How To Value An Exploration Project

How to Value an
Exploration Project
Richard Schodde
Manager - Risk Capital Analysis

WMC Resources Ltd
Minerals Exploration Branch Conference

China Mining Association
Kunming : 13 December 2002
How to Value an Exploration Project
Overview
1/ Why do we need Valuations ?
2/ How should the Valuation be done ?
Recommend using a standardised approach.
In Australia we use the Valmin Code of Practice
3/ Recent Trends in the Valuation of Exploration
Projects in Australia
Examples of the types of valuations used for projects
4/ Important Valuation Issues for Foreign
Companies working in China
Suggestions on how to improve the value of your
exploration project
1/ Why do we need Valuations ?

Valuations are important because they :
n
n
Are used to determine the sale price of an exploration

project
n
n
Set the relative contributions for each of the partners in a

Joint Venture project
n
n
Help confirm that a proposed exploration project is of

value ((ie
ie that the benefits exceed the cost of doing the
exploration)
The importance of Using a

Standardised System for Valuations
Advantages to China from using an internationally
accepted valuation system are it :
n
Improves the confidence in the numbers

generated are reliable
Encourages foreign investment in the industry
Enables Chinese companies to work overseas
International Valuation Approaches

n
United States : Uses the Uniform Standards of

Professional Appraisal ((USPAP)
USPAP) mainly designed for
valuing Real Estate, not mineral projects
Australia : VALMIN Code, was developed by the

Australasian Institute of Mining and Metallurgy in 1995
is presently the only valuation standard in the world
specifically designed for mineral assets
Canada : Canadian Institute of Mining will release its

CIMVal in 2003 (it is largely based on the VALMIN Code)
South Africa : South African Institute of Mining and

Metallurgy is currently developing SAMVAL
SAMVAL.. It is based on
elements of VALMIN and CIMVal
VALMIN Code
VALMIN Code provides general rules on the :

n
n
n
n
n
n
Purpose and type of reports to be produced

Qualifications required for the valuer
Preferred valuation methodologies used
Content and structure of the report
Obligations of the company requesting the valuation
Responsibilities of the valuer
Four Requirements of the VALMIN Code

1/ Transparency
n
n
Study needs to explain how the valuation was done,

and the methods and assumptions used (so that other
people can replicate the results)
2/ Materiality
n
n
The valuation must include all of the important

information about the project
3/ Competence
n
n
The valuer must have a high level of expertise in the

commodity being evaluated
4/ Independence
n
n
n
n
The valuer must not receive any beneficial interest in

the outcome of the study
The price set must be at fair market value
2/ How should the Valuation be done ?

n
The VALMIN Code does not specify which valuation

methodology should be used. It leaves the decision
to the valuer
valuer..
n
n
However, the valuer must state the reasons why he chose

the particular methodology used
The choice of methodology depends on the

available data and the exploration stage for the
project
Recommend using alternate methodologies

n
n
Use them to validate the preferred value
Common Valuation Methodologies

1/ Multiples of Exploration Expenditure Method
n
n
Value depends on how much money has been spent in

the past and/or how much will be spent on the project
2/ Joint Venture Method

n
n
The value is related to how much the Joint Venture

partner is planning to spend on the project
3/ Geoscience Method (Kilburn Method)

n
n
Involves assessing the technical factors of the project
4/ Comparable Market Value Method

n
n
Value is set by what other similar projects sell for
5/ Income Method
n
n
Value is calculated from the likely future cash flows

generated from the project
Multiples of Exploration Expenditure Method

Value is determined by how much was spent on
exploration in the past plus future expenditures.
The total figure is adjusted by a factor related to
the prospectivity of the area
This factor is called the
Prospectivity Enhancement Factor (PEM).
note :
n Only include those past expenditures that are reasonable and
productive (ie exclude expenditures that were ineffective)
n Only count those future expenditures which are committed to
the project
n Only use a high PEM is the exploration results are compelling
10
Typical Adjustment Factors
Sim
Ex plified
am
ple
The Prospectivity Enhancement Multiplier( PEM) can range from

