Valuation

  1. International Accounting and Valuation Standards – a threat or an opportunity for AusIMM’s VALMIN Code?
  2. A Bibliography Of The Valuation Of Resource Assets
  3. Valuation of Exploration Prospects -the Usefulness of Rating Methods
  4. Valuation methodology for mineral properties: an international perspective on what is ‘Market Value’
  5. Formal Mineral Asset Valuation Methods: DCF/NPV and Option Theory Methods
  6. DCF/NPV Modelling: Valuation Practice or Financial Engineering?
  7. An Australian Perspective on Mineral Valuation Best Practice
  8. An Outline of Market-Based Approaches for Mineral Asset Valuation Best Practice
  9. Mineral Property Valuation, or “What number did you have in mind?

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International Accounting and Valuation Standards – a threat or an opportunity for AusIMM’s VALMIN Code?

MICHAEL J LAWRENCE, BSC(HONS1), GDPSM, FAUSIMM(CPGEO), FAIG, MAIMA, FIMM, MMICA CEO, MINVAL ASSOCIATES PTY LTD [FOR AUSIMM 2001-2002 YEARBOOK, AUGUST 2001]

The VALMIN Committee’s main aim over recent years has been education, concentrating on “selling the message” at as many conferences and meetings as possible, both in Australia and overseas. A related aim has been to facilitate the global mobility of minerals industry professionals by attempting to have the VALMIN Code I accepted by the regulators in overseas countries (especially in Canada, USA and Indonesia). In a practical sense, however, it is not easy to achieve reciprocity between those reporting in all international jurisdictions, mainly because of differing jurisdictional requirements (even within the same country) and because an international VALMIN-type Code does not yet exist.

The author believes this provides yet another opportunity for AusIMM to show its leadership in the international development of codes of best practice that impact on the minerals industry.

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A Bibliography Of The Valuation Of Resource Assets

Proceedings of the VALMIN 94 Valuation Methodology Conference 1994. The Australasian Institute of Mining and Metallurgy.

MICHAEL J LAWRENCE, CARLOS M SORENTINO

This document contains a comprehensive listing of references for

• valuation textbooks, valuation of exploration properties, DCF/NPV Valuation,

• Betas, WACC and discount rate,

• option pricing approaches, risk analysis issues, environmental issues and

• liability and legal issues

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Valuation of Exploration Prospects -the Usefulness of Rating Methods

Proceedings of the 27th Annual Conference 1993, New Zealand Branch of the Australasian Institute of Mining and Metallurgy.

This paper examines the issues involved in the technical audit and valuation of exploration prospects. Certain methodologies are more appropriate to use depending upon whether the mineral property valuation is of an exploration area, a project under development, or an operating mine. Valuation approaches that are reviewed include the Multiple of Exploration Expenditure, Joint Venture Terms, Rules of Thumb, and particularly the Kilburn Rating Method. The DCF/NPV Financial Simulation Method, even modified by the use of Expected Values, is not considered appropriate for valuing exploration prospects. The choice of the most appropriate methodology and its successful application depends primarily upon the amount of reliable input data available and, more importantly, the experience and judgement of the valuer. It must be remembered that all valuations are time and circumstance specific and will be generally subject to revision as more data becomes available.

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Valuation methodology for mineral properties: an international perspective on what is ‘Market Value’

MJ LAWRENCE, BSC (HONS1), GDPSM, FAUSIMM(CP), FAIG, FIMM, AIAMA, MMICA MANAGING DIRECTOR, MINVAL ASSOCIATES PTY LIMITED, CROYDON, NSW, AUSTRALIA LAWRENCEMINVAL@MSN.COM.AU, CHAIR, AUSIMM VALMIN COMMITTEE & CONVENOR VALMIN 2001, SYDNEY.

How the Australasian and Canadian Codes (VALMIN and CIMVal) approach mineral property valuation is described. Brief comment is also made on the International Valuation Standards Committee’s interest in a global valuation standard for Mineral (Extractive) Industries and the South African SAMREC initiatives to adopt a VALMIN-like Code. The conventional tripartite classification of valuation approaches into those that are Market-based, Income-based and Cost-based is outlined.

It is best practice to use as many of these approaches as possible (and as many methods as reasonable in the particular circumstances), given the quantity and quality of the data available on the Mineral Asset (which depends upon the state of development of the mineral property). The use of specific methods must satisfy the basic considerations of logic and reasonableness and the purpose of the valuation. The competence, judgement and repute of the valuer are critical factors, since all valuations are time and circumstance specific. What constitutes ‘Market Value’ in the different jurisdictions is discussed and definitions are given.

Challenges facing the globalisation of a VALMIN-type Code for the international Minerals Industry are the influence of real estate valuers and the US jurisdictional idiosyncrasies. This is mainly due to a fixation on real property rights with a preference for using real estate-like comparative sales techniques (Market Approach) to the exclusion of Income-based approaches; a regulatory reluctance in the US to accept that Resources have considerable value; and the International Accounting Standards Board’s preference for Historical, rather than Current Value, accounting.

