VALUATION

VALUATION METHODS
METHODS
FOR
FOR MINERAL
MINERAL
PROJECTS
PROJECTS
 PROSPECT MINE
MINERAL EXPLORATION EVALUATION PROJECT CONSTRUCTION
PRODUCTION

Resources Reserves

PROJECT
COMMISSIONING
FEASIBILITY
STUDY

PRE-FEASIBILITY
STUDY

DESK TOP
STUDY

DISCOVERY
Value

Confidence
A function of the amount of knowledge on a mineral resource/property
and the degree of probability of it being brought to account.
 PROSPECT MINE
MINERAL EXPLORATION EVALUATION PROJECT CONSTRUCTION
PRODUCTION

Resources Reserves

PROJECT
COMMISSIONING
FEASIBILITY
STUDY

PRE-FEASIBILITY
sTUDY

STANDARD METHODS
• Prospectivity Enhancement
DESKTOP
Multiplier (“PEM”)
STUDY
• Comparative Value Method
DISCOVERY
• Royalties/Farm-in Agreements
Value

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 Farm–in 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 vendor’s 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.
 PROSPECT MINE
MINERAL EXPLORATION EVALUATION PROJECT CONSTRUCTION
PRODUCTION

Resources Reserves

PROJECT
COMMISSIONING
FEASIBILITY
STUDY

PRE-FEASIBILITY
STUDY

STANDARD METHODS
DESK TOP
STUDY &
DISCOVERY
EXPECTED VALUE METHOD
Value

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.
 PROSPECT MINE
MINERAL EXPLORATION EVALUATION PROJECT CONSTRUCTION
PRODUCTION

Resources Reserves

PROJECT
COMMISSIONING
FEASIBILITY
STUDY

PRE-FEASIBILITY
STUDY

DCF
DESK TOP
STUDY &
DISCOVERY
STANDARD METHODS
Value

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?
 PROSPECT MINE
MINERAL EXPLORATION EVALUATION PROJECT CONSTRUCTION
PRODUCTION

Resources Reserves

PROJECT
COMMISSIONING
FEASIBILITY
STUDY

PRE-FEASIBILITY
STUDY

DCF
DESK TOP
STUDY &
DISCOVERY
OPTION PRICING
Value

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

Venmyn