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CHAPTER 4.

valuation of
Mineral Properties
Bernard J. Guarnera and Michael D. Martin

inTRoDuCTion

raw land, where the presence of minerals is only suspected,


to large developed properties that have been mined for many
years. The commodities can include metallic minerals, nonmetallic minerals, energy minerals, and gemstones.

The valuation of mineral properties or mining companies


involves the integration of geology, mining, processing, mineral markets, society, and the environment Accordingly, it is
common for a multi-disciplinary team to work on valuation
efforts and their findings to be incorporated into the valuation.
It is essential, however, that any effort be led by an experienced
valuator who assumes responsibility for the valuation report.

valuation Assumptions
Before a valuation is undertaken, certain basic assumptions
must be satisfied:
Mineral development is the highest and best use of the
property (unless the valuation is for condemnation
purposes).
A fair market value is attainable.
All lands have an inherent value for minerals that might
occur on them.
A market exists for the mineral or minerals that may be
on or under the land.
Economic realism must be employed (e.g., a granite
deposit under an ice cap would have no value, whereas
one adjacent to a major city could be developed for
aggregates or dimension stone).

What is a valuation?
How does a valuation differ from an evaluation? An evaluation simply focuses on the technical aspects of an asset or
assets, whereas a valuation focuses on the worth of the asset.
Two major factors are considered:
1. Highest and best use: Although all mineral-containing
properties have an inherent value, which in itself does
not indicate that a valuation of the minerals is required,
the valuation performed must be based on the highest and
best use of a property. An example would be a mineral
deposit suddenly discovered on an undeveloped property
in the middle of an area with developed residential or
commercial real estate. It is possible that the value of the
real estate would exceed the value of the minerals (the
highest use) or, if it did not, that real estate development
was the only possible use of the property because of zoning or environmental factors (the best use). Therefore,
unless the valuation was for a condemnation proceeding
specifically to value the mineral interest, the highest and
best use would be deemed to be real estate development.
2. Fair market value (FMV): The valuation should always
be based on the FMV of the asset, which is the price an
asset would be exchanged for with the parties being a
willing buyer and seller, with both parties having access
to the same information about the asset, and with neither
party being under compulsion to buy or sell the asset.

existing Mineral valuation Codes


Although valuations of assets have many things in common,
it is recognized that the valuation of mineral deposits, properties, or mining companies requires expertise beyond that
offered by the typical appraiser. In recognition of these differences, specific codes governing the valuation of mineral
deposits and properties have been developed by professional
mining associations in countries where mineral resources significantly contribute to the economy:
VALMIN codeAustralasian Institute of Mining and
Metallurgy. This code is statutory in Australia.
CIMVAL codeCanadian Institute of Mining,
Metallurgy and Petroleum. This code is due to become
statutory in Canada.
SAMVAL codeSouth African mining associations.
This code is statutory in South Africa.

Types of Properties
Valuation methods vary in type and effectiveness for both
undeveloped properties and properties already in operation.
Properties warranting or requiring a valuation can range from

The Mining and Metallurgical Society of America is in the


process of developing recommended standards for mineral

Bernard J. Guarnera, President and Chairman of the Board of Directors, Behre Dolbear Group, Inc., Denver, Colorado, USA
Michael D. Martin, Senior Associate, Behre Dolbear & Company (USA), Inc., Denver, Colorado, USA

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Table 4.6-1 Applicable valuation methods


Types of Properties
Method

exploration Stage

feasibility Stage

Development Stage

operating Stage

Multi-Property
Company

x*

Income (cash-flow) approach


Market-related transaction

Market multiples approach


Replacement cost approach

Option/real option pricing


Monte Carlo simulation

x
x

Source: Adapted from CIMVAL 2003.


*The income approach may or may not be applicable at the feasibility stage, depending on the reliability of the available information at the time that the valuation
is required.

property valuation in the United States. The International


Valuation Standards Council is also developing guidelines for
the valuation of mineral properties. These are anticipated to
focus on market factors and will potentially be in conflict with
the above three codes.
Unless specifically requested otherwise, mineral property
valuations should be carried out in accordance with one of
the VALMIN, CIMVAL, or SAMVAL codes/standards. The
choice of code will depend primarily on the reporting location
of the company as well as the property, the party requesting
the valuation, and the party carrying out the valuation.

