Watts, Griffis and McOuat Mineral Sector Valuations A Presentation on Practices in the Canadian...
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Watts, Griffis and McOuat
Mineral Sector ValuationsMineral Sector Valuations
A Presentation on Practices in A Presentation on Practices in the Canadian Minerals the Canadian Minerals
IndustryIndustry
November, 2005November, 2005
Al Workman, P.Geo., Vice-PresidentAl Workman, P.Geo., Vice-President
Watts, Griffis and McOuat LimitedWatts, Griffis and McOuat Limited
Watts, Griffis and McOuat
Valuation StandardsValuation Standards
The Valuator must understand the standard of value that is required by the client:
Investment Value - the value to the ownerForced Liquidation Value - the value if assets of a failed business are sold at auctionOrderly Liquidation Value - net proceeds if assets of a business are sold over a period of time to maximize the proceeds receivedFair Market Value or Market Value – proceeds from unforced sale between willing vendor and a willing buyer
Watts, Griffis and McOuat
Valuation StandardsValuation Standards
Most valuations in the Minerals Sector involve the estimation of “Fair Market Value”.
Fair Market Value is defined in accordance with Revenue Canada guidelines as “the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm’s length, and under no compulsion to act, expressed in terms of money or money’s worth”.
Watts, Griffis and McOuat
Valuation StandardsValuation Standards
Some valuations in the Minerals Sector involve the estimation of “Market Value”.
Market Value as defined by the British Columbia Mining Rights Compensation Regulations is defined as “the market value of an estate or interest in land is the amount that would have been paid to the holder of the expropriated mineral title if the title had been sold on the date of expropriation, in an open and unrestricted market between informed and prudent parties acting at arm’s length”.
Watts, Griffis and McOuat
Valuation StandardsValuation Standards
The difference in these two definitions is important.
Market Value is estimated as the likely outcome of a sale and it requires the valuator to estimate the value in accordance with probability.
Fair Market Value is estimated as the highest outcome of a sale and it requires the valuator to estimate the value based on what the most willing buyer would pay.
Watts, Griffis and McOuat
Valuation ApproachesValuation Approaches
Three traditional approaches:
Cost – what did it cost to acquire the property and how much has been invested in it
Market – what would the market be willing to pay if the property were sold
Income – what is the earning power of the property expressed as a Net Present Value
Watts, Griffis and McOuat
Use of Valuation ApproachesUse of Valuation ApproachesCIMVal covers examples of many valuation methods:Valuation Approach
Valuation Method
Method Ranking Comments
Income Discounted Cash Flow Primary Very widely used and generally accepted in Canada as the best method
IncomeMonte Carlo Simulation Primary Less widely used but gaining in
acceptance
Income Option Pricing Primary Not commonly used and not well understood but gaining in acceptance
MarketComparable
Transactions Analysis Primary Widely used – based on substitution
MarketOption Agreement
Terms Primary Widely used but option terms must be discounted over time
MarketGross In-Situ Metal
Value x Not acceptable
Watts, Griffis and McOuat
Use of Valuation ApproachesUse of Valuation ApproachesSummary of valuation methods continued…………
Valuation Approach
Valuation Method
Method Ranking Comments
MarketNet Value of In-Situ
Metal Secondary Very widely used ‘rule of thumb’
Market Value per Unit Area Secondary For large reconnaissance exploration properties without central focus.
Market Market Capitalization Secondary Can be used for single property companies – usually junior companies
Cost Appraised Value Primary Widely used but not uniformly accepted
CostMultiple of Exploration
Costs Primary Not widely used or accepted in Canada
Cost Geoscience Factor Secondary Not widely used.
Watts, Griffis and McOuat
Valuation ApproachesValuation Approaches
Income Approach:
Discounted Cash Flow Analysis - well suited for the valuation of mineral assets for which there are Mineral Resources and/or Mineral Reserves, and some form of economic analysis
Monte Carlo Simulation Analysis – well suited for the valuation of mineral assets for which there is some indication of Mineral Resources and/or Mineral Reserves, but where costs and revenue streams are uncertain
Watts, Griffis and McOuat
Valuation ApproachesValuation Approaches
Market Approach:
Joint Venture Terms Analysis - quite effective if there are examples available for the subject property
Comparable Transaction Analysis - based on the principle of substitution, which says that the economic value of a property can be determined by the cost of acquiring an equally desirable substitute
In-Situ Resource Analysis – market value of the mineral in the ground
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
DISCOUNTED CASH FLOW (DCF) MODELLING
CIMVal guidelines state that DCF modelling is an acceptable valuation method for valuing Measured and Indicated Mineral Resources, but it should be used with caution for Inferred Resources. It does not forbid the use of Inferred Resources.