0 to 5 but is usually in the range 0.5 to 3 .0 . The average is ~1.8
Multiplier
x0.5
Previous exploration indicates that the area has limited potential for a major discovery
x1.0
Existing data is sufficient to warrant further exploration
x1.5
Have direct evidence of an interesting target. Further work is warranted to evaluate

the target
x2.0
The leases contain a defined drill target with significant geochemical intersections
x2.5
Exploration is well advanced and limited in-fill drilling is likely to define a resource
x3.0
Have already found a substantial resource (that is likely to lead to a mine). Further
exploration is likely to lead to an increase in the size and quality of the resource
11
Joint Venture Method

Value is directly related to how much the Joint
Venture partner will spend on exploration to earn
his interest in the project.
Value of 100%
of Project
= (Exploration Expenditures)
(Equity share for JV Partner)
and
Remaining Value
to Original Owner
= (Value of 100% of Project) x (Owners Equity Share)
Note : Need to adjust the value for delay in when the money
is spent (time-value-of-money) as well as the likelihood
that the JV partner will continue to fund the project
12
Joint Venture Method : Worked Example

Company A is prepared to spend $2m over 4 years to earn a 60% equity share in an
exploration project currently owned by Company B.
Assume 33% Probability of the project going to completion and (say) a 18% discount for
delayed payments
Value of 100%
of Project
= ($2m) x 33% x (1-0.18)

-----60%
= $0.90m
and
Remaining Value
to Company B
= ($0.90m) x 40% = $0.36m
13
Geoscience Method
Was originally developed by Kilburn in 1990 to
systematically assess the physical attributes of the
exploration property using a scoring system
The score is adjusted for local market conditions
and then multiplied against a standard cost
($ per km22) for a typical exploration project
This value is called the Basic Acquisition Cost (BAC), and refers
to the typical average cost incurred to acquire a tenement and
pay all Government charges for the for next 12 months
14
Kilburn Rating Criteria

Rating
Off-Property
Factor
On-Property
Factor
Anomaly
Factor
Sim
Ex plified
am
ple
Geological
Factor
Unfavourable Lithology
0.1
Extensive previous
exploration gave poor
results
0.5
Generally favourable
Lithology on 25% of the
Lease area
Lithology (50% Lease)
0.9
1.0
No known mineralisation
in district
No known mineralisation
on the leases
No Targets outlined
Generally Favourable
Lithology (70% Lease)
2.0
Several old workings in

district
Several old workings on

the leases
Several well defined

targets
Generally Favourable
Lithology with structures
3.5
Historic production
>200,000 ounces
Historic production
>100,000 ounces
5.0
Historic production
>1 million ounces
Historic production
>500,000 ounces
Several Ore Grade

Drill Intersections
15
Geoscience Method :
Worked Example
Company A has 220 km2 of exploration leases, in a district with known historical
production of 200,000oz of gold. While there are several old workings on the lease,
historical production was small. Also only 50% of leases has a favourable lithology and
much of the host rocks are under cover. Some drill targets have been defined
Off-Property
Factor
On-Property
Factor
Anomaly
Factor
Geological
Factor
Historic production
>200,000 ounces
Several old workings

on the leases
Some Targets outlined
Lithology on 25% of the
Lease area
x3.5
x2.0
x 1.5
X 0.5
Technical Factor = 3.5 x 2.0 x 1.5 x 0.5 = 5.25

Market Factor = 1.0
In Australia the BAC for an

Exploration Lease is A$335/km2
Value of Leases = 5.25 x 1.0 x A$335 /km2 x 220 km2 = $387,000

16
Comparable Market Value Method

This method uses the sales price of other other
projects in the area to determine the value of the
exploration project
There are several problems with this method :
n
n
n
n
n
n
The mineral potential of your leases may be different

Many sales do not involve cash. Instead they may be
Joint Ventures or Royalties which are difficult to value
The sale might not be at arms
-length and therefore
arms-length
not be a fair price
One variation on this is the Yardstick Method

where the project is valued in terms of recent
sales on a $/ounce basis
17
Selling Price of various Undeveloped Gold

