods of Canada, Australia and South Africa – A Comparative Summary

By Adrian Manlagnit

How do you put a dollar value on a property not unlike a moose pasture that returned some metal grades after few drill holes? Or an area with several holes with encouraging grades? Or a producing metal mine? Or a mine project at its closure stage yet with existing infrastructure and equipment and some exploration potential?

This article results from a sampling of technical papers available online and presents salient features of mine valuation approaches common to Canada, Australia and South Africa. Canada has the Canadian Institute of Mining, Metallurgy and Petroleum Standards and Guidelines for Valuation of Mineral Properties (CIMVAL) published in February 2003 widely and used by the mining industry in general and accepted by the Canadian securities regulators and Canadian stock exchanges. The Australia’s VALMIN Code is for valuation of both mineral and petroleum assets required under Corporations Law and supported by the Australian Stock Exchange, the Australian Securities and Investment Commission, the Institute of Chartered Accountants in Australia, and the Australian Institute of Company Directors. While in South Africa, the SAMVAL Code, prepared by the South African Institute of Mining and Metallurgy, is being adapted by the South African securities regulators and stock exchanges. The valuation of mineral properties in the U.S. is only partially regulated and was not included in this paper.

Valuation is the process of estimating or determining the value of a mineral property. It is carried out for mergers and acquisitions, non arm’s length transactions, a component of pricing of initial public offering of stock, listing support, support of audited financial statements, support for property agreements (IPOs), determination of vendor considerations, litigation, expropriation compensation, income tax matters, insurance claims, and as components of corporate valuations and fairness opinions, among others.

Tenets

Each valuation method is guided by basic tenets or principles to which a qualified valuator must adhere to. As shown in the Table 1 below, tenets of the three countries are similar, with Canada having one more – reasonableness. It is what other appropriately qualified and experienced valuators with access to the same information would value the property at approximately the same range. A reasonableness test serves to identify valuations which may be out of step with industry standards and industry norms.

Tenets

Canada

Australia

South Africa

Materiality

x

x

x

Transparency

x

x

x

Competency

x

x

x

Impartiality/ Independence

x

x

x

Reasonableness

x

Applicable Properties and In-between

The methods of the three countries covers both metallic and non-metallic properties and all agree to exclude petroleum properties, with petroleum being any naturally occurring hydrocarbon, whether in a gaseous or liquid state. But there are some nuisances. In Canada, CIMVal methods include oil shale and oil sands (tar) properties, together with uranium, coal and energy fuels as long as these commodities can be mined; oil and gas are not included. But Australia’s VALMIN methods cover petroleum assets including producing oil and gas fields.

Valuation Approaches

The use of a particular approach depends on the type or level of development of a particular property. But whatever method was chosen and excluded by the valuator must be justified including its limitations. Though there might minor variations, common in Canada, Australia and South Africa to use the following approaches on a particular property.

Approach

Exploration Properties

Mineral Resource Properties

Development Properties

Production Properties

Income (Cash Flow Capitalization)

In some cases

x

x

Market (Sales Comparative)

x

x

x

x

Cost

x

In some cases

Note: Taken from CIMVal Final Version Feb/03

South Africa’s SAMVAL method has provisions for dormant and defunct properties.

Approach

Dormant Properties

Defunct Properties

Income (Cash Flow Capitalization)

x

Market (Sales Comparative)

x

x

Cost

x

x

Note: Taken from The SAMVAL Code Aug/06

It should not come as a surprise if the valuation approaches adapted by the Canada, Australia, and South Africa are almost identical to each other as there was close coordination and consultation among these three countries when valuation standards and guidelines for the three countries were being formulated. There may be country-specific deviations but are minor ones.

Canadian Practices

From the paper entitled An Overview of Valuation Practices and the Development of a Canadian Code for the Valuation of Mineral Properties (Spence, K. 2000), an informal survey among valuation practitioners in Canada was made as to the methods commonly used in valuating properties. The results of the survey are as follows: For the technical papers referenced in this article and others interesting papers on valuation of mining properties, please see the links below:

Type of Properties

Dominant Methods

1) Very early stage Exploration (just above

Appraised value/cost approach, market

the level of “moose pasture” with a few

comparables

holes drilled with encouraging results)

2) Early stage Exploration (with a several

Appraised value/cost approach, market

holes drilled with encouraging results)

comparables

3) Late stage Exploration (decision made

Discounted cash flow, market comparables

to do a full bankable feasibility study, pre-

feasibility study already completed with

positive results)

4) Early development (a full bankable

Discounted cash flow, market comparables

feasibility study completed and the bank

financing lined up; construction to begin in

the next 6 months)

5) Late development (full completion to be

Discounted cash flow, market comparables

reached in the next 6 months)

6) Producing mine

Discounted cash flow, market comparables

7) Late stage producing mine (reserves to

Discounted cash flow, market comparables

be depleted in 2 years; limited further

exploration potential )

8) Mine closed (equipment still on site,

Salvage value

limited further exploration potential)

An Overview of Valuation Practices and the Development of a Canadian Code for the Valuation of Mineral Properties

CIMVAL Standards and Guidelines – Final Draft (February 2003)

South African Code for the Valuation of Mineral Assets (The SAMVAL Code)

Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports – The VALMIN Code

The VALMIN Code - The Australian Experience

The U.S. Mineral Property Valuation Patchwork of Regulations and Standards

Valuation of Mineral Exploration Properties Using the Cost Approach (Roscoe, 2000)

Valuation of Mineral Properties Without Mineral Resources: A Review Of Market-Based Approaches (Lawrence, 2000)

A Critique of Valuation Methods for Exploration Properties And Undeveloped Mineral Resources (Thompson, 2000)