Technical Paper Mineral Economics KEYWORDS: Valuation, Mineral resources, fiplration properties, Appraised value vethod. Feper presented at Mining Milenium 2000 and previously published in Mineral Property \eluaton Proceedings. Paper reviewed and approved for publication bythe Mineral Economics Society of CIM. nasTRACT Mireral exploration properties ae those on which an economically viable mineral depasit has not yet been discovered. Such oprtes are bought, sold, optioned and oint ventured onthe basis of their perceived poten- tal forthe enstence and discovery ofa viable ‘ina deposit The intrinsic value ofan explo- ‘ton property is therefore based onthe explo ‘ion potential. One measure of the ‘platon potential the amount that can be Ii to pnd on explain fr 8 vibe it eaten ‘Shes eraser Valuation of mineral exploration properties using the cost approach WE. Roscoe, Roscoe Postle Associates Inc, Toronto, Ontario The appraised value method uses a cost approach to value exploration properties. it is based on the premise that an exploration prop- ery is worth the meaningful past exploration expenditures plus warranted future costs to test remaining exploration potential. Rests of ast exploration work are analyzed inorder to retain only hase past expenditures that are productive in tems of identifying remaining potential. Warranted future costs comprise a reasonable exploration budget to test that potential. Introduction The purpose of thls paper i to describe a ‘ost approach to the valuation of mineral exploration properties and to provide some val- uation examples. The particular cost approach cescibed isthe appraised valve method, which is best applied to mineral properties at the exploration stage At presen, there are no comprehensive regulations or guidelines in Canada that spec fy what approaches and methods to use forthe Yalaton of mineral properties n this pape, the appraised value method described is one method thatthe wter considers to be accept- ed industy practice for mineral properties at the exploration stage. Mineral properties are valued for a num- ber of reasons, including mergers and acquis- tions, non-am’s length transactions, pricing of intial public offering of stock, support for prop- erty agreements litigation, expropriation, and insurance daims, Value and valuation in this paper refer to market value or fir market value of mineral rights, which ae held as various types of min- eal tenure, including mineral aims, develop- tment licence, mining licences and leases, and Patented lands with mineral rights Fair market Value canbe defined as follows: Fair market value is the amount that ‘would have been paid fra mineral property in the open market bya wing sel to 2 wing buyer in cash or equivalent at a patculr date. One ofthe important concepts inthis def inition that i crcl to mineral properties i the efecive dat of valuation. Ths is because mineral property values var overtime, depend- ing on events on neighbouring properties, mar- et interest, commodity price, ec. For an exproptation, insurance clam or igaton the effecive date may be a contentious issue in that the property owner may perceive thatthe property will be more valuable in the future ‘when market conditions improve, and thatthe expropriation or legal sue foes the valuation ina time of poor market conditions ‘Types of Mineral Properties ‘There ate three main categories of miner al properties which require diferent approach- es to valuation, These are development properties, exploration properties, and margin al development properties, which are defined below. This subdivision is based on technical information rather than onthe type of mineral tenure, Development Properties Development. properties are those on which an economically viable mineral deposit has been demonstrated to exis, incuding pro ducing mines. Such properties are ata suf cient advanced stage that enough reliable infomation ext to valu the propery by ds ‘counted cashflow analysis, with a reasonable degree of confidence. In genera, such informa tion includes reasonably assured mineable reserves, workable mining plan and production tate, metallurgical test results and process recoveries, capital and operating cost est= mates, environmental and reclamation cost estimates, and commasity pice projections. The value of a development property is the net present value ofa stream of estimated Cash flows, discounted at an appropriate rate to properly cflect the risk ofthe mining proj- ‘ect. Development properties include producing mines as wel as properties on which develop-Valuation of mineral exploration properties. using the cost approach ot. Vriaton nthe values feorton prope ve tne i. 2. Romane futon of 45 treatin n Canada in 19596 700,000 120 00,000 2 100 500,000 z 80 © 