TyPeS of vAluATion MeThoDS

There are three primary methods of valuations:


1. The income (cash-flow) approach, whereby the cash
flow resulting from a financial model is discounted at an
appropriate rate to yield a net present value (NPV)
2. Market-related approaches, which develop a value based
on recent related transactions, and the market multiples
approach for publicly traded companies or from recent
transactions
3. The replacement cost approach, in which the cost required
to duplicate the asset being valued is assessed
Secondary methods include option/real option pricing valuations and Monte Carlo simulations. Table 4.6-1 lists the
six valuation methods, together with the types of properties
to which they are applicable. The methods themselves are
described later in more detail.
In contrast to the other methods listed in Table 4.6-1, the
income approach should yield a true or long-term value over
the life of the asset, provided that the inputs to the cash-flow
model are realistic. The market-related transaction or market
multiples approach, on the other hand, provides a snapshot
value at the time of the valuation; the derived value will likely
be higher than the income approach value in prosperous times
and lower in difficult times.
The market multiples approach differs from the marketrelated transaction method in that, rather than comparing the
asset against one that was recently sold, it is based on the
value ascribed by public markets to units of production of specific commodities. An example would be to base the valuation
solely on the pounds of copper or ounces of gold recoverable
from the property.
When market valuation methods are used, it is essential
that they be adjusted to reflect the realities and characteristics of the asset or company being valued. Failure to allow

for these differences will result in incorrect valuations. Thus


a property containing 1 million ounces of recoverable gold
with the capability of achieving full (cash plus capital) production costs of $200 per ounce is clearly worth much more
than another million-ounce property whose full production costs are forecast to be $400 per ounce. Similarly, an
underground gold property with a refractory ore would be
negatively viewed when compared with an underground gold
property with an ore that would only require simple flotation
and concentration.
The replacement cost approach can be used as a check on
one of the other methods, or alone if none of the other methods
is particularly applicable. This method puts a value on finding
another similar mineral property and replacing similar infrastructure that previously existed. This method is most commonly used for valuing early-stage exploration properties or
properties that have ceased operations but still have resources
or reserves. When using this approach, it is essential to consider improvements in technology.
The option/real option pricing valuation approach should
be used only to value a company with multiple operations,
rather than an individual property. This method is described
later in this chapter.
The Monte Carlo simulation approach is a method of
analysis based on the use of random numbers and probability statistics to investigate problems with variable potential
outcomes. In financial analysis and valuation there is a fair
amount of uncertainty and risk involved with estimating the
future value of financial numbers or quantity amounts because
of the wide variety of potential outcomes (i.e., grade of
deposit, reserve tonnage, commodity price, operating costs,
capital costs, etc.) The use of Monte Carlo simulation is one
technique that can be applied to evaluate the uncertainty in
estimating future outcomes and allows for the development of
plans to mitigate or cope with risk.
Typically with conventional spreadsheet models, the
engineer, geologist, or analyst creates models with the bestcase, worst-case, and average-case scenarios, only to find later
that the actual outcome was very different. With Monte Carlo
simulation, the analyst explores thousands of combinations
of the what-if factors, analyzing the full range of possible
outcomesan iterative process yielding much more accurate
results with only a small amount of extra work, thanks to the
numerous choices of Monte Carlo simulation software that
are available. The Monte Carlo simulation cannot eliminate
uncertainty and risk, but it does make them easier to understand by ascribing probabilistic characteristics to the inputs

valuation of Mineral Properties

and outputs of a model. The determination of the different


risks and factors affecting forecasted variables can lead to
more accurate predictionsthe desire of all mining managers.
Reviewing Table 4.6-1, one can observe the four stages in
the life of a mineral property and the likely applicable valuation methods for each one. Early-stage exploration properties
are the hardest to value, whereas operating-stage properties
are usually the easiest. In between those two stages, more
than one method can usually be employed, with a weighted
average value based on the strength of each method used or
range of values developed from which a preferred value can
be derived. It is also possible for a given property to be in
more than one stage at any given time. One such example is a
property with undeveloped resources undergoing exploration
very near an operating mine.
valuation Methods for Developed or operating
Properties
Properties that are developed (i.e., ready to operate) or are
operating and have a financial history, are usually valued by
the income approach. This approach employs the life-of-mine
production schedule, forecast or actual operating costs, forecast sustaining and replacement capital costs, and reclamation/
closure costs. On the assumption that these have been correctly forecast and projected, the only parameters that would
be subject to dispute in this method are the commodity prices
and the discount rate used in the valuation.
Some other valuation methods used for developed or
operating properties include

Liquidation value,
Market-related values,
Replacement value, and
The value of a royalty stream if the property is being valued for a lessor.