Deposits around the World : 1993-2002
Sale Price : US$/Ounce
$200
$200
Excludes Operating Mines
$150
$150
$100
$100
Weighted Average Price
$50
$50
limited
data
US$6/oz
$0
$0
1993
1993
1995
1995
1997
1997
1999
1999
2001
2001
2003
2003
18
Income (or NPV) Method

Value is based on the likely income that will be
generated from the mine when it is developed
The cash flow is then adjusted for capital
expenditures and tax payments and the resulting
cash flow is discounted back to a Net Present Value
Advantage : It gives a reliable and robust valuation
Disadvantage: Need to have defined an economic orebody
orebody..
Consequently, it can only be applied to advanced
-stage
advanced-stage
projects where a feasibility study has been completed
19
Other Valuation Methods

n
Rule of Thumb Method

n
n
Empirical Method
n
n
The Valuers Best Guess
Statistical / Probabilistic Method

n
n
Assign an arbitrary value ( xx

$/km22)
xx$/km
Assess likely size and value of prize and adjust the value
for the probability of success
Decision Tree Analysis Method

n
n
Is a variation on the Statistical Method. Uses a range of

possible outcomes (from failure to a major success)
20
3/ Recent Trends in the Valuation of

Exploration Projects in Australia
n
Australia has a large exploration and mining

industry. Have ~20 qualified people working on
valuing exploration projects
Companies are required to use the VALMIN Code

for transactions that involve the issue of shares
on the Stock Exchange
21
Analysis
Since VALMIN was introduced in July 1995, 107 new
Mineral Exploration Companies have been listed on the
Australian Stock Exchange several of these used
independent valuers to assess their exploration projects.
Number of New Exploration Companies
12
12
No
No Valuation
Valuation
With
With Valuation
Valuation
10
10
8
8
6
6
4
4
2
2
M
M
aarr
--002
2
M
M
aarr
--001
1
M
M
aarr
--000
0
M
M
aarr
--999
9
M
M
aarr
--998
8
M
M
aarr
--996
6
M
M
aarr
--995
5
M
M
aarr
--997
7
No Data
0
0
Source : ASX
22
Exploration Projects
Number of Projects
100
100
80
80
Based on a review of 150 exploration

projects for 18 new Mineral Exploration
Companies, it is clear that most projects
are at an early stage of exploration
60
60
40
40
20
20
0
0
Identify
Anomalies
Drill
Target
Early Stage
Resource
Drilling
Feasibility
Study
Late Stage
23
Valuation Method Used

Number of Projects
Combination
Combination of
of Methods
Methods
100
100
Income
Income (NPV)
(NPV)
Joint
Joint Venture
Venture
80
80
Comparative
Comparative Sales
Sales
Empirical
Empirical (ie
(ie Valuer's
Valuer's Guess)
Guess)
60
60
Yardstick
Yardstick (ie
(ie $/Ha
$/Ha or
or $/oz)
$/oz)
Geotechnical
Geotechnical Ranking
Ranking
40
40
Multiples
Multiples of
of Exploration
Exploration Expenditure
Expenditure
20
20
0
0
Identify
Anomalies
Drill
Target
Early Stage
Resource
Drilling
Feasibility
Study
Late Stage
24
Valuation Method Used Depends

on the Stage of Exploration
Percentage Basis
Combination
Combination of
of Methods
Methods
100%
100%
Income
Income (NPV)
(NPV)
Joint
Joint Venture
Venture
80%
80%
Comparative
Comparative Sales
Sales
Empirical
Empirical (ie
(ie Valuer's
Valuer's Guess)
Guess)
60%
60%
Yardstick
Yardstick (ie
(ie $/Ha
$/Ha or
or $/oz)
$/oz)
Geotechnical
Geotechnical Ranking
Ranking
40%
40%
Multiples
Multiples of
of Exploration
Exploration Expenditure
Expenditure
20%
20%
0%
0%
Identify
Anomalies
Drill
Target
Resource
Drilling
Feasibility
Study
25
Value varies widely with the size

of the Lease area
Value (A$ Million)
(Yuan Million)
100
100
100
10
10
10
1
1
0.1
0.1
0.1
0.01
0.01
0.01
0.001
0.001
0.01
0.01
0.1
0.1
1
1
10
10
100
100
Lease Area (km2)
1000
1000
10000
10000
26
However, Early Stage Projects

tend to have Lower Values
Value (A$ Million)