400, & 0oa00 Eo J 300,000 er z Property 3 40 200,000 2 20 100,000 s Property pety ol. - “1632 no. ‘Siek 4 S104 >in o 12 3 4 6 6 2% 1006 3¥66 “Ih ‘Transaction Value Range (6) — ‘ible 1.Vauaton approaches for erent pes of mineral properties ‘alain Approach vauaon| ‘evelopment Marga Development Exploration Method Properties Properties ‘roperes ame Teconied ah Toe es Mae Te en Yes ve cs om ‘yp eg $¢¢ Je Gece fcr Ne Maje ws cg Ganga eno e Yes Ye Open agement e we ve we ment of an economically viable operation is feasible, planned or under construction, Exploration Properties Exploration properties ae those on which an economically viable neal deposit has not been demonsvated to exist. The real value of ‘an exploration propery ls ints potential for the existence and discovery ofan economically Viable mineral depos. Only aver small num- ber of exploration properties wil ultimately become mining properties as discussed in the following secon, but unt exploration poten- tial is easonably well tested, they have value Exploration properties canbe further subdivid- ed into those with and without quetifable mineral resources. Marginal Development Properties Dividing mineral properties into expo- tation or development properties is relatively staighfonard forthe most part. There are some mineral properties, however, which fall into are area between the two groups. These are properties which contin well defined in eral resources which would became econon- cally mineable reserves under improved ceumstances nd which have enough reliable data to show thatthe economies are marginal under peng conto atthe time of a= ation. Improved circumstances can include commodity prices technological improvements, ‘stabshment of local infastucture, et. Such Properties are heen called marginal develop- ment properties. These also indude mines hich ae temporerly closed down due to low ‘commodity prices, Exploration Properties and the Exploration Process Exploration properties are the rw mate al from which mines are made. Exploration properties ate aciuired for thelr pecehed potential to host an economic mineral deposit The challenge of the exploration process is t0 clscover economic mineral deposits on those very few exlration properties where they exist. Modern exploration is a process which operates by stages. n general, each stage of exploration works designed to get tothe next decision point, that is, whether or not to con- tinue exploration on 2 property, based on resits ofthe previous stage. Each successive stage i, in genera, more expensive, due tothe procressvely more detaled nature ofthe work required. Whenever an exploration program is caried cut to get tothe net stage, the value cf a property may be enhance, reduced, or remain the same, depending on how resus of the program affect the perceived exploration potential. The objective of the exploration proces is to identify and concentrate work on the prop- erties that show more promise in terms of exploration potential and screen out the prop- erties which are downgraded by ongoing work. Obviously the properties on which wore demonstrates higher exploration potertil se moe valuable to mining comparies. A corsay 's that exploration properties on wich wor demonstrates lite oF no potential have liter no value. Figue 1 lustates how the values of exoloration properties vary over time and emphasizes the importance of the efeche ate of valuation, Exploration work on Prope AA gave encouraging results year afer yea, which shows up as an increase in value ovr time. Exploration work on Property 8 gaie encouraging results and increased in volver the fist two stages of exploration in the Fist two years, but exploration work in year thee was discouraging, resulting in a decease in ‘ale. No work was done in years four and fe ‘on Propet resulting in 2 leveling of then decease in value and declined marke teres. The intnsc value ofan exploration pp erty isin its potential forthe existence and clscovery ofan economic mineral post n the mining industry, mineral exploration prop: erties are optioned, ont ventured, bought od and traded on the basis of perceived erg tation potential. There area number of feet Approaches and methods which are used Yelue mineral exploration properies, alo which ae subjective, Valuation Approaches and Methodology As in other fields, the three mat approaches to valuation of minerl propetis are income, cost and market approaches ferent approaches apply to diferent gpes mineral properies 2s do diferent methods ‘strated in Table 1. ‘The appraised value method, whichis subject ofthis paper, can be applied to ex- ation properties and, in many cases, t9 M2 inal development properties, Other valuet®” CHT Btn «VLpuletin aches and methods ae descibed in apes presented 2 Ming Wilerium