MINERAL PROPERTY VALUATION

Dallas W. Davis, P. Eng., FECGeologist and President, Dalmin Corporation

Presentation at AGS 2017, 43rd Colloquium and Annual General Meeting "Innovations in Geoscience, Geological engineering, and the Geoenvironment, in

the Northern Appalachians"Fredericton Inn & Conference Centre, Fredericton, New Brunswick | February 10-11, 2017

What is “Mineral Property Valuation” ??

• “Valuation is the process of estimating or determining the value of a Mineral Property. Valuation Date means the effective date of the Valuation, which may be different from the Report Date or from the cut-off date for the data used in the Valuation.” (CIMVal Standards and Guidelines, February 2003, p. 12)

• “Valuation is the process of determining the monetary Value of a Mineral Asset at a set Valuation Date.” (VALMIN Code, 2015 Edition, Clause 14)

• “Value means the estimated amount of money ... 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 wherein the parties each acted knowledgeably, prudently and without compulsion.” (VALMIN Code, 2015 Edition, Clause 14)

http://web.cim.org/standards/MenuPage.cfm?sections=177&menu=182

What is a “Qualified Valuator” (or “Valuer”) ?

• “Qualified Valuator is an individual who (a) is a professional with demonstrated extensive experience in the Valuation of Mineral Properties, (b) has experience relevant to the subject Mineral Property or has relied on a Current Technical Report on the subject Mineral Property by a Qualified Person, and (c) is regulated by or is a member in good standing of a Professional Association or a Self-Regulatory Professional Organization.” (CIMVal Standards and Guidelines, February 2003, page 11 - http://web.cim.org/standards/documents/Block487_Doc69.pdf)

• “Valuer - A person who (a) is a professional with demonstrated experience and Competence in the Valuation of Mineral Properties, (b) has experience relevant to the subject Mineral Property or has relied on an Expert with experience relevant to the subject Mineral Property, and (c) is regulated by or is a member in good standing of a Professional Organisation.” (IMVAL* Template, Second Edition, July 2016, page 17 - http://web.cim.org/standards/documents/Block724_Doc187.pdf)

• *IMVAL refers to the International Mineral Valuation Committee which prepared the International Mineral Property Valuation Standards Template (“IMVAL Template”), “a standards and guidelines template created for the harmonisation of International Mineral Valuation Codes and Standards”.

What is a Qualified Person ?• “qualified person” means an individual who • (a)  is an engineer or geoscientist with a university degree, or equivalent accreditation, in an area of

geoscience, or engineering, relating to mineral exploration or mining; • (b)  has at least five years of experience in mineral exploration, mine development or operation, or

mineral project assessment, or any combination of these, that is relevant to his or her professional degree or area of practice;

• (c)  has experience relevant to the subject matter of the mineral project and the technical report; • (d)  is in good standing with a professional association; and • (e)  in the case of a professional association in a foreign jurisdiction, has a membership designation

that • (i)  requires attainment of a position of responsibility in their profession that requires the exercise of independent

judgment; and • (ii)  requires

• a favourable confidential peer evaluation of the individual’s character, professional judgement, experience, and ethical fitness; or

• a recommendation for membership by at least two peers, and demonstrated prominence or expertise in the field of mineral exploration or mining;

(Unofficial consolidation of all amendments to National Instrument 43-101 Standards of Disclosure for Mineral Projects, current to 9 May 2016, pages 3 & 4 - http://www.osc.gov.on.ca/documents/en/Securities-Category4/ni_20160509_43-101_mineral-projects.pdf)

Why Do We Use Valuations?

• To determine the sale or purchase price of a mineral asset• To compare alternative investment opportunities• To advise shareholders and stakeholders in the event of a

proposed corporate transaction, such as a takeover or merger• To determine the base for value-related impost or taxes• To quantify asset levels in company balance sheets• To determine entry or participation levels in joint ventures• To assess the potential for adding value by exploration or

development

https://www.tsx.com/resource/en/531

https://www.tsx.com/resource/en/531APPENDIX 3G VALUATION STANDARDS AND GUIDELINES FOR MINERALS PROPERTIES