Income (Cash-Flow) Approach

The income, or cash-flow, method involves constructing a


financial model of the cash flow covering the expected life of
the mine, generally up to the first 20 years of production. The
financial model should be based on constant dollars, where
product selling prices, cash operating costs, and future capital requirements are not inflated (varied). It is appropriate to
change future operating costs over time by reflecting changing
physical conditions, such as longer haul-truck cycles, reduced
metallurgical recoveries because of a change in the character
of the ore body, and similar measures that the mining professional can predict.
To perform an accurate valuation using this method, the
following inputs are required:
Ore reserves over the life of mine. Resources can be
included if factored for their probability of conversion
to reserves; however, the valuator should be cognizant
of regulatory requirements, such as those of the TSX
Venture Exchange (a Canadian stock exchange) that precludes the inclusion of resources in a cash-flow model.
Production rates
Operating costs, including on-site general and administrative (G&A) costs, ongoing development costs, and
nonincome taxes
Capital costspreproduction and sustaining/replacement
Environmental and reclamation costs

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Commodity prices
Discount rate
The commodity prices and discount rate utilized in the cashflow valuation are two critical items that are based on the valuators experience and judgment. Because of the critical impact
these two inputs have on the income approach valuation, they
should be developed by the valuator from first principles.
Commodity price selection. While valuations are
forward-looking, income approach valuations should normally incorporate a constant commodity price based on longterm historical data. Commodity prices should reflect the
up-and-down cycles, which are common to the mineral industry. It is the authors experience that a 10-year period would
normally incorporate both cycles. When valuing an operating
property or one near operating status, however, it is acceptable
and appropriate to include consensus pricing for the first 2 or
3 years of operation prior to returning to the long-term price.
As an example, when an examiner values an operating copper
property, if the copper price for the last 10 years has averaged
$1.75 per pound, but the current price is $3.50 per pound, the
consensus view might be to use $3.50 per pound for year 1
of the cash flow model, $3.00 per pound for year 2, $2.25 per
pound for year 3, and then level off at the 10-year average
price of $1.75 per pound for the remainder of the mine life.
Discount rate determination. The discount rate essentially reflects the risks present in an investment and is the rate
at which the cash flow from a mining property or of a mining
company will be discounted. It is never appropriate when conducting a valuation to arbitrarily assign a discount rate; rather
the discount rate should be derived from first principles.
Three methods are employed for deriving a suitable discount rate; the method selected is based on the nature of the
asset being valued.
1. Weighted average cost of capital (WACC) method
2. Capital asset pricing model (CAPM)
3. Risk buildup method
Weighted average cost of capital discount rate derivation. The WACC method is based on the proportional cost of
equity and debt for a particular corporation at a specific time.
It should be used as a discount rate only for companies; it is
not appropriate for valuing single projects. The key strength
of the WACC method is that it incorporates the global risks of
all of a companys operations and projects into a single rate,
which should reflect the melded risks of the companys assets.
Capital asset pricing model. The CAPM was developed
as a valuation tool for shares of publicly traded stocks. It incorporates various elements of an investment, including the riskfree rate of return offered by U.S. Treasury bills and notes,
the greater risks inherent in stocks versus other investments,
and the volatility of the shares of a company compared to the
average companys shares as measured by its beta. (Note: Beta
is a measure of a stocks price volatility in relation to the rest
of the market. In other words, it is a guide on how a stocks
price is likely to move relative to the overall market. Beta is
calculated using regression analysis. The whole market, which
for this purpose is considered to be the Standard and Poors
500 (S&P 500), is assigned a beta of 1. Stocks that have a
beta greater than 1 have greater price volatility than the overall market and are more risky. Conversely, a beta lower than 1
denotes less volatility than the market and therefore less risk.
For example, if the market with a beta of 1 is expected to