100
100
10
10
(Yuan Million)
Identify
Identify Anomalies
Anomalies
Drill
Drill Targets
Targets
Resource
Resource Drilling
Drilling
Feasiblity
Feasiblity Study
Study
100
10
1
1
0.1
0.1
0.1
0.01
0.01
0.01
0.001
0.001
0.01
0.01
0.1
0.1
1
1
10
10
100
100
Lease Area (km2)
1000
1000
10000
10000
27
At a Given Stage of Exploration, Different

Commodities have Similar Values
Value (A$ Million)
100
100
10
10
1
1
(Yuan Million)
EARLY STAGE : Identify Anomalies
Diamonds
Diamonds
Gold
Gold
Nickel
Nickel
Platinum
Platinum
Base
Base Metals
Metals
Multi-Metals
Multi-Metals
Other
Other
100
10
1
0.1
0.1
0.1
0.01
0.01
0.01
0.001
0.001
0.01
0.01
0.1
0.1
1
1
10
10
100
100
Lease Area (km2)
1000
1000
10000
10000
28
Project Value for Various Commodities

Value (A$ Million)
100
100
10
10
1
1
(Yuan Million)
STAGE : Drill Targets
Diamonds
Diamonds
Gold
Gold
Nickel
Nickel
Platinum
Platinum
Base
Base Metals
Metals
Multi-Metals
Multi-Metals
Other
Other
100
10
1
0.1
0.1
0.1
0.01
0.01
0.01
0.001
0.001
0.01
0.01
0.1
0.1
1
1
10
10
100
100
Lease Area (km2)
1000
1000
10000
10000
29
Value is Loosely Related to the Level

of Historical Expenditures
Value (A$Million)
Ratio of
x1 Value/Cost
x5
100
100
x0.2
10
10
1
1
0.1
0.1
Identify
Identify Anomalies
Anomalies
Drill
Drill Targets
Targets
Resource
Resource Drilling
Drilling
Feasiblity
Feasiblity Study
Study
0.01
0.01
0.001
0.001
0.01
0.01
0.1
0.1
1
1
10
10
Historical Expenditures (A$ Million)
100
100
Note : Excludes unproductive Expenditures

30
How Accurate are the

Independent Valuations ?
The accuracy of the Independent Valuations was assessed by comparing
it against the value the Stock Market placed on the Company soon after
its shares were first listed on the Stock Exchange.
Ex
am
ple
$8
$6
$4
$2
$3.0m
$3.0m
Independent
Valuation of
Projects
Cash
$5.0m
Market Value of
the Company
$2.2m
Market Value
of Projects
$2.8m
Cash
$0
Expected Value of Company

at time of Capital Raising
Market Value of company

one month after Listing
Market Value of Exploration Projects = Share Price x Number of Shares Cash

31
Independent Valuation
versus Market Value
Market Value (A$m)
$20
$20
x1
1 MONTH
AFTER LISTING
Based on 16 newly
listed Companies
between 1997-2002
$15
$15
Independent Value =
1.40x Market Value
$10
$10
$5
$5
Note: Each Company typically has

4 to 10 exploration projects
$0
$0
$0
$0
$5
$5
$10
$10
$15
$15
$20
$20
Independent Valuation (A$m)