gr IMM2000) The geoscience factor ‘ot avait ofthe tot oprah and ‘bo descbedn anther paper presented st {nz00. name approaches ae not eon fe! be appropiate for properties tthe tpiaton Sage, Maret approach methods 12 decribed retin tis pape, See they fe commonly used as 2 chek on the ‘sed vale method Cost Approach ‘prised Value Method ‘The aprased value method is based on premise tat the real value of an exo ian property or a marginal development pps lis in is potential forthe existence and discovery ofan economic mineral deposit. Ti apprlsed value method assumes thatthe snout of exploration expenditure justified on 2 property Is related to its value. The cost ‘roach is given some vay bythe fact that ‘pion agreements on mineral properties are cten based on expenditures requied to eam an terest, There i also a reference to past exoation expendtures in option agreements, wich can often be related to value of the residual interest ofthe optionee The appraised value method s described ‘popes by Roscoe (1986, 1988, 1994, 1999), ‘gnean (1996), Thompson (1991) and lawrence (1989, 1998). The basic tenet of the appraised value "ethodisthat an exploration property is worth the mezningful past exploration expenditures ths waranted future costs. An important ele ‘eof this method, which soften overlooked ins aplication is that onl those ast expen- tues which are considered reasonable and ductive ae retained as value, Productive ans thatthe results of the work give sufi- at encouragement to warrant further work $y Kestying potential fo the existence and ery ofan economic mineral epost. Wa- ated future costs comprise 2 reasonable "oration budget to tes the identified poten- 1a which can be geophysical or geochemical ‘analis, or promising showings or mineral "ed zones already identified. AS noted prev- ‘sh, if exploration work downgrades Penal, i is not producive and its cost ‘oud not be retained as value or should be ‘tices. Obvousy, ifthe property Is consd- ‘4 to have neghible exloration potential, it Ile o no val. Fast expentures ae usualy analyzed on ‘2 annual basis, using technical expertise to ts which expenditures to retain and which ‘eect in terms of identiyng_ remaining Valuation of mineral exploration properties using the cost approach stn Guidelines or retained expenltres for marginal and inactive propre Ta ana weaeaa y Sae e WE voretd Ua a propery wih magia ees an peel fre tot ut engh ota loan xen a Maybe ate nde, flown sage Fig wi a a Ba a RT aa iignoon aad abe TT Peake ae pa nk ssig000 Wear ue oper poyeraninok $8 tee surioean otra netsnete ween 4187500 Spt tassios 35 Wea) Stier S24 Ri siter s3orien Renton Sear, Teiee oan CRT nO CES Selo ee ee ‘Stale ange SST aos ‘Valuation of mineral exploration properties using the cost approach property values, based on published transac tions. Figure 2 shows the range of values for 445 exploration properties located across CCanada during 1995 and 1996. The histogram shows the percentage frequency in each range of values, ona logarithmic sale. About 50% of the property values le between $100,000 and $1,000,000. About 27% of the propery values are less than $100,000 and 23% are greater that $1,000,000, Conclusion ‘The appralsed valve method uses @ cost approach to value mineral properties at the exploration stage, and in many cases, marginal development properties. Wherever possible, it shouldbe used in conjunction with other valu- ation methods fr confirmation Proper application ofthe aprased value method requires experienced judgment onthe part of he valuator who should be experienced and knowedgeable in the mineral exportion business and also have famliaty with real ‘world property transaction values, References AGNERIAN, H, 1996. Valuation of exploration prop- eis. CIM Buln, 1004, , 69-72 LAWRENCE, RD, 1989, Valuation of mineral assets: ‘Acountany or alchemy? Paper presented at the CM Annual General Meeteg. LAWRENCE, RD, 1998. Valuation of mineral assess ‘An oferview. ape: presented a5 par ofa couse offered by the Geological Associaton of Canada andthe specs an Devoe Asocaten ROSCOE, WE, 1986. Geting your mane/’s wort, Norther ines Magazine, 1, 17-20, ROSCOE, WE, 1988, Valuation of mining expo tation popats The Land Economist, 18, p.3. ROSCOE, WE, 1994 The value of mineral properties {35 (aw material for new mines. Presentation to the CIM Mineral Economies Society Disausion Gowp, ROSCOE, WE, 1999. The valuation of mineral pop- fries for compensation. Pesatation to the Bish Columbia Exopraion Soc. THOMPSON, 15, 1951 Valuing mineral properties ‘without uanifable reserves Paper presented at the CIV Mirra Economics Sympostum WARD, MC. and LAWRENCE, RD, 1998, Compare bie twansaction ana: The’ market place 1 as right? Paper resented at a Short Course, esp reves Asocatn of Cane