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return 8% annually, a stock with a beta of 1.5 should return


12%. Young technology stocks will always carry high betas;
many utility stocks, on the other hand, carry betas below 1.)
The CAPM method is appropriate only for valuing companies;
it is not appropriate for establishing the discount rate for individual mining projects or properties. Importantly, the discount
rate derived is after-tax for a seller of the shares, and pretax
for a buyer of the shares.
Risk buildup discount rate derivation. The risk buildup
method is preferred by the authors of this chapter as it reflects
the values relevant to the specific properties. In form it is similar to the CAPM method; however, it is differentiated by its
inclusion of the technical and other risks associated with the
typical mining project. Essentially it adds the components of
risk at the project to arrive at an overall risk rate for a given
specific property or group of properties. The usual components incorporated are
The real risk-free rate of return;
The risk premium expected by an investor who would
invest in mining projects which can be assumed to be the
same as that for a publicly traded company. There would
be additional premium if the project being valued would
have a market capitalization of a small cap (i.e., less
than $200 million);
Mining industry specific risk; and
Site-specific risk for individual properties.
The real risk-free rate of return is the difference between
the interest rate on U.S. Treasury notes of a maturity approximating that of the project life and the current inflation rate and
is measured by the following formula:
Rfr =
where

^1 + Rfn h
1
^1 + Ie h

Rfr = real risk-free rate of return


Rfn = nominal risk-free rate offered by U.S. Treasury
notes
Ie = expected inflation rate

Accordingly, assuming a 10-year mine life and 10-year U.S.


Treasury notes yielding 4% with inflation at 1.5%, the real
risk-free rate of return is
^1 + 0.04 h
1 = 0.025 or 2.5%
^1 + 0.015 h

With a public company risk premium, investors clearly


require a greater return on their investment than that provided
by risk-free U.S. Treasury notes. They are willing to accept
additional risk for the expectation of a greater return.
If the company involved is a large one (S&P500), the
risk premium for such shares can be found at the Ibbotson
Associates Web site. The risk in 2007 was about 7%.
If the company has a market capitalization of less than
$200 million (i.e., small cap), an additional risk premium is
warranted. In 2007, this was an additional 3% for a total public company risk premium of 10%.
With mining industry risk, based on historic company
and industry returns on equity, there is an above-average risk
premium for certain industries. These include the aggregate,
mining, and petroleum industries, all of which are dependent
on the vagaries of natural resources. In 2007, the industry risk
premium for the mining industry was 2.5%.

With site-specific project risk, multiple risk factors exist


at mining properties ranging from reserve risk through processing, environmental, political, and geotechnical risk.
Following are some of the factors that need to be considered:
Project statusThis involves exploration, development, or in operation. As a project advances through
these stages, the risk factor will normally decrease. For a
mature operating property that is performing up to forecasts, the risk will be lowest.
Quality of analytical dataIf the quality of the data
derived from the drilling, sampling, and assaying of
the ore body is suspect, the project risk must reflect this
uncertainty.
Processing-related riskThis risk can be high if adequate metallurgical test work has not been performed on
samples truly representative of the whole ore body or if
new, unproven technology is being employed.
Infrastructure-related factorsRisks can occur if
there are unusual circumstances that might cause interruption to the power and water supply or cause access to
the property to be lost.
Environmental considerationsIn contrast to projects
20 or more years ago, a project located in a sensitive environmental setting must be given a risk rating higher than
one that is isolated and insulated from likely environmental damage; government, regulatory, and permitting risks
are thus assessed.
Operating and capital costs, and working capital
Poorly predicted figures for these three items introduce
substantial risk. The most common of these is an underestimation of total project capital.
Prices and marketsPrice projections on which the
project economics are based must be realistic, and there
must be a market for the product produced.
Labor/Management issuesThe availability, education, and trainability of the required labor force in less
developed countries is an issue. Union activism poses a
risk to some projects. The quality and experiences of the
companys management must be considered.
Political and social issues, and the social license to
operateThe lack of perceived support from the local
inhabitants and government bodies is a major risk.
It is not always possible to secure good information on all
of these factors affecting site-specific project risk. If possible,
a matrix should be constructed with a ranking from 1 to 10
assigned to each factor. From this, an overall risk factor can
be assigned. For an exceptionally low-risk project, a factor of
1% or 2% may be chosen; for one with many uncertainties, the
factor is likely to be 5% or higher.
Summary of risk-buildup discount rate. Table 4.6-2 is an
example of a risk-buildup discount rate, showing both pretax
and after-tax figures. Since the discount rate developed is pretax, it must be converted to an after-tax basis.
Other factors to be considered in the income approach
valuation method. Two other factors should be taken into
account in an income approach valuation of a property or
properties.
The first, and more important of the two, comes into play
if an acquisition is involved and if the acquirer will end up
being in control of the property, properties, or company. Given
that the acquirer will be in charge of his or her own destiny, he
or she is not subject to the bad decisions of a senior owner. If