The Toronto Stock Exchange (TSE) will not accept the use of Inferred Resources.
The use of Inferred Resources is prevalent within the industry in striking deals between companies, however there is little hard evidence of its use.
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
EXAMPLE OF THE USE OF INFERRED RESOURCESDuring 1996, Barrick Gold acquired Arequipa Resources just after the discovery of the Pierina gold deposit in Peru. At the time, only 20 diamond drill holes had been completed. Barrick paid US $756 M to purchase the deposit. Barrick recognized the geological model, and based on the model, inferred that the deposit contained at least 6 Moz of gold. Barrick was willing to pay $150 per potential contained ounce for the “inferred” resource. Further exploration showed that the deposit contained over 7 Moz of gold.
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
DISCOUNTED CASH FLOW (DCF) MODELLING
WGM believes that the position of the TSE is based on:
a misguided interpretation of National Instrument 43-101 rules;
fear of the misuse of Inferred Resources; and,
a desire to avoid the over-capitalization of companies
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
DISCOUNTED CASH FLOW (DCF) MODELLING
DCF modelling requires:
clearly defined resources and/or reserves;
good idea of appropriate mining and processing techniques, equipment requirements, G & A costs, capital and operating costs, metallurgical recoveries, by-product credits…etc
current and future commodity prices
taxes, royalties and mine closure costs
a production schedule;
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation MethodsDCF EXAMPLE
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation MethodsDCF EXAMPLE
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MONTE CARLO SIMULATION
Use Monte Carlo simulation to develop realistic discounted cash flow valuations to reflect the uncertainty contained within a project.
Use MCS to build confidence in a project knowing where the main risk parameters are located.
Simulate and examine the affect of risk elements within a project by varying in-put parameters and visualizing the result.
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MONTE CARLO SIMULATION
Use when DCF in-put parameters can not be defined, but can be estimated within a range.
TSE rules do not cover probabilistic modelling and so the use of Inferred Resources is not prevented.
MCS should be carried out by an experienced mineral economist in consultation with either (1) a Mining Engineer or (2) a current and comprehensive mine production database.
Careful consideration must be given to in-put ranges and the skewness of the range.
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS APPLICATION
Early exploration property has 50 drill holes and Inferred Resource of 12.6 mt grading ~9 g Au/t.
Additional drilling indicates strong possibility of doubling and up-grading the estimated resource.
Based on other similar mines in the area, we can estimate, +/- 10-25%, the following:
metallurgical recoveries; total capital and production costs; taxes, royalties and mine closure costs
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS APPLICATION
Symmetrical or Skewed Inputs?????
The confidence of the data may allow issues of the average grade to be a simple matter of assessing the need to cut high grade values:
Average gold grade with no cutting = 9.4 g/t
Average gold grade with assays cut at the 98th percentile (50 g/t) = 9.1 g/t.
Average gold grade with assays cut at the 95th percentile (30 g/t) = 8.8 g/t.
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS APPLICATION
Symmetrical or Skewed Inputs?????
The effect of cutting shows no serious nugget affect caused by coarse gold and so we might reasonably select a normally distributed range of values for gold in-put between 8.8 and 9.4 g/t.
0
20
40
60
80
8.5 8.8 9.1 9.4 9.7
Pro
bab
ility
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS APPLICATION
Symmetrical or Skewed Inputs?????
Uncertainties regarding the amount of refractory gold and its effect on overall recoveries may dictate a more cautious approach. Recovery of refractory gold may be 60% versus 95% for non-refractory gold.
