Download Valuations in Mining and Exploration Seminar ‐ AIG (QLD)

Valuations in Mining and Exploration Seminar ‐ AIG (QLD)
11th November 2016 BRISBANE
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VALUATION OF MINERAL EXPLORATION
PROPERTIES WITH NO RESOURCES OR
SUB‐ECONOMIC RESOURCES
By Les Davis
A BRIEF REVIEW OF METHODS AND DIFFICULTIES
ALWAYS SPECULATIVE
OFTEN CONTENTIOUS
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VALID TENURE VALUE
GEOLOGICAL UNDERSTANDING MODELS – IDEAS – OPPORTUNITIES‐ RISKS
VALID PROGRAMS EXPLORATION EXPENDITURES
RESULTS
INCREASES
ASSESSMENT OF EXPLORATION TARGETS
INCREASES
OR
DECREASES
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Commodity prices influence valuations greatly
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• Copper is an excellent barometer and follows industry needs –
supply and demand
• Some commodities, particularly oil, gold, uranium are also affected by global politics
• Some, particularly minor metals, can be subject to market manipulation (think tin and silver) which can propel prices upwards for a time
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Individual commodities go through their own boom‐and bust cycle as well as the whole industry
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VALUATIONS IN COMMODITY SLUMPS ARE VERY DIFFICULT –
FUTURE COMMODITY PRICE SENTIMENT ALSO DRIVES VALUE
• Example gold in the 1970s
• Trough Tank – BHP 1976 (Low‐grade intersection)‐ walked away
• Osborne 1989 discovery‐1994‐construction‐1996 ‐production
• Mount Leyshon – Esso/EZI 1972 (bulk low‐grade gold recognised) walked away
• Mine developed 1986‐1987
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PRICE CYCLES AND LONG LEAD‐IN TIMES MAKE VALUATIONS DIFFICULT
The industry tends to explore and evaluate in booms and production may take place at any part of the cycle.
The Teutonic Bore deposit, a copper‐zinc‐lead‐silver VMS deposit, located 60 km north of Leonora
1974: Discovery 1976: Seltrust/CEC JV drill evaluate a massive sulphide lens over 320 m of strike
1981‐1985: All mining of the small deposit completed at a time of low metal prices
The valuer must also consider complexities such as the mineralogy of the discovery or target : is it amenable to upgrading by conventional methods to a concentrate with widely accepted grade(s), and only minor deleterious elements?
• Beltana willemite (Zn2SiO4) deposit – viable, Yes but restricted sales
• Fine grained massive sulphides – the lead‐in time to production can be painfully long – Consider the HYC and Dugald River deposits
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SOURCES OF VALUATION METHODS CONFERENCE VALMIN 1994 – MINERAL VALUATION METHODOLOGIES, Sydney Australia 27‐28 October 1994
AusIMM published "Mineral Economics" as MONOGRAPH 29 IN 2013 Chapter 9 Mineral Project Evaluation ‐ Financial Modelling and Discounted Cash Flow Analysis
Chapter 1O Mineral Project Evaluation ‐ Dealing with Uncertainty and Risk AuslMM (2012): "VALMIN Seminar Series 2011‐12". Conference Proceedings, 161pp C1MVAL(2003). Standards and Guidelines for Valuation of Mineral Properties. Gregg, L. T. and Pickering, S.M. (2007). Methods for Valuing Previous Exploration Programs during Consideration of Prospective Mineral Ventures in 42nd Industrial Minerals Forum in Asheville, NC. Lawrence, R.D. (2000). Valuation of Mineral Properties without Mineral Resources: A Review of Market‐Based Approaches in Special Session on Valuation of Mineral Properties, Mining Millennium 2000, Toronto, Canada. Onley, P.G. (2004). Multiples of Exploration Expenditure as a Basis for Mineral Property Valuation. In Mineral Valuation Methodologies Conference. AusIMM. pp191‐197. Thompson, I.S. (2000) A critique of Valuation Methods for Exploration Properties And Undeveloped Mineral Resources in Special
Session on Valuation of Mineral Properties, Mining Millennium 2000, Toronto, Canada. VALMIN Committee (2005). "Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports" , 2005 and 2015 editions. AIMVA (Australasian Institute of Minerals Valuers & Appraisers) presentation THE VALUATION OF MINERAL DEPOSITS – Sydney Branch AusIMM October 2014
Pat Stephenson of AMC –Newsletter ‐ Valuation of Mineral Exploration Properties
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METHODS
• Multiples of Exploration Expenditure ‐Prospectivity enhancement multiplier (PEM)
• Joint Venture Terms ‐ Option ‐ Farm‐in
• Points Rating Systems – Kilburn method
• Rule of thumb – Yardstick ‐ In situ metal value
• Expected Value probability decision tree analysis
• Market Capitalisation
• Real Estate Method – Comparative transactions
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VALUATION OBJECTIVES
• Valmin ‐ An independent estimation of fair market value of a mineral asset which could change hands between a willing buyer and a willing seller in an arm’s length transaction, wherein the parties had acted knowledgeably, prudently and without compulsion.
