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John Lizak Mineral Valuation & Capital, Inc. December 6, 2011 Northeast Office Mailing Address 1805 Evans St. – Suite 1 Northampton, PA 18067 Phone 610-262-9120 Fax 610-262-4212 Direct Email: [email protected] •Weighted Average Cost of Capital (WACC) •Transactional Data © Mineral Valuation & Capital, Inc. 2011 WACC = (E/V x Ce) + (D/V x Cd) x (1 – Tc) Where: Ce = cost of equity Cd = cost of debt E = market value of the firm’s equity D = market value of the firm’s debt V =E+D E/V= percentage of financing that is equity D/V= percentage of financing that is debt Tc = corporate tax rate © Mineral Valuation & Capital, Inc. 2011 © Mineral Valuation & Capital, Inc. 2011 © Mineral Valuation & Capital, Inc. 2011 Data from guideline publicly traded companies Transaction data from public & private companies © Mineral Valuation & Capital, Inc. 2011 WACC = (E/V x Ce)+ (D/V x Cd) x (1 – Tc) Cd = The average yield to maturity on corporate debt with similar maturity and quality. Ce = cost of equity Cd = cost of debt E = market value of the firm’s equity D = market value of the firm’s debt V =E+D E/V= percentage of financing that is equity D/V= percentage of financing that is debt Tc = corporate ta © Mineral Valuation & Capital, Inc. 2011 Capital Asset Pricing Model (CAPM) Ce = Rf + ß(Rm – Rf) Where: Ce = cost of equity or expected/required return Rf = risk free rate of return Rm = expected market return (Rm – Rf) = Equity Risk Premium, or the amount by which investors expect the future return on equities to exceed that of the risk free rate ß = beta, the volatility of the company or comparable guideline companies relative to the market as a whole © Mineral Valuation & Capital, Inc. 2011 INDUSTRY SEGMENT 2007 2008 2009 Building Materials, Cement, Aggregates Companies 10.6 8.8 11.1 Coal Companies 15.0 12.5 14.2 Precious Metals Companies 11.8 11.6 12.2 Oil Producing Companies 10.4 9.7 11.4 © Mineral Valuation & Capital, Inc. 2011 © Mineral Valuation & Capital, Inc. 2011 © Mineral Valuation & Capital, Inc. 2011 INDUSTRY SEGMENT INDUSTRY RISK PREMIUM (from SBBI) 2007 2009 Coal Companies 7.0 3.8 Mining & Quarrying (Non-fuel, non-metal) 4.0 1.6 Oil & Gas Exploration Companies -0.4 1.6 Gold & Silver Companies -1.0 -1.5 © Mineral Valuation & Capital, Inc. (MVC) 2011 INDUSTRY SEGMENT Industry Risk Premium* OIL & GAS Royalty Trading Companies -4.0 Exploration Companies -1.0 Difference -3.0 * SBBI-IA Methodology © Mineral Valuation & Capital, Inc. 2011