This Appendix sets out the Exchange’s expectations and requirements for a valuation of mineral properties and outlines: (a)  the general purpose of valuation reports; (b)  guidelines respecting circumstances where the Exchange will require a valuation report; and (c)  valuation standards, guidelines and methods that are generally acceptable to the Exchange. Mining industry standards and guidelines for valuations and valuation reports can be found in the Canadian Institute of Mining, Metallurgy and Petroleum Standards and Guidelines for Valuation of Mineral Properties (“CIMVal”) published in February, 2003 (www.cim.org). CIMVal consists of two parts, Standards and Guidelines. The Standards are mandatory and must be followed in order for a valuation to be CIMVal compliant. The Guidelines in CIMVal are not mandatory, but are strongly recommended. The Exchange requires that CIMVal Standards be used by Issuers and their professional advisors when preparing valuations and valuation reports on mineral properties. The CIMVal Guidelines should be followed by Issuers and their professional advisors in preparing valuation reports on mineral properties, with the exception that the valuation methods and guidelines under Section 4 Acceptable Valuation Methods and Guidelines below, must be followed.

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions

• 3.3 Formal Valuation • (1)  An issuer that makes an issuer bid shall

• (a)  obtain a formal valuation, • (b)  provide the disclosure required by section 6.2, • (c)  include, in accordance with section 6.5, a summary of the formal valuation in the disclosure

document for the issuer bid, unless the formal valuation is included in its entirety in the disclosure document,

• (d)  if there is an interested party other than the issuer, state in the disclosure document who will pay or has paid for the valuation, and

• (e)  comply with the other provisions of Part 6 applicable to it relating to formal valuations. • (2)  The board of directors of the issuer or an independent committee of the board

shall • (a)  determine who the valuator will be, and

• (b)  supervise the preparation of the formal valuation.

• (Unofficial consolidation of all amendments to Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, current to 9 May 2016, page - http://www.osc.gov.on.ca/documents/en/Securities-Category6/rule_20160509_61-101_special-transactions.pdf)

Excerpt from Recent Stratabound News Release re Exemption to Valuation

• “Certain insiders of the Company will acquire Units under the private placement. The participation by such insiders is considered to be a "related party transaction", as defined under Multilateral Instrument 61-101 ("MI 61-101"). The Company intends to rely on the exemptions from the valuation and minority shareholder approval requirements of MI 61-101 contained in sections 5.5(b) and 5.7(1)(b) of MI 61-101 in respect of such insider participation.” (http://www.stratabound.ca/images/stories/2017/stratabound_press_release_2-2-2017.pdf) 

MULTILATERAL INSTRUMENT 61-101 Exemptions Clauses cited in Recent Stratabound News Release

• 5.5  Exemptions from Formal Valuation Requirement – Section 5.4 does not apply to an issuer carrying out a related party transaction in any of the following circumstances:

• (b) Issuer Not Listed on Specified Markets – no securities of the issuer are listed or quoted on the Toronto Stock Exchange, Aequitas NEO Exchange Inc., the New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market, or a stock exchange outside of Canada and the United States other than the Alternative Investment Market of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc,

• 5.7  Exemptions from Minority Approval Requirement • (1) Subject to subsections (2), (3), (4) and (5), section 5.6 does not apply to an issuer carrying out a related party transaction in

any of the following circumstances if the exemption relied on, any formal valuation exemption relied on, and the facts supporting reliance on those exemptions are disclosed in the disclosure document, if any, for the transaction:

• (a)  Fair Market Value Not More Than 25 Per Cent of Market Capitalization – the circumstances described in paragraph (a) of section 5.5,

• (b)  Fair Market Value Not More Than $2,500,000 – Distribution of Securities for Cash – the circumstances described in paragraph (c) of section 5.5, if

• (i) no securities of the issuer are listed or quoted on the Toronto Stock Exchange, Aequitas NEO Exchange Inc., the New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market, or a stock exchange outside of Canada and the United States other than the Alternative Investment Market of the London Stock Exchange or the PLUS markets operated by PLUS Markets Group plc,

• Unofficial Consolidation – May 9, 2016 • (ii)  at the time the transaction is agreed to, neither the fair market value of the securities to be distributed in the transaction nor

the consideration to be received for those securities, insofar as the transaction involves interested parties, exceeds $2,500,000, • (iii)  the issuer has one or more independent directors in respect of the transaction who are not employees of the issuer, and • (iv)  at least two-thirds of the directors described in subparagraph (iii) approve the transaction,

MULTILATERAL INSTRUMENT 61-101 PROTECTION OF MINORITY SECURITY HOLDERS IN SPECIAL TRANSACTIONS (excerpt from Table of Contents)