valuation of Mineral Properties

Table 4.6-2 Summary of risk buildup discount rate


item

Rate, %

Real risk-free rate of return

2.5

Public company risk premium

7.0

Small cap premium

3.0

Industry-specific risk

2.5

Site-specific risk*

3.0*

Total (pre-tax)

18.0

Total (after-tax)

12.0

*A low-average risk rate of 3% has been chosen for this example.


From Lerch 1990; the example assumes a tax rate of 33.3%.

the acquirer is in charge, a control premium should be added


to the total valuation obtained from the income approach
method. The amount of this premium cannot be standardized
and depends on the type of company and its position in the
development/operating chain. During 2007, the control premium for acquisitions of large properties and companies frequently exceeded 30%.
The second factor to be considered is a terminal value
of the free cash flow for operations that have a life exceeding that of the financial model. A terminal value is commonly
arrived at using the assumption that ongoing operations will
mirror the conditions that applied to the last 5 years of the
cash-flow valuation, unless there is good reason to expect an
ore-grade change or a metallurgical recovery change, and so
forth, to occur. The terminal value is measured by the following formula:
Tv =
where

FCFN + 1
^ D Gh

Tv = terminal value
FCFN+1 = annual free cash flow in the residual years
after the final year in the financial model
D = discount rate used for the terminal value
G = annualized rate of growth of the enterprise
over the life of the financial model

The discount rate used may be higher than that used in the
financial model as the inputs to the model would be less certain in the terminal value years.
It is not uncommon for the terminal value to be a significant part of the NPV determined by the financial model.
Market-Related Transaction

On the surface, the market-related transactions or comparable


sales approach valuation method should be the simplest to understand and the easiest not to fault. One can simply find several
recent transactions with their documented purchase prices and
then compare the price paid per pound or ounce at that property
with the one requiring the valuation. Unfortunately, it is not that
simple. No two mining properties are even remotely identical
due to differences in all the parameters that were itemized in the
site-specific project risk discourse previously discussed. Even
parts of the same mineral deposit can be different. Nevertheless,
because of the perceived simplicity of the method, this is a frequently used valuation method and is a preferred technique by
the International Valuation Standards Council.
To achieve even relative comparability, all transactions
considered must be adjusted in relation to the property being

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valued. For example, if both are narrow-vein, underground


gold properties and one has a grade of 0.6 ounces per ton and
the subject property has 0.3 ounces per ton, the value of an
ounce at the subject property will obviously be lower than the
property it is being compared with. Similar adjustments need
to be made for mining costs, processing costs, political factors, geography, and so on.
Market-related transactions, as applied to exploration
properties. Generally little information is available about
exploration properties due to the early stage of the property
in the mine development cycle. Assuming that results are
positive, the value of exploration properties increases with
the level of work performed. Frequently a prospectivity factor is added or deducted to the value based on known results,
regional settings, and history.
By the time that a property has either been fully explored,
reached the development stage, or started production, there
are likely to be other transactions that can be used for developing a market-related transaction valuation, provided that the
individual differences between the properties are taken into
account.
Market-related transactions, as applied to development or operating properties. When a property is either
in development or operating, there will be much credible
information available for it, and, unless the commodity is an
unusual one, there are likely to be several fairly recent comparable transactions to reference for the valuation. Even so, care
must be taken in two areas:
1. The transaction prices for the comparables must be adjusted
to present-day conditions when either or both metals prices
and costs of production may have changed; and
2. The transaction prices must be adjusted to reflect the
different variables that will have affected the price paid
for each property, including the relative size of the mineral deposit; differences in ore grade, mining method,
and processing recoveries and methods; and the amount
and cost of required infrastructure, operating and capital
costs, environmental and social issues, tax regimes, and
political risk.
Market Multiples Valuation