0
10
20
30
40
60 65 70 75 80 85 90 95 100
Pro
bab
ility
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS EXAMPLE
ITEMITEM LowLow HighHigh Frequency DistributionFrequency Distribution
Average GradeAverage Grade 8.58.5 9.59.5
TonnesTonnes 12 MT12 MT 13.2 Mt13.2 Mt
Gold RecoveryGold Recovery 6060 100100
Mining CostsMining Costs 2020 5555
Processing CostsProcessing Costs 4040 6060
0
10
20
30
40
60 65 70 75 80 85 90 95 100
0
5
10
15
20
25
12 12.2 12.4 12.6 12.8 13 13.2
0
20
40
60
80
8.5 8.8 9.1 9.4 9.7
0102030
20 25 30 35 40 45 50 55 60
0
10
20
30
40
45 50 55 60 65 70
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS EXAMPLE
0
10
20
30
40
60 65 70 75 80 85 90 95 100
0
5
10
15
20
25
12 12.2 12.4 12.6 12.8 13 13.2
0
20
40
60
80
8.5 8.8 9.1 9.4 9.7
0102030
20 25 30 35 40 45 50 55 60
0
10
20
30
40
45 50 55 60 65 70
It is very important that the Monte Carlo simulation be repeated enough times to produce reliable out-put = recommend 1,000 iterations
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS EXAMPLE – OPERATING COSTS
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS EXAMPLE – CAPITAL COSTS
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS EXAMPLE – COMMODITY PRICE
Watts, Griffis and McOuat
Application of Valuation MethodsApplication of Valuation Methods
MCS EXAMPLE – NET PRESENT VALUE
Watts, Griffis and McOuat
MCS EXAMPLE – OTHER VARIABLES
Political risk
Environmental risk
Social risk
Other variables that could be analysed and used as multipliers of net present value could include:
Application of Valuation MethodsApplication of Valuation Methods
Watts, Griffis and McOuat
JOINT VENTURE TERMS ANALYSIS
If I invest $1M into a property worth $5M, the property may become worth $6 M. – this is not a JV
The Valuator must always separate the value of the Joint Venture from the value of the underlying property – they are not the same.
Application of Valuation MethodsApplication of Valuation Methods
If I invest $1M into a JV where the underlying property is worth $5M, the value of the JV may be worth $6M, but the value of the property to me must be determined by my earned position in the JV.
Watts, Griffis and McOuat
JOINT VENTURE TERMS ANALYSIS
Application of Valuation MethodsApplication of Valuation Methods
A useful formula is:
$Vp = $E x (100 - I%) / I%
Where $Vp is equal to value of 100% of the entire property
$E is the cash being contributed to the JV by in-coming Party (the investor)
I% is the interest to be earned in the JV by the investor
Watts, Griffis and McOuat
JOINT VENTURE TERMS ANALYSIS
Application of Valuation MethodsApplication of Valuation Methods
The underlying principle is that an investor putting money into a property will earn his interest immediately, and the property may see an increase in value using, for example, the appraised value method.
An investor putting his money into a JV is increasing the value of the JV, but not necessarily increasing the value of the underlying property, and the investors interest remains in the JV.
Watts, Griffis and McOuat
Other Valuation MethodsOther Valuation Methods
Other valuation methods exist, but many of these are not accepted as primary valuation techniques. However, they can be useful as a test of reasonableness.
These include:
Value per unit of area for an raw exploration property – use with caution to ensure areas are approximately comparable.
Decision tree (probabilistic) analysis – not commonly used.
Watts, Griffis and McOuat
ConclusionsConclusions
Valuing a mineral property is a time sensitive practice. What seems logical today may not seem reasonable 6 months from today. The Qualified Valuator must keep good notes to ensure that the chain of rational decisions that led him / her to his conclusions can be understood and duplicated in the future.
Cross-referencing of valuation techniques is an important means to ensure that the valuation is reasonable. If the valuator does not see congruence in his individual conclusions, he should re-examine the data and his conclusions each step of the way.
Watts, Griffis and McOuat
ConclusionsConclusions
MethodMethod
Comparable Transactions
Net Value In-Situ Metal
Monte Carlo Simulation
Appraised Value
Fair Market Value
2 4 6
$ Millions
2.6 5.8
2.2 3.6
2.7 4.3
2.5 3.6
3.6 4.4
Watts, Griffis and McOuat
Suggested ReadingSuggested Reading
CIMVal Standards and Guidelines for the Valuation of Mineral Properties (Canada).
VALMIN – supported by the AusIMM (Australia).
SAMVAL – South African Institute of Mining and Metallurgy – draws on CIMVal and VALMIN.