PART 6 FORMAL VALUATIONS AND PRIOR VALUATIONS6.1 Independence and Qualifications of Valuator6.2 Disclosure Regarding Valuator6.3 Subject Matter of Formal Valuation6.4 Preparation of Formal Valuation 6.5 Summary of Formal Valuation 6.6 Filing of Formal Valuation 6.7 Valuator's Consent 6.8 Disclosure of Prior Valuation6.9 Filing of Prior Valuation6.10 Consent of Prior Valuator Not Required http://www.osc.gov.on.ca/documents/en/Securities-Category6/rule_20160509_61-101_special-transactions.pdf

Importance of a StandardisedSystem of Valuation

• A standardised valuation report improves confidence in the reliability of the findings• A standardised valuation report can be more readily

transferred across jurisdictions.• In turn, these permit better access for national companies

to international markets.• In turn, this encourages further foreign investment in the

national market.

Key Valuation Concepts

• An open and effective market• Highest and best use of the asset• The effective date of valuation• Technical Value derived from Evaluation• Technical Value assumptions• Premium or discount for market considerations• Restrictions to reasonable asset marketing times: current (vs best) use,

orderly liquidation, forced sales• Market restrictions: entity-specific factors, synergy, and transaction costs.

These are not classified as market considerations in determining value as defined.

Market Considerations

• Location: adjustments are made for geo-political risk, social licence, regional infrastructure

• Commodity: Value is influenced by long-term price and commodity market • Percentage ownership: Majority ownership delivers higher-than-

proportional value compared to minority ownership.• Management control: delivers higher-than-proportional value compared to

a non-controlling or passive interest.• Perceived risk: The market may take a different view of risk elements than

the evaluator does.• Market volatility: Market instability and gyrations may result in reduced

value for included assets.

Government Use of Valuations

• A better understanding of the value-adding process employed by mining companies, and the stages where value is added• A mechanism for equable distribution of value between the

mining company and the State• A mechanism for determining assessable value for statutory

imposts other than company income tax• NOTE: As evaluation is the starting point for valuation, the

evaluation components must not be neglected. They are critical in determining the impact of taxes, royalties and duties on project viability and funding competiveness.

Generally Accepted Valuation Approaches

Market-based

Exploration projects

Pre-development projects

Development projects

Production projects

Income-based

Pre-development projects (in some cases)

Development projects

Production projects

Cost-based

Exploration projects

Pre-development projects (in some cases)

The Qualified Valuator has the responsibility to decide which Valuation approaches and methods to use. The choice of the specific approaches and methods used, or excluded, must be justified and explained by the Qualified Valuator. The limitations of each method must be explained……. More than one approach should be used in the Valuation of each Mineral Property. If a Qualified Valuator is strongly of the opinion that only one approach should be used in particular circumstances, the Qualified Valuator must justify and explain why other approaches are not used…. The Valuation of a Mineral Property must be reported as a range of values to reflect the uncertainty and subjective nature of the Valuation process. If reporting of a single value is required, the selection of a single value from the range must be explained.(CIMVal, page 16)

Valuation Approach Descriptions

• The Income Approach is based on the principle of anticipation of benefits and includes all methods that are based on the income or cash flow generation potential of the Mineral Property.

• The Market Approach is based primarily on the principle of substitution and is also called the Sales Comparison Approach. The Mineral Property being valued is compared with the transaction value of similar Mineral Properties, transacted in an open market. Methods include comparable transactions and option or farm-in agreement terms analysis.

• The Cost Approach is based on the principle of contribution to value. The appraised value method, is one commonly used method where exploration expenditures are analyzed for their contribution to the exploration potential of the Mineral Property. (CIMVal Standards and Guidelines, S1, page 21) The IVS Glossary states that it is “A valuation approach based on the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction.” Cost Approaches estimate Value of a Mineral Property based on past expenditures and, in some cases, can include adjusted future expenditures predicted to be required to evaluate the potential as perceived to exist. International Valuation Standards (IVS) Glossary, https://www.ivsc.org/standards/glossary

• Value relates to a specific point in time. Valuation opinions must be given as at the Valuation Date.(Ibid, page 20)

Valuation Methods (in general, sub-sets of Approaches)

Valuation Approach Description Valuation

MethodExploration Properties

Development Properties

Production Properties

IncomeRelies on the “value-in

use” principle and requires determination of the present value of

future cash flow

Discounted Cash Flow (DCF) Not generally used Widely used Widely used

Real Options Not widely used Less widely used Quite widely usedMonte Carlo Analysis Not widely used Less widely used Less widely usedProbabilistic Method Not used Not widely used Not widely used

Market

Relies on the principle of substitution. The

Mineral Property being valued is compared with the transaction

value of similar Mineral Properties, transacted on an open market.