32
4/ Important Valuation Issues for

Foreign Companies working in China
Foreign Companies are reluctant to put a high
value on exploration projects because they :
n
n
n
n
n
n
n
n
Have limited access to geological data to form a good

view on the prospectivity
Required to setup Joint Ventures with local Companies
Are unfamiliar with how to do business in China
Not familiar with the local valuation methods used
Resolving these issues will lead to better prices

for exploration projects
33
Summary
n
n
n
n
n
n
n
n
Must recognise that valuations are not precise

To gain confidence, it is important that the industry use a
standardised approach. Australias VALMIN Code is the
most comprehensive one available
Which ever set of rules are used, it is critical that the
methodology used is transparent, includes all relevant
information, and is evaluated by experts who are
independent
Several valuation techniques are available. Which one to
use depends on the quality of data available and what stage
at the exploration project
34
Summary .
n
n
n
n
n
n
In Australia, early
-stage projects are usually valued using
early-stage
the Multiples of Exploration Expenditures Method or the
Geoscience Method. Advanced
-stage projects are best
Advanced-stage
valued using the Income (NPV) Method
Benchmarking studies indicate that the Australian
valuers tend to over
-value projects by 40%
over-value
Early
-stage exploration projects tend to have low values.
Early-stage
In Australia a project at the drill
-testing stage is typically
drill-testing
only worth A$0.1 to $1m. Similar projects in China should
have an even lower value
35
Conclusions
n
n
n
n
n
n
n
n
Most exploration projects are not worth much

The low value for early
-stage projects is due to the high
early-stage
risk nature of exploration
The value is further reduced if the exploration costs
are high, the JV terms are difficult or if the business risk
is high
The value / attractiveness of an exploration project in
China can be maximised by providing high quality data
on the prospectivity and by ensuring that the business
rules are transparent
36

How To Value An Exploration Project

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

How To Value An Exploration Project

Uploaded by

Copyright:

Available Formats

How to Value an

Manager - Risk Capital Analysis

Minerals Exploration Branch Conference

1/ Why do we need Valuations ?

Are used to determine the sale price of an exploration

Set the relative contributions for each of the partners in a

Help confirm that a proposed exploration project is of

How to Value an Exploration Project

The importance of Using a

Improves the confidence in the numbers

Encourages foreign investment in the industry

Enables Chinese companies to work overseas

How to Value an Exploration Project

International Valuation Approaches

United States : Uses the Uniform Standards of

Australia : VALMIN Code, was developed by the

Canada : Canadian Institute of Mining will release its

South Africa : South African Institute of Mining and

How to Value an Exploration Project

VALMIN Code provides general rules on the :

Purpose and type of reports to be produced

How to Value an Exploration Project

Four Requirements of the VALMIN Code

Study needs to explain how the valuation was done,

The valuation must include all of the important

The valuer must have a high level of expertise in the

The valuer must not receive any beneficial interest in

How to Value an Exploration Project

2/ How should the Valuation be done ?

The VALMIN Code does not specify which valuation

However, the valuer must state the reasons why he chose

The choice of methodology depends on the

Recommend using alternate methodologies

Use them to validate the preferred value

How to Value an Exploration Project

Common Valuation Methodologies

Value depends on how much money has been spent in

2/ Joint Venture Method

The value is related to how much the Joint Venture

3/ Geoscience Method (Kilburn Method)

Involves assessing the technical factors of the project

4/ Comparable Market Value Method

Value is set by what other similar projects sell for

Value is calculated from the likely future cash flows

How to Value an Exploration Project

Multiples of Exploration Expenditure Method

Typical Adjustment Factors

The Prospectivity Enhancement Multiplier( PEM) can range from

Existing data is sufficient to warrant further exploration

Have direct evidence of an interesting target. Further work is warranted to evaluate

How to Value an Exploration Project

Joint Venture Method

= (Value of 100% of Project) x (Owners Equity Share)

Joint Venture Method : Worked Example

= ($2m) x 33% x (1-0.18)

How to Value an Exploration Project

= ($0.90m) x 40% = $0.36m

How to Value an Exploration Project

Kilburn Rating Criteria

Several old workings in

Several old workings on

Several well defined

How to Value an Exploration Project