The market multiples valuation method has similarities to the


market-related transactions valuation method and has some of
the same drawbacks (principally property or corporate differences). It also has the advantage wherein other transactions
(comparable existing properties) do not have to be identified
and evaluated.
Market capitalization, which is the quoted share price
multiplied by the number of issued shares, can be divided by
many factors to derive a value per ounce or pound of proven
and probable ore reserves or resources, the value per pound
or ounce of annual production, the multiplier given to earnings, and so forth. These different metrics constitute a market
multiples valuation, and these can then be used to develop a
generic value for the company. Such figures are available for
many mineral companies, enabling an average valuation per
unit of the metric to be established.
A market multiples valuation can also be based on
A multiple of average annual cash flow, and
A multiple of earnings before interest, taxes, depreciation, and amortization.

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Again, adjustments must be made to ensure that the value


developed is truly based on comparable factors. For example,
a market capitalization value for a major mining company
with several producing mines should not be used to develop
a market multiples value for a junior company with only one
producing mine.
Replacement Cost Valuation

Replacement cost valuations are simply the expenditure that


would be required in current dollars (or other currency units)
to duplicate a prior effort. Replacement cost valuations are
most commonly used for
Exploration properties at various stages, and
Operations that have been shut down with remaining
resources or reserves.
For exploration properties, the costs of land acquisition,
duplicating any geological, geochemical, or geophysical work,
duplicating the prior drilling and assaying performed, and so
forth, are determined as the basis of the propertys value. Any
negative results must be considered, and, using the appraisers
judgment, they may be subtracted entirely or included in a
factored manner.
When being applied to operations that have been dormant for a period of time but which still have facilities in
place, the replacement cost valuation focuses on the current
cost required to replicate the facilities. A factor that must be
considered is whether new technology has made the original
equipment obsolete. If such is the case, the cost of the new
technology must be included, although it is possible that this
would overvalue the property. Another factor that should be
considered is whether there has been any change in the markets for the commodity that was previously produced.
If the property is being valued by the replacement cost
method and resources and/or reserves are still present, the
value could be based on the cost of replacing those ounces,
pounds, or tons present.
Option/Real Option Pricing Valuation

Although used less frequently than the methods already


described, the option/real option pricing valuation method is
one that can be used for valuing mining companies with multiple operating properties. The philosophy behind options is
based on the formula developed in 1973 by Black and Scholes
to be used in the valuation of equities. As currently applied to
mineral properties, option valuations are based on the following premises:
The income approach valuation method may undervalue
both producing and nonproducing mining assets. This is generally true in boom times, but incorrect in difficult times.
Mining properties offer the opportunity to be shut down
when economics are negatively affecting cash flow and
reopened when economic factors are positive. Although
this is true in concept, in practice, closing and reopening
mines based on volatile economic changes is impractical
and would potentially be financially ruinous if attempted
by mining companies. The cost of shutting down, maintaining the property on a standby basis, and the time it
would take to reopen and ramp-up production is not considered in option theory.

