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Valuation in Mining 

 
Authors: Jack Caldwell and Adrian Manlagnit

Summary

This review describes national and international standards and procedures for valuation of mining and mineral projects. Listed are consultants that provide valuation services; this includes a list of valuators in South Africa, Australia, Canada and the United States. Described are the procedures that may be adopted to assess the value of mineral and mining assets, particularly those established by the International Valuation Standards Committee.

INTRODUCTION

The downside of a luxury cruise to Mexico or Alaska is the pervasive tension of agoraphobia. Every well-appointed meal after a day on shore is dominated by discussions of the ugly ceramic pieces you did not buy lest you pay too much. Worse still is buying that hideous silver artifact and somebody else at the dinner table got something similar far cheaper by bargaining or going down a more secluded alley.

Agoraphobia is defined in the 14 January 2006 issue of the Economist as "fear of the marketplace." In a masterful article, we are told how business is constrained not by efficient market mechanisms, but by consumers who develop an aversion to markets: "Opportunities for choice may be interpreted as opportunities for mistakes, embarrassment, and regret." This inhibits financial activity or pushes it into distorted patterns.

For example, pity the mining company that bid on an orebody, won the bid, and then discovered they had paid twice the average bid-and well above the next highest bidder.

Pity the investors who put their life savings into an industrial mineral site valued at $300 million, only to discover that the stockpile is so remote and difficult to process that it is essentially worthless.

VALUATION STANDARDS

The previous example is from Trevor Ellis's website. His answer to agoraphobia is valuation. He is the only minerals valuator I have ever spoken to and I would want him on my side if I were about to invest in a property. In fact if you go to his site and read his many papers you will probably be a convert/expert too. This is from the abstract of his latest paper:

The 2005 edition of the International Valuation Standards (IVS) is the first edition to include specific standards addressing the valuation of assets in the minerals and petroleum industries... It also provides asset valuation support to the International Financial Reporting Standards (IFRSs) for corporate reporting to the stock markets of the world.

This paper proceeds to discuss the development of the IVS and IFRS standards, their implications to the minerals industry, and the implications to professionals who valuate mineral properties. He leads the extractive industries standards project of the International Valuation Standards Committee.

The ISVC IVSC is an NGO (Non-Government-Organization) member of the United Nations and works cooperatively with member States, organizations such as the World Bank, OECD, International Federation of Accountants, International Accounting Standards Board and others, including valuation societies throughout the world to harmonize and promote agreement and understanding of valuation standards.


VALUATORS

Of course there are other valuators; see the list of presenters at the September 2006 short course on Valuation of Mineral Projects. I hope these presenters have experience in determining the market value of mineral projects by applying valuation standards.

Or you can do a Google search with keywords mine valuation . I did this for my ex-country (by law I lost my citizenship when I "identified with another country".)


South Africa

In response to the first posting of this review, Venmyn sent us a great presentation on Valuation and this additional information:

"As you have noted, there are not many companies that specialize in the valuation of mineral assets and we believe that we are at the forefront of this sector of the industry. In this regard we have been directly involved in the writing of the SAMVAL Code (South African Valuation Code) which will be released in the near future. We have also been involved in commentary on the IVS rules and regularly converse with Trevor Ellis to canvas his views on particular issues. Venmyn specializes in techno-economic valuations which link the technical issues with the economics of the valuation of mineral assets. We have developed a number of valuation curves, for particular minerals (including gold, platinum, chrome, diamonds, coal), using the degree of development of the project and its associated value in the ground i.e. US$/oz for gold & platinum. The curve is based upon a database of transactions in that particular commodity. I have attached the standard valuation curve for your information which indicates the valuation methods to be used at the various stages of development."
In case you are not familiar with Venmyn and their services, here is a summary from their Capability Statement:
Venmyn is an internationally focused, South African based, independent mining and minerals management advisor specialising in the technical and economic evaluation of mineral projects and the strategic analysis of mining and mineral resource companies. After more than two decades of operation, and having developed strong links with minerals and mining companies, together with merchant banks and financial institutions around the world, we have extended our specialist services to include corporate advice on international compliance assignments and the identification and facilitation of strategic partnerships between project promoters and financiers.
In recent years, Venmyn has been actively involved in the development and promulgation of professional codes, listings requirements and valuation standards for the minerals industry.

Other South African valuators who came up courtesy of Google include the Wits lecturers Gavin Lind and Fred Cawood. I had a lump in my throat seeing the coat-of-arms of my alma mater. I e-mailed them about this article, but they never did reply, so maybe this is but another of those abandoned websites that litter the internet like car-wreck junkyards in the Midwest.