• International Financial Reporting Standards ‐ IFRS 13 states that when measuring fair value, the objective is to estimate the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (ie. to estimate an exit price).
• Consider the results of more than one methodology, if possible
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• Provide valuations within a range (Low – High)
• Provide a preferred value taken within the range
• Adopt appropriately rounded figures
• Clear statements of assumptions, data shortcomings , project risks, estimation risk, etc.
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MULTIPLES OF EXPLORATION EXPENDITURE
Issues
• The exploration must be relevant
• The exploration must be effective
• Exploration companies accounting methods are different and administration can be excessive
• Old expenditure must be adjusted for time
• Duplication of work might have taken place
• Recommended PEMs (usually in the range 0.5 to 3.0 but from zero to 5) do not have meaningful derivation
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It may be better to re‐cost the effective work for the valuation date rather than use reported expenses
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It is a good method for valuing large tracts of ground at early stages but tenements are required to be reduced; then expenditure applied outside the tenement has somehow to be accounted for.
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Note that some Valuations include the cost of future committed work. 12
The multiples of exploration method has received much criticism especially where properties have been abandoned
• Clearly at mature prospects, with time the opportunities must diminish and the PEM should be low
• Question: if a company abandons a prospect can the next explorer claim value for the work?
• We have seen discoveries made by explorers going over what seemed to be well‐explored ground so the decision can be difficult
• Again, tenements reduced to a small size may have reduced opportunity and less attractive targets 13
JOINT VENTURE TERMS
• For a simple case:
Value = Farm‐in expenditure divided by the interest earned (as a %), adjusted (reduced) for the time to earn the interest
• For cases where the joint venturer may withdraw:
Value = Farm‐in expenditure divided by the interest earned (as a %), adjusted for the time to earn the interest x the probability of completion
• Complex cases may in involve further adjustments for staged earnings, options, cash payments and other items. 14
Joint Venture Terms
• A Joint Venture establishes that there is at least some value and might be a guide
• Most explorers would think that earning‐in is a preferred method to offering cash and the amount does establish an arm’s‐length negotiation between the buyer and seller. The probability of completion is the main uncertainty.
• The principal shortcoming ‐ As the exploration program has not taken place, and may not even be planned, the effectiveness and validity of the program cannot be assessed.
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“At the very least, an exploration tenement without resources is worth the amount of money that an exploration group is reliably committed to spending on initial exploration of that tenement.“ (Ed Malone 1994)
I would add – probably, as long as the valuer
thinks that the program is appropriate.
Not all agree
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ASSESSMENT OF EXPLORATION PROGRAMS
For all methods but in particular Multiples of Exploration and Joint Venture terms, assessment of the work programs is critical. The Valuer needs to form a firm opinion It is important to take the time to avoid prejudice and technical arrogance Example: In 1988, Great Central Mines NL discovered the Plutonic gold deposit 180 km north of Meekatharra, in the Plutonic Well greenstone belt. 17
POINTS RATING METHOD (Kilburn system 1994)
After estimating the cost of acquiring a unit of ground, factors are applied for the measure of exploration appeal.
