Valuation of Mineral and Coal Assets

– Challenges and Opportunities

SMEDGE Focus on Exploration

24 January 2019 and Mineral Resources

Caue ‘Paul’ Araujo

SRK Consulting
Sydney, Australia
[email protected]
Content

• Introduction

• Codes, standards, guidelines and industry

practice

• Common Valuation Methods

• Conclusions
Introduction
What is being valued?

Components of mining company’s share price:

• Mineral properties
• Other assets and liabilities (e.g. cash and debt)
• Commodity markets and general market sentiment
• Quality of management
• Market recognition and liquidity
Introduction
What is being valued?

As defined in the VALMIN Code (2015), mineral assets

comprise all property including (but not limited to) tangible
property, intellectual property, mining and exploration tenure
and other rights held or acquired in connection with the
exploration, development of and production from those
Tenures.
This may include the plant, equipment and infrastructure
owned or acquired for the development, extraction and
processing of Minerals in connection with that Tenure.
Introduction
What is the purpose of the valuation?
VALMIN Compliant/ Non-Compliant Valuations:
• Value Opinion vs Full Valuation
• “Technical Value”
• “Market Value” of mineral properties
• “Investment Value”
• “Selling Value”
• “Bidding Value”
• Stamp Duty Disputes
• JV Partners Disputes
• Third-Party Opinion
Introduction

What is “Market Value”?

“Market Value” is the estimated amount (or the cash
equivalent of some other consideration) for which the Mineral
Asset should exchange on the date of Valuation between a
willing buyer and a willing seller in an arm’s length transaction
after appropriate marketing where the parties had each acted
knowledgeably, prudently and without compulsion.
Introduction

What is “Market Value”?

• Value that would have been paid

• Open and unrestricted market
• Between informed and prudent parties
• Acting at arms length
Introduction
Project development
Criterion
stage
Mineralisation may or may not be defined, but where Mineral Resources have not been
Early stage exploration identified.
Considerable exploration has been undertaken and specific targets identified that
warrant further detailed evaluation, usually by drill testing, trenching or some other
form of detailed geological sampling. Sufficient work has been completed on at least
Advanced exploration one prospect to provide both a good understanding of the type of mineralisation
present and encouragement that further work will elevate one or more prospects to the
Mineral Resource category.
Mineral Resources have been identified and their extent estimated (possibly
incompletely), but where a decision to proceed with development has not been made.
Properties in the early assessment stage, properties for which a decision has been
Pre-development made not to proceed with development, properties on care and maintenance and
properties held on retention titles are included in this category if Mineral Resources
have been identified, even if no further work is being undertaken.
Tenure holdings for which a decision has been made to proceed with construction or
Development production or both, but which are not yet commissioned or operating at design levels.
Economic viability will be proved by at least a Pre-Feasibility Study.
Tenure holdings, particularly mines, well fields and processing plants, that have been
Operating commissioned and are in production.
Source: VALMIN Code, 2015
Introduction
Typical information required for valuations:
• An independently validated tenement schedule outlining
tenement number, area (in square kilometres), ownership
(including mineral rights, clawback provisions, royalties, etc.),
date of grant, date of expiry, taxes, rents, rates, minimum
exploration expenditures, encumbrances, i.e. legal, Native Title,
environmental, social
• Details of expenditure history (by tenement) to estimate the
value of the exploration information
• Copy of any material agreements and contracts (i.e. service,
joint venture, off-take, royalty)
• Any reports outlining recent exploration, such as annual reports
• Reports outlining the potential of the tenements
Introduction
Typical information required for valuations:

• Any Mineral Resource estimates (either current or historical) or

exploration target estimate
• Any test work and processing studies
• Any mining, geotechnical, infrastructure or environmental
studies
• Previous and/or current feasibility studies or technical studies
• Any valuations or independent expert’s reports on actual or
adjacent properties considered relevant (i.e. within the last five
years)
Codes
Interaction

