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VALUATION METHODS FOR MINERAL PROJECTS

MINERAL EXPLORATION

PROSPECT EVALUATION

PROJECT CONSTRUCTION

MINE PRODUCTION

Resources

Reserves

PROJECT COMMISSIONING FEASIBILITY STUDY

PRE-FEASIBILITY STUDY

DESK TOP STUDY

Value

DISCOVERY

Confidence

A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account.

MINERAL EXPLORATION

PROSPECT EVALUATION

PROJECT CONSTRUCTION

MINE PRODUCTION

Resources

Reserves

PROJECT COMMISSIONING FEASIBILITY STUDY

PRE-FEASIBILITY sTUDY

STANDARD METHODS
DESKTOP STUDY

Prospectivity Enhancement Multiplier (PEM) Comparative Value Method Royalties/Farm-in Agreements

Value

DISCOVERY

Confidence

A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account

STANDARD METHODS 1. Prospectivity Enhancement Multiplier (PEM)


Based on the principle of Past Expenditure; A premium (or discount) multiplier is applied to the total cost of exploration to date, depending on whether the exploration has enhanced the prospectivity of the ground or not; Multiplier typically ranges from 0.5 3.0; Historical expenditures must be declared as audited; Issue Subjective choice of multiplier value.

STANDARD METHODS 2. Comparative Value Method


Value is based upon recent arms length transactions of a similar nature; Based on a monetary value per unit of resource in the ground or per unit area of defined mineralisation; Issue Often insufficient similar publicly quoted transactions to make a meaningful comparison.

STANDARD METHODS 3. Royalties or Farmin Agreements


The initial committed expenditure establishes a base value for the property; The staged expenditure is discounted to determined the value a buyer is placing on the vendors interest; The funding partner predetermines the ratchet effect of exploration success (PEM). This is a legal document and thus the value is firmly entrenched; The level of discounting is an opinion based on the probability that the buyer will actually commit the funds; Issue Aspects of the method are subjective.

MINERAL EXPLORATION

PROSPECT EVALUATION

PROJECT CONSTRUCTION

MINE PRODUCTION

Resources

Reserves

PROJECT COMMISSIONING FEASIBILITY STUDY

PRE-FEASIBILITY STUDY

STANDARD METHODS
DESK TOP STUDY

& EXPECTED VALUE METHOD

Value

DISCOVERY

Confidence

A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account

EXPECTED VALUE METHOD


Statistically defines the probability of successful outcome of expenditure; and Based upon geological knowledge, cost and time. Issue Highly subjective.

MINERAL EXPLORATION

PROSPECT EVALUATION

PROJECT CONSTRUCTION

MINE PRODUCTION

Resources

Reserves

PROJECT COMMISSIONING FEASIBILITY STUDY

PRE-FEASIBILITY STUDY

DCF
DESK TOP STUDY

& STANDARD METHODS

Value

DISCOVERY

Confidence

A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account

DISCOUNTED CASHFLOW METHOD (DCF)


Where possible a cashflow model should be generated;

This method takes into account the uniqueness of each resource;


Value is calculated from future cashflows generated from the mining of the mineral resource; Cashflow assumptions are based on the likely costs of construction, production and sales for a mine of a similar nature; Discount rate is applied to the cashflows according to the risk profile; Issues - The accuracy of the input assumptions; and - The selection of a suitable discount rate which is a highly contentious issue; Question Should inferred resources be included?

MINERAL EXPLORATION

PROSPECT EVALUATION

PROJECT CONSTRUCTION

MINE PRODUCTION

Resources

Reserves

FEASIBILITY STUDY

PROJECT COMMISSIONING

PRE-FEASIBILITY STUDY

DESK TOP STUDY

DCF &

Value

DISCOVERY

OPTION PRICING
A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account

Confidence

OPTION PRICING MODEL


Typically used for Wits gold properties;

Method is applied when the current viability of exploiting the resource is negative by using the DCF;
Reflection of the potential for the resource to be developed into a viable mine at some time in the future when the commodity price is favourable; The owner of the resource has the option to list the project on a stock exchange and realise the value the market would place on it; Use the option pricing theory to calculate the commodity price at which the full risk adjusted NPV of the mine is greater than 0.

THE BOTTOMLINE

Where possible, use a number of different valuation methods to increase the voracity of your results
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