Mining properties offer a call option on increases in metals prices. (If the gold price is, for instance, $300 per
ounce, then a property requiring a price of $350 per ounce
to generate a positive cash flow has a finite value.) Note:
For readers not familiar with the concept of options, reference is made to puts and calls on 100 shares of a stock
on a major stock exchange. Simply, each call gives the
call owner the right to purchase 100 shares of the stock in
question at a fixed price for a fixed period of time. (The
lower the fixed price and the longer the period of time,
the higher is the price of buying the call.) For example,
if Party A owns 100 shares of a stock currently selling
at $100 per share and the calls on a price of $110 per
share expiring 2 months in the future are trading at $3
per share, then Party A can sell a call on his or her stock
and immediately pocket a check for $300. If the stock
does not reach the call price of $110 per share in the next
2 months, Party A will have made $300 and will still have
the stock. In the meantime, Party B has bought Party As
call for $300, but if the stock does not reach $110 a share
within the 2-month time period, Party B will have lost
their $300. However, should the price of the stock rise
to, for instance, $116 per share before the 2 months are
up, Party B will have doubled their initial investment of
$300. (Party Bs call gives them the right to buy the stock
at $110 per share and they can turn around and immediately sell it for $116 per share, thus realizing a net profit
of $300.)
When considering the use of option valuations, it is also
important to recognize that
The longer the option period, the higher the value will be;
The greater the volatility of the commodity price, the
higher the value will be;
This valuation method will always produce the highest
(and probably unrealistic) value; and
This method is applicable to valuations of companies, not
single properties.
Monte Carlo Simulation

The Monte Carlo simulation method can be used for any properties that are at least at the advanced exploration phase. Monte
Carlo simulations allow for multiple variables to be changed
simultaneously while a specific operation is mathematically
performed literally thousands of times. The probabilistic value
results from a range of probabilities assigned to each variable
in the analysis (i.e., capital and operating costs, and commodity prices) to arrive at a most likely value, or range of values,
as based on iterations of cases that sample the distributions of
each variable.
Alternative valuation Methods for undeveloped
Properties
Undeveloped properties include those with blocked-out
resources or properties with drill holes that have ore grade
intercepts. Although the lack of concrete information makes
the valuation of such properties more difficult, a probability
approach, such as the risk-adjusted income approach, can be
used. The approach entails the construction of a financial model
of the property using likely production rates, ore grades, mining and processing methods, and capital and operating costs.

valuation of Mineral Properties

A justifiable commodity price is chosen, the real risk-free rate


of return is used for the discount rate, and the discounted cash
flow is calculated. The valuation for an example property then
becomes the calculated NPV (say, $100 million), as adjusted
for the percentage probability that the items incorporated in
the financial model, such as ore reserves, costs, and environmental risks, have been correctly estimated. If the risks for the
stated items are, respectively, 80%, 90%, and 50%, the valuation would be $36 million ($100 million # 0.8 # 0.9 # 0.5).
Alternative valuation Methods for exploration
Properties
Exploration properties include those where no work has been
performed and those where some work has been performed.
For properties where no work has been performed, two
methods are commonly used:
1. The valuation is a percentage of the surface value of the
property. For no work of any kind in a mineralized or
unmineralized area, the percentage is 5%. For raw property, but where initial reconnaissance has indicated favorable potential, the percentage is 10%.
2. The valuation is the money that has been spent in staking/
leasing and maintaining the property.
For properties where some exploration work has been
performed, the following methods are commonly used:
Modified cost of work performed, with prospectivity
factors included
Geoscience matrix valuation
In the modified cost of work valuation method, the direct costs
of work performed are added to valid G&A costs to arrive at a
base value. If there have been some highly favorable exploration results, some enhancement of the base valuation is appropriate. Similarly, if results on or at nearby similar properties
have been negative, a negative prospectivity factor is applied.
The geoscience matrix valuation method was developed by Lionel Kilburn for the British Columbia Securities
Commission to assist them in validating the values being
assigned to exploration properties by junior mining companies. Five major criteria are considered, which are divided into
nineteen possibilities:
1. The location of the property with respect to off-property
mineralization;
2. The presence of any on-property mineralization;
3. The location of the property with respect to off-property
geochemical/geophysical/geological targets;
4. The presence of any on-property geophysical/geochemical
targets; and
5. Geological patterns on the property associated with
known commercial deposits.
The starting point, or base value, for the valuation is the
per-acre or per-hectare cost of acquiring the right to a mineral
property, usually the cost of staking and maintaining a claim
for 1 year. The property is then rated on the basis of its score
from the matrix, and this rating is then used to adjust the base
value. The value from the matrix is arrived at by assigning
points in the five categories, based on whether the property is
above or below average. Table 4.6-3 illustrates how the matrix
rating is derived.

