How right is your valuation

– The challenges of valuing

exploration properties and resources
 Content

• Exploration properties and resources

• Valuation principles
• Some clearly wrong valuations
• What successful exploration can look like
• How do we get it right?

Deborah Lord SRK Consulting

Exploration properties and
resources
• High risk, speculative
• Low probability of discovery
• Exploration prospects/ Targets
• Inferred Resources
• Indicated, Measured Resources
typically valued by DCF approach
So how ‘right’ can valuations
be?

• Exploration prospects
1 in 100 chance of discovery?
• Exploration Targets
± 50%?
• Inferred Resources
± 35%?
Stages of exploration JORC
2012
Valuation principles

VALMIN
• Competency
• Materiality
• Transparency
• Independence
• Technical value vs market value
Valuation ‘War Stories’

• Market frauds
• Investigations by corporate
regulators
– ASIC
• Technical issues with valuations
Market Scams

• Bre-X Busang Au 1997

Gold today, Gone tomorrow
– The Northern Miner
– Share price 12c to US$280, 47Moz Au,
TSX 300 listed
– Introduction of NI43-101
• Poseidon Ni 1969-70
The Money Miners
– Trevor Sykes
Market Scams

• Bre-X Busang Au 1997

– Whole core sampled
– Alteration, but gold morphology wrong
– Exposed during independent Due
Diligence
– Led to market regulation changes
Market Successes

• Sirius
– Transparent reporting
– Systems in place
– Solid geological model
Regulators - ASIC

• ASIC vs MacLeod 1998

– Misleading report on diamond
exploration results
– Report on behalf of Cambridge Gulf in
1993 contained a prediction of an
annual profit of US$1.374 billion
– ‘Exploration results achieved from a
very small sample, not representative
of deposit as a whole’
– ‘Dominating influence of Cambridge
Chairman’
Watchdog snaps at company
heels over Avoca report

• The Australian 10 July 2009

– “Bemused shareholders of the gold
miner Dioro Resources must be
wondering what, if any, credence to
place on the IER … in relation to the
bid from Avoca Resources following the
latest intervention by the corporate
regulator ASIC”
– May 2009 Avoca launched scrip bid for
Dioro (Implied price 59 cents / share)
ASIC Supplementary reports

• Target’s statement released by

Dioro 28/05/09 - Preferred value
of $1.88 / share
• 376% more than Dioro 6-month
VWAP of 34.5 cents / share
• Supplementary 09/06/09 (IER)
• 8th Supplementary 14/08/09
• Avoca final offer $1.25 / share
So what was wrong?

• Target’s statement released by

Dioro 28/05/09
• Discussed a number of
approaches
─Reserves/ Resources by DCF model
─Resources ‘In situ’ method
─Exploration mostly by MEE
approach
‘In situ’ valuations

• JORC (2012) Clause 51

- “…in ground financial valuations must not be
reported by companies in relation to
Exploration Results, Mineral Resources or
deposit sizes.”

• Yet Mineral Resources do have value and

yardstick method provides ‘sanity check’
- As commonly well within range of values
derived by other methods (Lawrence, 2012
AusIMM Publication)
Resources: In situ method

• ITA quoted range 2-4.5% of spot

• Measured and Indicated 1,335 koz
Au Preferred 3%
• Inferred 320 koz Au Preferred 2%
• Value in report 2.0 Moz, $62M
• No cross check against
comparable transactions
• Lawrence 2012 quotes 0.4 to 5%
(in his view 0.4 to 3%)
Exploration

• Multiples Exploration Expenditure

approach (MEE)
• Uses Prospectivity Enhancement
Multiplier (PEM) typically 0.5-3.0
• So 0.5 if previous exploration has
destroyed value
• Up to 3.0 if exploration created
value
Exploration Cont…

• One example used 1-5 as PEM

• Based on meaningful past and
warranted future costs
• So $1.5M exploration expenditure
used to provide valuation of
$1.5M to $7.5M with preferred
value of $7.5M
Dioro Learnings

• Alarm bells with respect to share

price value
• Only used one method
• In situ valuation for resources (not
cross checked)
• Use of MEE and PEM of 1-5
• Report was not transparent in
terms of assumptions
A common issue?

• A company has a DCF model as part

of a historic scoping study (Indicated
and Inferred resources)

• Commodity price
assumptions no longer
apply
• When updated DCF
negative
• Could we look at market
transactions to value the
resources
A less common issue

• One of my first valuations

– Au company, asset in Chile
– Valuation done then asset sold
– Valuation update requested
– Failed to meet tenure requirement,
forfeited
Principles of ‘right’ valuations

• Reasonable basis?
• Are my assumptions transparent?
• Could I stand up in court?
• Where is my ‘comfort zone’?
• Cross check using other
approaches
Further guides for ‘right’
valuations

• Site visit
• Methodology is choice of the expert
• Use a number of approaches
• Preferred value within a range
Comparable transactions

• What is comparable?
• Consider grade, size, date, market,
potential, jurisdiction (Roscoe 2012)
• In depressed market few
transactions – trend line?
• Metal equivalents / metal ratio
• Staged option payments need
consideration ($1M up front >$1M in
staged payments)
Further guides for ‘right’
valuations

• Client to check for material / factual

accuracy (not the values)
• Corporate advisor relies on
geologists report (talk to them)
• Assumptions reported, sensitivities
Conclusions

• Beware of market scams – site visit

is critical
• Consider what is material
• Be objective (independent)
• Check for reasonableness
• Assumptions need to be transparent