SAMVAL Code

For Industry Discussion -- this is the newly issued (August 2006) South African Code for the Valuation of Mineral Assets. The guiding principles of the code are:

  • Materiality: The Public Report should contain relevant information that investors and their professional advisors would reasonably require and expect to find in a report that may be used to make a reasoned and balanced judgment of Exploration Results, Mineral Resources, and Mineral Reserves.
  • Transparency: The Public Report should provide sufficient information, the presentation of which is clear and unambiguous, to enable the user to understand the report and not be misled.
  • Competency: The Public Report should be based on the work of responsible, qualified, and experienced persons who are subject to an enforceable professional Code of Ethics.
  • Impartiality: The author of the Public Report should be satisfied that his/her work has not been unduly influenced by the organization, company, or person commissioning the Public Report or any report that may become a Public Report, that assumptions are documented, and that adequate disclosure is made of material aspects that the informed reader may require in order to make a reasonable and balanced judgment.

The Code requires that a Mineral Asset Valuation Report contain these elements:

1. Executive Summary
2. Introduction and Scope
3. Restrictions
4. Compliance with Standards
5. Property Being Valued
6. History of Activities
7. Geology
8. Mineral Resources
9. Modifying Factors, Assumptions, Key Risks.
10. Valuation Approaches and Methods
11. Valuation Summary
12. Valuation Conclusions, including ranges of values, best estimate, and restrictions.
13. Sources of Data
14. Previous Valuations
15. Competency of Valuator
16. Report Date
17. Other reports
18. Names and Qualifications of Competent Persons.

About half the 48 pages of the Code is given over to an Appendix on Valuation Methodology Guidelines. Interesting stuff--much of it reminded me of what I read in the software by Palisade on Decision Making. I wonder if this software can be used in South African Valuations?

Canada
I suspect there are others in Canada, but the only company coming up in searches is Watts, Griffis and McOuat. They have a long and impressive list of projects valuing mineral assets recently updated to 2005.

Having written the paragraph above, I wandered through the large number of Google pages and found Campbell Valuation Partners Limited. Mr. Ian R. Campbell their president is the author of the Canada Valuation Service (1990) which is updated five to six times a years and costs $446. There is no mention I can find on the site that they have undertaken valuations for mines. In fact they state specifically that they are Canada's longest established business valuation consulting firm specializing in mid-market business sales and acquisition transactions.

USA
In the USA we have Mr. Ellis (previously mentioned) and the John T Boyd Company for coal property valuations.

There is also the American Institute of Mineral Appraisers. Their stated purpose is to:

  • advance the profession of appraisal of minerals
  • advance the profession of appraisal of minerals
  • certify the qualifications of individual Member appraisers to the public; and
  • promote high standards of ethical conduct among its Members, and within the profession of appraisal of minerals.

On their website is a list of certified mineral appraisers, many fine technical papers on valuation, links to other mineral valuation resources.

They note two common approaches to valuation of a mine, namely the Discounted Cash Flow approach and the Sales Comparison approach. Here is a list of factors that enter into the use of the discounted cash flow approach for mines at different stages of development:

Type of Properties:

  • 1) Very early stage exploration (just above the level of "moose pressure" wotj a few holes drilled with encouraging results)
  • 2) Early stage exploration (with a several holes drilled with encouraging results)
  • 3) Late Stage Exploration (decision made to do a full bankable feasibility study, pre-feasibility study already completed with positive results)
  • 4) Early development (a full bankable feasibility study completed and the bank financing lined up: construction to begin in the next 6 months)
  • 5) Late development (full completion to be reached in the next 6 months)
  • 6) Producing mine
  • 7) Late stage producing mine (reserves to be depleted in 2 years; limited further exp;oration potential)
  • 8) Mine closed (equipment still on site, limited further exploration potential)

Dominant Methods:

1) and 2)

  • Appraised value/cost approach market comparables
  • 3) and 7)

  • Discounted cash flow, market comparables
  • 8)

  • Salvage Value
  • From An Overview of Valuation Practices and Development of a Canadian Code for the Valuation of Mineral Properties.

    As regards the use of the sales comparison approach, they note that this involves finding "comparable" properties and then making many small adjustments using what they term the "gridding" method. Here is a list of griding heading that may be used:

    • Mine
    • Company
    • Location
    • Development
    • Mine Life
    • Grade
    • Reserves
    • Country Risk
    • Other Risk
    • Expansion Potential
    • Taxes

    Australia
    MINASCO AUSTRALIA describes their valuation services thus:

    Minasco Australia provides mining and construction industries worldwide with specialist asset valuation and project marketing services and also consults to associated bankers, financiers and industry over a broad range of equipment on a number of bases. For full details on our services and current projects please visit our web site at www.Minasco.com.au

    Australia also yields Snowden but only Evaluation not Valuation. I am told they are as different as effect and affect, pathos and bathos. An Evaluation is generally a report on viability, whereas a Valuation is a report on monetary worth. So before we descend into either, we end this review. If you can add to it please do.



    MINE VALUATION METHODS OF CANADA, AUSTRALIA AND S. AFRICA - A COMPARATIVE SUMMARY

    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)

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