225

Table 4.6-3 Categories used in matrix valuation


Rank

value
factor

Sub-ore grade in two horizontal directions

17

1.5

Ore grade with two horizontal dimensions

13

2.0

Sub-ore grade with three dimensions known

12

2.5

Ore grade with three dimensions known

3.0

A past or present producing mine

4.0

A major past or present mine

5.0

13

2.0

Ore grade with two horizontal dimensions of


economically interesting size

3.0

Interesting but sub-ore grade in three dimensions

5.0

An economically interesting ore-grade zone in three


dimensions

68

Past producer with ore grades measured in three


dimensions

78

Major past or present producer with ore grades


measured in three dimensions

910

Category
A.

B.

Location with respect to off-property mineralization

Location with respect to on-property mineralization


Interesting but sub-ore grade with two horizontal
directions

C.

D.

Location with respect to off-property geochemical/


geophysical/geological targets
One target or two, based on different methods

19

1.3

Three or more targets

17

1.5

Location with respect to on-property geophysical/


geochemical targets
13

2.0

Two or three targets

3.0

Four or more targets

3.5

13

2.0

3.0

One target

E.

Geological patterns associated with known


commercial deposits
One or two patterns
Three or more patterns

Source: Adapted from Kilburn 1990.

RuleS-of-ThuMB vAluATionS

In the rules-of-thumb valuation method, the valuation is based


on a percentage of the commoditys price, with the percentage dependent on the state of advancement of the particular
property. Table 4.6-4, based on more than 500 transactions
analyzed by Frank Ludeman in his publication, A Decade of
Deals, gives the range of percentages for the different stages
of properties (Ludeman 2000).
The rules-of-thumb values provided in Table 4.6-4 should
be considered as generic, and the actual percentage a property will value varies with the tenor of the mining industry.
The 500 properties studied provided an average value, and
the percentage of the commodity price assigned to a property
should be based on its characteristics versus that of the average property.

ReQuiReD QuAlifiCATionS foR A vAluAToR

The required qualifications for a valuator will depend to some


extent on the complexity of the property to be valued, as well
as on the type and number of the methods to be employed.
The greater the complexity and the number of methods to be

226

SMe Mining engineering handbook

Table 4.6-4 Rules-of-thumb values


Precious Metals
(%-per-ounce
price)

Base Metals
(%-per-pound
price)

Early exploration

1.52.5

1.02.0

Inferred resources

2.55.0

2.03.0

Measured and indicated resource

5.07.5

3.05.0

Feasibility

10.015.0

5.07.50

Production

20.0+

10.0+

Property Stage

Source: Data from Ludeman 2000.

accredited appraisal association or professional society. The


valuator and the members of the valuation team should hold
degrees in geology, mining engineering, or metallurgy; however, overall experience in, and a working knowledge of, the
minerals industry is the most important qualification.

ACknoWleDgMenT

The authors and SME acknowledge Behre Dolbear Group Inc.


for granting permission to use their copyrighted material in
this chapter.

RefeRenCeS
used, the greater must be the knowledge and experience of the
valuator (who may be one individual with all the necessary
skills and experience or a small team whose combined expertise covers all the skills needed).
The principal qualifications, not necessarily in order of
importance, are
A total lack of bias as to the outcome of the valuation,
Knowledge of and previous experience in the valuation
method(s) to be used, and
Familiarity with all relevant aspects of the minerals
industry.
Sometimes in special circumstances, the valuator or the head
of the valuating team may be required to be a member of an

Black, F., and Scholes, M. 1973. The pricing of options and


corporate liabilities. J. Polit. Econ. 81:637654.
CIMVAL. 2003. Standards and Guidelines for Valuation of
Mineral Properties. www.minevaluation.com/CIMVal
_Final_Standards.pdf. Accessed November 2009.
Kilburn, L. 1990. Valuation of mineral properties which do
not contain exploitable reserves. CIM Bull. 83:9093.
Lerch, M.A. 1990. Pre-tax/after-tax conversion formula for
capitalization rates and cash flow discount rates. Bus. Val.
Rev. (March).
Ludeman, F.L. 2000. A Decade of Deals: Gold and Copper
Ore Reserve Acquisition Costs, 19901999. Castle Rock,
CO: The Mining Business Digest.