Source: VALMIN, 2015

Interaction

Source: McCarthy, 2014

 JORC (2012) & VALMIN (2015)
Codes & guidelines Materiality
All reasonable information
Technical Reporting Codes expected

Transparency
• Provide minimum standards, Clear, unambiguous presentation
recommendations and guidelines
Competence
Work completed by Competent
• Principles of transparency and Person
materiality in reporting
+ VALMIN (2015)
Reporting is subject to interpretation,
therefore require greater transparency and Independence
consistency. May be required depending on
circumstance

Reasonableness
Impartial assessment that a third
party would reach a similar
conclusion
Codes
Reporting definitions

Don’t forget about:

• Development stages
• Timing
• Level of technical-economic
study
• Level of confidence in all
relevant factors, including SEG
factors
• Transparent, consistent,
balanced reporting
• “If not, why not” basis
Source: JORC Code, 2012
Competence requirements
JORC (2012) & VALMIN (2015) + VALMIN (2015)

Membership Experience
Member or Fellow of: Technical Assessment:
• AusIMM Minimum 5 years experience in
• AIG Technical Assessment
• Recognised Professional
Organisation with an Valuation:
‘enforceable code of ethics’ Minimum additional 5 years (i.e.
Experience ten years in total) experience in
valuation of mineral assets
Minimum 5 years experience in:
• Style of mineralisation or type Familiarity
of deposit under consideration;
and VALMIN & JORC Codes, Corps
• Activity which that person is Act, ASIC/ASX policy & court
undertaking decisions
Valuation Approaches
Valuation Approaches
Income Approach:
• Based on expectation of income
• Discounted cash flow method and variations

Market Approach:
• Based on principle of substitution
• Sales comparison/ comparable transactions

Cost Approach:
• Cost of equivalent property
• Appraised value method
• Multiple of exploration expenditures
• Geoscience factor

At least two valuation methods should be considered for

each mineral asset.
Valuation of Non-Producing Assets

Why Non-Producing Assets have value?

• They represent potential for eventual mineral production

through
• Exploration discovery
• Enhancement of existing mineral resources
• Improved circumstances, (e.g. new roads or higher metal
prices)
Valuation of Non-Producing Assets

Why Non-Producing Assets have value?

• New ownership
• A market exists for non-producing mineral properties
• With mineral resources or without mineral resources
• Deals are commonly option or farm-in agreements
Valuation of Non-Producing Assets
Most commonly used methods:

• Actual Transactions
• Comparable Transactions
• Joint Venture Terms
• Past Effective Expenditure/ Prospectivity Enhancement
Multiplier (PEM)
• Geoscience Factor (i.e. Kilburn Method)
• SRK Geological Risk
• Metal Transaction Ratio (MTR)
• Yardstick/ Rule of Thumb Method
Comparable Transactions Analysis

• Commonly used in valuations for assets in any stage of

development
• No true comparables – mineral properties are unique
• Market size is small with relatively few transactions
• Can use transactions on a number of similar properties to
obtain a range of values
Comparable Transactions Analysis

• Complex property deals need analysis to obtain a value of

the property
• Can adjust comparable transaction values by property
area or by metal contained in resource
• Transaction date is very important since market activity
and value change over time
Comparable Transactions Analysis

Use similar characteristics to those of subject property:

• Commodity or group of commodities, e.g. gold
• Political jurisdiction
• Location, access, infrastructure
• Property size
• Geological setting
• Mineral deposit type
• Stage of exploration and exploration potential
• Exploration results and targets
• Activity on neighbouring properties
• Similar resource tonnage and grade, if any
Comparable Transactions Analysis

Option Agreement Analysis/ JV Terms:

• Analysis needed for valuation of market transactions
• Most non-producing mineral property transactions are option or earn-
in agreements to earn an interest in the property
• The option or earn-in period may last several years; three to four is
common
• Earn-in terms include cash, stock, work commitments and royalties
• Usually first year is firm and subsequent years optional
• Option agreement terms analysis:
‒ Schedule of payments and work commitments
‒ Estimate probability of realization of future commitments
‒ Date of the agreement is the valuation date
Comparable Transactions Analysis

Published description of the deal:

X Resources can earn a 60% interest in a Rare Earths property of Y
Corporation by making payments totalling $600,000 and expending a
total of $2,500,000 on exploration over four years. The first year requires
$50,000 cash on signing and an expenditure commitment of $250,000.
Further optional annual payments and work commitments are shown in
the following analysis table.
Comparable Transactions Analysis
Prospectivity Enhancement Multiplier

• 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
Kilburn Method
Ranking of appropriate factors applied to a Base Acquisition
Cost (BAC).
The BAC represents the average cost incurred by a
Tenement Holder or Explorer to identify, apply for and then
retain a unit area of the exploration licence of title (Goulevitch
and Eupene, 1994), including statutory expenditure costs.
The BAC forms the starting value from which a technical
valuation range is then estimated.
The factors used for the technical rating include Off-property,
On-property, Geology and Anomaly factors. The ranking of
these key factors will either enhance or reduce the intrinsic
value of a property. A further factor, the Market factor, may
then be considered in order to derive a Fair Market Value.
Kilburn Method

Source: Modified after Xstract, 2009 and Agricola Mining Consultants, 2011.
Geological Risk Method
Geological
Risk Method
Metal Transaction Ratio (MTR)

• Valuation of properties with more than one metal in the

mineral resources (polymetallic deposits)
• Metal Transaction Ratio (MTR) is the ratio of the
transaction value to the gross in situ “dollar content” of all
metals in the resource
• Gross in situ “dollar content” uses metal prices as of the
transaction date
• Analogous to $ per unit metal expressed as % of metal
price
Yardstick / Rule of Thumb Method

Under the yardstick method of valuation, specified

percentages of the spot price is used to assess the likely
value. Commonly used yardstick factors as applicable to
gold are:
• Measured Resources - 2% to 5% of the spot price
• Indicated Resources - 1% to 2% of the spot price
• Inferred Resources - 0.5% to 1% of the spot price
• Exploration Targets - <0.5% of the spot price
Valuation of Mineral Resources
Use comparable properties for valuation:
• Same commodity, e.g. gold, uranium, copper
• Same political jurisdiction
• Similar geological setting
• Similar mineral deposit type
• Similar size and grade of resource
• Similar stage of exploration or development

Determine $/unit metal for market comparables:

• Analyse transaction terms to get property value
• Calculate units of metal in mineral resource estimate
• Calculate $ per unit metal, e.g. $/oz Au, $/lb U3O8 or $/lb Cu

Analyse $/unit metal values to determine an appropriate range

of values for the subject property.
Valuation of Producing Assets

Most commonly used methods are:

• Discounted Cashflow (DCF)/ Net Present Value (NPV Model)
• Real Options
• Comparable Transactions
• Option Agreement Terms
Conclusion
• Investors have access to an array of public information
• Inconsistent use of reporting definitions, supporting
information/ project assumptions and outcomes may be
confusing and even misleading
• Confirming the correct project development context is
essential for assessing the risk, opportunity, relative
confidence and value associated with a resource project
• Value of exploration and other non-producing mineral
properties lies in their potential for hosting a viable mining
operation
Conclusion