Unlike PEMs the factors are prescribed in some detail
The method forces one to look for and consider detail in the exploration results
The method was devised in the 1990s. For 2016, the template should be expanded to include Access and Environment restrictions
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EXPECTED VALUE PROBABILITY DECISION TREE ANALYSIS
• The process can be simplified as follows:
• After examining the geology and exploration potential a NPV range is assumed for a successful project
• At each stage the probabilities for progressing or withdrawing are estimated
• The ultimate Value is determined from the sum of the discounted NPVs after success
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Expected Value probability decision tree analysis, after Peter Onley valuing Ranger Minerals NL
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Expected Value probability decision tree analysis
ISSUES
• The range of NPVs must be appropriate to the economics for the region:
• A low NPV is not probably not relevant to remote inland Australia. There may be a high chance for discovery of a small deposit, which might be viable in favourable geographical situations – So, value nil • A small alluvial deposit with near 100% chance of success may be valued similarly to a valid but unlikely project campaign targeting a world class deposit with 0.001% probability chance of success • If you think you understand the target(s) well enough, you could apply Zipf’s Law ‐ plotting the rank and size of ore deposits to determine how many deposits remain undiscovered and their size. 21
RULE OF THUMB – YARDSTICK ‐ IN SITU METAL VALUE
Alter GOLDEN DRAGON CAPITAL
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RULE OF THUMB – YARDSTICK ‐ IN SITU METAL VALUE
The principle issue with applying dollar values to in‐situ estimated units is that there is no allowance for all the other factors which contribute to a viable scenario ‐
• particularly grade
• Depth and distribution of the mineralisation
• complexity and grainsize of the mineralisation
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MARKET CAPITALISATION
• Can be very misleading • Vast numbers of issued shares can inflate to the extent that underlying company assets are very overvalued
• In poor market conditions, the Market capitalisation can be less than the cash backing, let alone exploration assets 24
REAL ESTATE – COMPARATIVE VALUES
• An independent estimation of fair market value of a mineral asset which could change hands between a willing buyer and a willing seller in an arm’s length transaction, wherein the parties had acted knowledgeably, prudently and without compulsion.
• Very rare. Usually one party is under stress
• The circumstances behind a transaction should be investigated closely
• In practice, for tenements without resources, cash transactions are uncommon (less uncommon in booms). On the other hand joint venture method is common 25
After AMC 1996
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Stressed seller – Pasminco sale of Elura, 2002‐3
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Stressed seller – Pasminco’s sale of Elura, 2002‐3
• ELURA LEAD‐ZINC‐SILVER MINE TIMELINE
• Late 1970s the Elura project had commenced feasibility on the basis of a resource of 27 million tonnes grading 8.3% zinc, 5.6% lead and 140g/t silver
• Elura was brought into production in 1983 at a cost of $270 million. Elura became the second largest metallic mine in NSW, with many up‐to‐date features ensuring high efficiency and productivity. • By mid decade it was operating at a high level, in excess of 1Mt per annum.
• The Elura mine was acquired by North Broken Hill Holdings Ltd in 1984‐5, after the latter took over EZ Industries Ltd in 1984.
• 1985 and the Cobar Mines, especially the CSA and Elura were in danger of closing but survived.
• Elura remained in a loss situation through 1986 and beyond
• Through merging the lead‐zinc mining and smelting assets of North Broken Hill Peko Ltd and CRA Ltd in 1988, Pasminco Limited (“Pasminco”) became one of the world's largest base metal mining and smelting companies. The company listed on the ASX in March1989 with an initial ownership of CRA 40%. North 40%, other 20%.
