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AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES

AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES. KEITH N. SPENCE Global Mining Corporation PDAC, Board of Directors Co - Chairman CIMVAL- Canadian Institute of Mining, Metallurgy & Petroleum. CHINA MINING, Beijing, November 14, 2007. Valuation vs. Evaluation.

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AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES

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  1. AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES KEITH N. SPENCE Global Mining Corporation PDAC, Board of Directors Co - Chairman CIMVAL- Canadian Institute of Mining, Metallurgy & Petroleum CHINA MINING, Beijing, November 14, 2007

  2. Valuation vs. Evaluation • Valuation - estimation of the value or worth of the mineral property. Question: How much is a property worth in dollars ? • Evaluation - economic assessment of the mineral property generally for an investment decision, for example, a feasibility study. Question: Go or No go Decision ?

  3. Items to be Discussed • The international Scene • Reasons for a Valuation • Definition of Value • Valuation Tenets • Types of Properties • Valuation Approaches • stage based valuation • Primary Valuation Methods • A word about Reserves and Resources • Use of Mineral Resources in Income Approach • Secondary Valuation Methods / Rules of Thumb • Valuation Reports • Some Issues with valuations • Conclusion

  4. The International Scene • CIMVal Standards & Guidelines (TSX –Toronto Stock Exchange –Appendix G) - Canada • Australian VALMIN Code • South African proposed SAMVal Code • US Minerals Appraisals/Valuations - a patchwork of regulations • International Valuations Standards (IVS) - IVSC -Extractive Industries Guidance Note – nearing completion

  5. Reasons for a Valuation • Mergers and acquisitions • Non arm’s length transactions • IPO pricing • Stock exchange listing support • Support of audited financial statements • Fairness opinions for a sale or purchase of a mining property • Litigation • Government expropriation • Insurance claims

  6. Definition of Value • Fair Market Value (FMV) is the standard of value. • Key elements of FMV are as follows: • Both seller and buyer are willing and not under compulsion to act • The transaction is at arm’s length • Both seller and buyer are informed or have reasonable knowledge of the relevant facts • Valuation should be based on a given point in time • Other types of value include; replacement value, salvage value, book value, depreciated value, net asset value, assessed value, insured value, etc.

  7. Valuation Tenets • Materiality - inclusion or omission of information that might result in different conclusion of value • Transparency - information used (or excluded), the assumptions, methodology etc, must be set out clearly, along with the rationale • Independence -the valuator must to be independent of the commissioning entity

  8. Valuation Tenets Cont’d • Competence -the valuator must be appropriately qualified to conduct the required valuation” • Reasonableness -other appropriately qualified and experienced valuators would value the property at approximately the same range

  9. Types of Properties Valuation depends on the stage of development of the property • Exploration Properties • Early stage exploration properties • Mineral resource properties • Advanced stage exploration properties • Properties with identified mineral resources • Pre-feasibility stage projects • Marginal development properties • Past producing mines • Development properties • Feasibility study completed • Development planned or under construction • Contain mineral reserves and mineral resources • Production properties

  10. Valuation Approaches Three generally accepted approaches: • Income approach - based on principle of anticipation of benefits (usually DCF) • Market approach– based on principle of substitution ( Market Comparables) • Cost approach– based on principle of contribution to value • Valuation approach depends on the stage of exploration or development of the property

  11. stage based valuation

  12. Primary Valuation Methods • Income Approach • Discounted Cash Flow Method - very widely used • Option Pricing Method/Real Option Method – not widely used but gaining in acceptance. Utilizing Black Scholes seminal work, that mining projects can be valued based on a series of options/decisions • Market Approach • Comparable Transactions Method – widely used • Option Agreement Terms – widely used • Cost Approach • Appraised Value Method – widely used but not accepted by all regulators • Geoscience Factor Method – not widely used

  13. A word about Reserves and Resources CIM, JORC & SAMREC Reserve Classifications Referenced • Mineral Resource - a mineral deposit for which quantity (tonnes) and quality (grade) can be estimated. But not demonstrated to be economic. • Measured - highest confidence category • Indicated • Inferred - lowest confidence category • Mineral Reserve - that part of the mineral resource that can be extracted economically. • Proven - higher confidence category • Probable - lower confidence category

  14. Use of Mineral Resources in Income Approach Generally Acceptable Practices • CIM, JORC & SAMREC Reserve Classifications Referenced • Use of all proven and probable mineral reserves • Use of measured and indicated mineral resources in the following circumstances • Mineral resources are current • Mineral reserves are mined ahead of resources in DCF • Confirmation that the mineral resources in the DCF are likely to be economically viable in the future • Recognize higher risk of using mineral resources by appropriate Adjustments

  15. Use of Mineral Resources in Income Approach Cont’d • Use of inferred mineral resources • With great care • Not if they are the dominant resource category • Any use must be justified in and treated appropriately for the substantially higher risk and uncertainty • Reserves and other resource categories are mined ahead of inferred resources in the DCF model • Inferred resources should not be used to make the property economically viable • Use of potential or hypothetical“resources” is not acceptable

  16. Secondary Valuation Methods & Rules of thumb • Rules of thumb - A good cross-check on a Valuation to test its “reasonableness” • $ per oz or lb in the ground • Value per unit of property area – used for large exploration properties • Market capitalization of company holding the mineral property – more applicable to valuation of single property junior companies

  17. Valuation Reports – best practice • A Valuator is ultimately responsible for: • preparation of the Valuation Report and its conclusions • adhering to the principles of materiality, transparency and reasonableness including technical input • An approved technical report can be appended to the valuation report • All mineral reserve and mineral resource estimates must be disclosed and discussed in the valuation report

  18. Valuation Reports –Best Practice Cont’d • List factors, critical issues, key risks and assumptions • Discuss all valuations within the last 24 months • Certificates of Qualifications of the valuator • Statement that the valuation complies with the Standards and Guidelines which he or she is governed by, in their entirety • Site visit should be undertaken or explain why not • Use More than one Approaches/Methods • Provides Checks & Balance • Valuation is Best Reported as a Range of Values • Effective date of the valuation

  19. Some Issues with Valuations • Use of unacceptable or dubious methods • Misapplication of acceptable methods • No explanation or justification for methods used • Lack of transparency

  20. Conclusion • Need for International Valuation Standards & Consistency • Valuation is Stage Based • Market Comparables applicable for all stages • How Reserves/Resources are used is the key Factor in Valuation Thank You !!

  21. AN OVERVIEW OF VALUATION OF MINERAL PROPERTIES KEITH N. SPENCE Global Mining Corporation PDAC, Board of Directors Co - Chairman CIMVAL- Canadian Institute of Mining, Metallurgy & Petroleum CHINA MINING, Beijing, November 14, 2007

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