• Comparable transactions method works reasonably well

using properties similar to the subject property
• Technical experience and judgement is a critical
requirement for valuation of non-producing mineral
properties
• Mineral property asset value is but one component of the
value of a mining company and the share price
SRK Key Personnel - Valuations
Jeames McKibben, BSc Hons, MBA, Chartered Valuation Surveyor (MRICS), MAusIMM(CP), MAIG – Principal Consultant
Jeames McKibben is an experienced international mining professional having operated in a variety of roles including consultant, project
manager, geologist and analyst over more than 24 years. He has a strong record in mineral asset valuation, project due diligence,
independent technical review and deposit evaluation. As a consultant, he specialises in mineral asset valuations and Independent
Technical Reports for equity transactions and in support of project finance. Jeames has been responsible for multi-disciplinary teams
covering precious metals, base metals, bulk commodities (ferrous and energy) and other minerals in Australia, Asia, Africa, North and
South America and Europe. He has assisted numerous mineral companies, financial, accounting and legal institutions and has been
actively involved in arbitration and litigation proceedings. Jeames is a current member of the VALMIN Committee.

Caue Araujo, BSc (Geology), MBA (Project Management & Finance), MAusIMM – Principal Consultant
Caue Araujo is an experienced mining professional with skills and experience encompassing geology, commercial leadership, mining
finance and investment strategy, mineral economics, economic modelling and project management. Caue has participated in mining
project evaluations and technical due diligence (Mergers & Acquisitions), and Mineral Resource/Ore Reserve audits
(NI 43-101, JORC, VALMIN and US SEC). He has prepared independent technical reports, exploration valuations and global strategic
geological exploration assessments across a range of geological environments and commodities. Most recently Caue held the roles of
Global Iron Ore Industry Director at the Australian Mineral Economics Group (AME) and General Manager SRK Consulting Brazil. He
has in-depth knowledge of technical and commercial aspects of the iron ore industry, and significant exposure to other base metal,
precious metal and industrial mineral deposits in Australia, Brazil, Canada, Africa and Russia. Prior to consultancy, Caue gained
experience in iron ore open pit grade control, brownfield exploration target generation, geologic 3D modelling, long-term planning and
ISO quality internal audits while working for Vale S.A. in Brazil.

Steve Gemell, BE (Mining) (Hons), FAusIMM(CP), MAIME, MMICA – Corporate Associate Consultant
Steve Gemell is a professional mining engineer with over 40 years’ experience, having worked throughout Australasia and in North and
South America, Africa, Asia, Europe and Oceania. He has been Principal of Gemell Mining Engineers, a multi-discipline consultancy,
since its formation in Kalgoorlie in 1984. His experience includes operational management from shift boss to resident manager level,
and supervision of open pit and underground mines, and CIP/CIL, flotation and alluvial processing plants. He has subsequently held
executive and non-executive directorships, including the positions of CEO and Chairman, in numerous listed mining and exploration
companies, and was for some years a Visiting Fellow at the University of New South Wales.
SRK Key Personnel - Valuations
Anthony Stepcich, BEng (Mining), MSc (Mineral Economics), GDip (Finance & Investment), Dip (Technical Analysis),
FAusIMM(CP) – Principal Consultant
Anthony Stepcich is a Mining Engineer with 22 years’ experience in the mining industry, having gained both underground and open-pit
metalliferous experience, and open-pit coal experience. Anthony has postgraduate qualifications in finance and economics. He
specialises in open-pit design and scheduling and project evaluations. Anthony is a Competent Person for the reporting of Ore
Reserves in accordance with JORC Code (2012). Anthony is also an Expert in accordance with the VALMIN Code (2005) for the public
reporting of valuations across multiple commodities. Anthony has experience working in Australia and Indonesia.

Karen Lloyd, BSc(Hons), MBA, FAusIMM – Associate Principal Consultant

Karen Lloyd has more than 20 years international resource industry experience gained with some of the major mining, consulting and
investment houses globally. She specialises in Independent reporting, mineral asset valuation, project due diligence, and corporate
advisory. Karen has worked in funds management and analysis for debt, mezzanine and equity financing and provides consulting and
advisory in support of project finance. She has been responsible for multi-disciplinary teams covering precious metals, base metals,
industrial minerals and bulk commodities in Australia, Asia, Africa, the Americas and Europe.