• The recession of 1991 again severely threatened the operation of the Cobar area mines, with Elura reducing staff by over 260 employees and Pasminco suffering a loss.
• The resources at Elura were expanded greatly to in excess of 45 million tonnes in the late 1980s‐early 1990s. By 1996, 13.5 million tonnes had been mined
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Stressed seller – Pasminco’s sale of Elura, 2002‐3
• In 2001, Pasminco was asset rich – the world’s biggest lead‐zinc‐silver mining and smelting company
• Cash poor however and with $2.6 billion in debt. Interest rates were still in the 7%‐8% range and sales could not service the debt at the low zinc and lead prices from July 2001 – 2003.
• Pasminco did not hedge.
• A decision was made to divest Pasminco' Australian mining assets and convert the company into an international smelting business in September 200I; it had become apparent that a number of Pasmincos
financiers were either unwilling or unable to extend longer term credit support.
• In February‐April 2003, Consolidated Broken Hill Ltd (“CBH”) completed negotiations for the purchase of the Elura zinc‐lead‐silver mine. • CBH would pay $2.2 million cash for Elura, a further $3.2 million nine months after completion and up to $5 million in production royalties should the zinc price exceed $2000 per tonne (it was $1300 a tonne at that time). CBH would also take on $11.8 million of Pasminco's liabilities, taking the total consideration for Elura up to $22.2 million.
• For this CBH procured:
• Mine and plant infrastructure costing $270 million (1983)
• Mine decline and development
• Capacity to process over one million tonnes per annum
• Existing ore estimated at approximately 30 million tonnes
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Ebullient buyers of uranium –1980 to ~2012
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Ebullient buyers of uranium –1980 to ~2012
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Ebullient buyers of uranium –1980 to ~2012
Date
U 3O 8
%
Purchase price A$ million
A$/lb
CPI
Theoretical A$ per pound (2016)
Spot
Deposit
Vendor
Purchaser
price
2007
Valhalla
100%
776.2
27.2
1.23
33.4
QLD
Paladin Limited
12900
US$ 85
Summit Resources
2008
Kintyre
Rio Tinto
25274
100
495
8.9
1.17
10.4
US$ 64
2012
WA
Yeelirrie
Cameco and Mitsubishi
BHP
Cameco
57760
100
411
3.2
1.07
3.5
US$ 48
2013
Wa
Maitland (Wiluna)
Mega Uranium Ltd
Toro Energy Ltd
12306
100
36.9
1.4
1.04
1.4
Energia Minerals
Paladin Limited
7100
100
15.8
1.0
1
1.0
Alliance Craton Explorer Pty Ltd
Quasar Resources Pty Ltd
30893
25
44
2.6
1
2.6
Boss Resources Limited
12500
100
14.5
0.53
1
0.5
US$
WA
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2015
Carley Bore
US$
Wa
37
2015
US$ 36
Four Mile East (Beverley)
SA
2015
Honeymoon
US$ 37
SA
Rosatom tonnes
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The decline in uranium prices was mostly due to the Fukushima disaster 33
FORWARD PRICES Although a Valuation must be current, the high end of the Valuation must inevitably allow for forecasting ‐ ARROW REPRESENTS TWO‐YEAR FORWARD EXPECTATIONS
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Conclusions ‐ dos and don’ts
• Use all appropriate methods as primary tools and the rest to compare • Explain your rationale but do not over‐complicate the discussion as it implies a precision you do not have
• If you apply statistical studies – Monte Carlo simulation perhaps you may end up with a broad range of value. This is no good for your client – the accountant or the buyer or seller • Consider yourself as an Exploration Manager – would you pay the Valuation amount?
• Try to get a second independent opinion
• One cannot be overly concerned with the view that in most cases the value will be shown to be excessive in the course of time. In rare cases, when the jackpot bonanza is struck the value will have been low. In the course of time, all valuations will be wrong. This is the way of the market and only re‐inforces the notion the market value is a function of time (Roth and Phillips, AusIMM Bulletin, No 3, May 1992)
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