Comparable Transactions Widely used Widely used Widely used

Option Agreement Terms Widely used Widely used Quite widely used

Market CapitalizationMore applicable to

single property asset junior companies

   

Net Metal Value per unit of metal

Widely used rule of thumb

   

Value per Unit Area Some use - if large area mineralized Not widely used Not widely used

Gross "in-situ" value Not acceptable    

CostRelies on historical

and/or future amounts spent on the Mineral

Property

Appraised Value Quite widely used Not widely used Not widely usedMultiples Quite widely used Quite widely used Widely used

Geoscience factor Not widely used Not widely used Not generally used

 

Frequency of usage of Valuation Approaches and Methods by stage of Mineral Property Evaluation

http://web.cim.org/mes/pdf/VALDAYKeithSpence.pdf

Valuation Report Components

• Purpose of the report, intended use and users, and restrictions thereto• Mineral property identification• Effective date and sign-off date of the report• Sources of information• Project evaluation, or technical assessment• Valuation approaches and methods• Valuation assumptions, risks, limitations, and forward-looking statements• Value opinion, including reconciliation of derived value estimates• Valuer’s declaration: identity, qualifications, experience, competence,

independence, site visits, conformance with professional code

Reporting Value

• The regulatory framework• National law, in reporting jurisdiction• Stock exchange rules, in reporting jurisdiction• Professional codes, in home jurisdiction and – if specified by reporting

jurisdiction law and stock exchange - reporting jurisdiction

• The regulatory framework is a “cascade”, with the each of the above components taking precedence over the one below in the event of conflicting rules or advice. • National Law is always the over-arching authority

The Professional Codes

• They apply to the valuation and evaluation of mineral properties• They do not apply to the valuation of mineral securities (ie company shares)

other than to those components involving evaluation of mineral properties. • They are not law, but may be referenced by law or regulation.• They are ‘best practice’, and are enforceable by the professional institutes.• A code includes a statement of purpose, definitions, rules and guidelines. In

some cases, a valuer may be required to explain why a guideline has not been adopted in a valuation report.

• Commonly used national codes include VALMIN (Australia, first issued in 1995, last revised in 2015), CIMVAL (Canada), SAMVAL (South Africa), SME Valuation Standards (USA)

Global Harmonisation

• With mining codes, global harmonisation was first initiated under the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) to make compatible (as far as practicable) the different national mineral resource and reserve reporting codes.

• The International Valuation Standards Council (IVSC) aims to introduce common standards to valuation, but its output is generic as it covers valuation in all industries. The IVSC Framework is currently under revision. New key documents are IVS General Standards 104 (Bases of Value) and 105 (Valuation Approaches and Methods).

• The International Mining Valuation Committee (IMVAL) aims to introduce common standards to mineral asset valuation, within the constraints imposed by national laws in different jurisdictions. The IMVAL Template, First and Second Editions,was issued in July 2016.

Widely Used and Accepted Reporting Standards or Codes for Mineral Resources, Reserves, Exploration and Valuation

Notes: 1) In Canada, provincial or territorial associations of engineers and geoscientists do not prepare the codes or standards, but they certify, discipline or expel members. 2) Government securities regulatory bodies periodically add to lists of foreign Recognised Professional Organisations (RPOs) and membership categories that will be accepted for public reporting. An example such addition by the CSA states "After considering submissions received, in staff's view the organization identified below meets the definition of a 'professional association' in NI 43-101, and the membership designation below meets the criteria in paragraph (e) of the definition of 'qualified person' in NI 43-101".

Code Structure• 1st priority: to provide a workable and enforceable guide to valuers• 2nd priority: to conform with national law and regulations• 3rd priority: to conform with stock exchange rules• 4th priority: to conform with mineral resource and ore reserve

reporting code• 5th priority: to conform with IVSC framework and definitions• 6th priority: to conform with IMVAL Template• Codes change with time. As material changes occur with any or all

of the above, then code revisions will be required.

Reporting Principles or “Valuation Tenets”

“The following basic tenets (see S1.0 Definitions) must be followed in the Valuation process and in the preparation of a Valuation Report. General principles of Valuation are discussed in the Guidelines.

• Materiality • Transparency • Independence • Competence • Reasonableness” (CIMVal Standards and Guidelines, Clause S4.1, page 13)

Materiality

Materiality and Material refer to data or information which contribute to the determination of the Mineral Property value, such that the inclusion or omission of such data or information might result in the reader of a Valuation Report coming to a substantially different conclusion as to the value of the Mineral Property. Material data and information are those which would reasonably be required to make an informed assessment of the value of the subject Mineral Property. In addition to the general definition above, section 2.4 of Companion Policy 43-101CP to National Instrument 43-101 provides further guidance on the meaning of “Material” and “Materiality”. (CIMVal Standards and Guidelines, S1, page 9)

“A Valuation must address all material information. All Material information must be included or adequately referenced in the Valuation Report. Materiality is the principle that determines whether certain information is relevant to the Valuation. Materiality applies to the nature of the items assessed and their influence on the quantum of a Valuation.The Valuer must clearly set out all Material assumptions regarding the input parameters, risks, limitations, and the associated effects in the Valuation Report. (IMVAL Template, Second Edition, July 2016)

Transparency

• Transparency and Transparent means that the Material data and information used in (or excluded from) the Valuation of a Mineral Property, the assumptions, the Valuation approaches and methods, and the Valuation itself must be set out clearly in the Valuation Report, along with the rationale for the choices and conclusions of the Qualified Valuator. (CIMVal Standards and Guidelines, S1, page 12)

• The Valuation process and Valuation Report must be Transparent, such that it must be clear and unambiguous and therefore understandable. (IMVAL Template, Second Edition, July 2016, page 4)

Independence

• Independence or Independent means that, other than professional fees and disbursements received or to be received in connection with the Valuation concerned, the Qualified Valuator or Qualified Person (as the case requires) has no pecuniary or beneficial (present or contingent) interest in any of the Mineral Properties being valued, nor has any association with the Commissioning Entity or any holder(s) of any rights in Mineral Properties which are the subject of the Valuation, which is likely to create an apprehension of bias. The concepts of “Independence” and “Independent” are questions of fact. For example, where a Qualified Valuator’s fees depend in whole or in part on an understanding or arrangement that an incentive will be paid based on a certain value being obtained, such Qualified Valuator is not Independent. For securities purposes, in addition to the general definition above, section 6.1 of the Ontario Securities Commission Rule 61-501 (“Insider Bids, Issuer Bids, Going Private Transactions and Related Party Transactions”) and section 5.2 of its Companion Policy 61-501CP provide further guidance on the meaning of “Independence” and “Independent”. (CIMVal Standards and Guidelines, S1, page 9)

Competence

• Competence or Competent means having relevant qualifications and relevant experience. (CIMVal Standards and Guidelines, S1, page 8)

• A Valuer must be able to demonstrate to the Commissioning Entity and those entitled to rely on a Valuation Report that the Valuer is sufficiently Competent to prepare or contribute to the Valuation Report. A Valuer must be clearly satisfied that they are able to face their professional peers and demonstrate Competence in the Valuation undertaken. Among other things, Valuers should assess their competence regarding the subject Mineral Property, the market in which the property would trade, and the purpose of the Valuation.A Valuer who is not personally Competent to undertake an aspect of a Valuation assignment must seek assistance from an Expert who is Competent in the applicable field or discipline necessary to address that aspect. Material assistance from Experts must be disclosed in the Valuation Report. (IMVAL Template, Second Edition, July 2016, page 4)

Reasonableness

• Reasonableness, in reference to the Valuation of a Mineral Property, means that other appropriately qualified and experienced valuators with access to the same information would value the property at approximately the same range. A Reasonableness test serves to identify Valuations which may be out of step with industry standards and industry norms. It is not sufficient for a Qualified Valuator to determine that he or she personally believes the value determined is appropriate without satisfying an objective standard of proof (adapted from NI 43- 101CP, Section 1.6). (CIMVal Standards and Guidelines, S1, page 12)

• The Valuer must ensure the Reasonableness of the Valuation. Any Valuation, assumptions applied and any method relied upon, should be reasonable within the context of the purpose of the Valuation and the Basis of Value. A method applied to the subject Mineral Property should be within the expected capability and consideration of an assumed likely buyer or lessee of the property. (IMVAL Template, Second Edition, July 2016, page 5)

Is this LinkedIn posting correct usage ?

What is Mineral Evaluation?

• A process to decide the future of a mineral project• “A broad physical, technical, legal, economic and other

assessment of a Mineral Property that is generally sought for an investment decision” (IMVAL Template, Second Edition, July 2016, Clause 4.7)• “For clarity, Evaluation is distinct from Valuation” (IMVAL

Template, Second Edition, July 2016, Clause 4.7)