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Formal Mineral Asset Valuation Methods: DCF/NPV and Option Theory Methods

C SORENTINO
Phd, Menvst, B Eng, Dip Rad Tech,
F AusIMM (Cpman, Cpenv), MMICA, MRACI, CCHEM,
Principal Ekos Research Pty Ltd,
Hon Assoc Macquarie University, Visiting Professor WASM, Chairman MICA, Chairman AusIMM Board Of Chartered Professionals

This paper reviews some of the formal methodologies for the valuation of mineral properties. A methodological context is developed, providing a general framework for asset valuation in the context of multidimensional utility theory. A number of valuation methods are examined analysis, including those based in the Net Present Value (NPV) criterion and option valuations. The capital asset pricing model and are reviewed.

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DCF/NPV Modelling: Valuation Practice or Financial Engineering?

MJ LAWRENCE, BSC (HONS1), GDPSM, FAUSIMM(CPGEO), FAIG, FIMM, MMICA,
Managing Director, Minval Associates Pty Limited, Croydon, NSW 2132, Australia 1999
President, AusIMM.
Submitted For SME Valuation Seminar February 2000

 Independent natural resource Valuers are an essential link between miners and mineral explorers on the one hand and the finance industry on the other. Investors (and regulators) expect the mining and financial industries to be vigilant against the use of inappropriate methodology or use of illogical steps within the chosen valuation method. The Australian Corporations Law generally requires an Independent Expert Report to support mergers and takeovers (as well as for capital raising activities). The introduction of the VALMIN Code (1998) by The Australasian Institute of Mining as Metallurgy, has meant that such Reports, when prepared in compliance with it, are now much more comprehensible and reliable than before. This is because the key requirements of the Code are for transparency and materiality in the Technical Assessment and Valuation Reports prepared in connection with the transaction involved. Transparency is particularly important because it allows the reader to identify and understand the assumptions made to derive a value and to then form a view as to the reasonableness of the result.

Even though many elements of resource asset valuation practice are undeniably subjective, there must be some basis of objective rationality to it. Where the reasoning is patently illogical or the inputs are chosen to achieve a particular result, the estimated value must be viewed as virtually worthless. Experience, qualifications, competence and repute are the hallmarks of a professional technical auditor and valuer.

To illustrate how the system may be manipulated, this paper focuses on the derivation of the fair market value of a mineral property using the DCF/NPV Financial Modelling Method (and its variation, the Expected Value Simulation Modelling). DCF/NPV techniques, whilst generally better than simple use of comparative sales to determine value, are also prone to financial engineering. This paper is written from the perspective of a technically qualified valuation practitioner, but it concentrates on the financial rather than the technical assumptions in the modelling. For simplicity it focuses on the merger/acquisition domain, but its conclusions have general applicability.

Of concern to many is a growing trend for Reports, issued in connection with mergers/acquisitions, to appear to support a particular side if the transaction is a “hostile” one. Thus, a Report issued in support of the “prey” commonly uses rather more optimistic scenarios and input assumptions, whereas those supporting the “predator” less commonly tend to take a pessimistic position and thereby undervalue the “prey”. Whilst this is fine in a corporate advisory sense, if Independent Expert Reports are to retain any credibility, they must be truly independent and transparent, otherwise it becomes merely an exercise in financial engineering.

This paper concludes that whilst it is preferable for valuations by DCF/NPV modelling techniques to give as much detail as possible in the derivation of the technical basis of the inputs used and the Discount Rate selected, it is more important for it to contain a table or graph showing the impact on the valuation of a change of 1% in the Discount Rate, from say zero to 15%pa (in real terms). This allows the reader to truly test the reasonableness of the valuation by estimating a value based on other Discount Rates. Also, there are other drivers of value in this methodology (notably assumptions about revenue, operating costs, initial and replacement capital, etc, but the most arbitrary of them is the Discount Rate used.

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 An Australian Perspective on Mineral Valuation Best Practice

Presented 27 February 2001 at SME 2001 Annual Meeting, Denver City, Colorado SME PrePrint 01-203

MJ LAWRENCE, BSC (HONS1), GDPSM, FAUSIMM(CPGEO), FAIG, FIMM, AIAMA, MMICA, MANAGING DIRECTOR, MINVAL ASSOCIATES PTY LIMITED, CROYDON, NSW 2132, AUSTRALIA 1999 PRESIDENT, THE AUSTRALASIAN INSTITUTE OF MINING AND METALLURGY

Valuers/Appraisers are an essential link between miners and mineral explorers on the one hand and the finance industry on the other. Often the investing public is caught in the middle. Thus, it is inevitable that there will be tension between the parties wanting high values (sellers) and low values (buyers) and heavy pressure is often brought to bear on the professional valuer to satisfy one or the other. The main benefits of codes of best practice, like the VALMIN Code, are that it ensures transparency and materiality concerns are met, whilst recognising mutual obligations and rights of the practitioner and the commissioning entity (or forcing them to be recognised).

Even though many elements of resource asset valuation practice are undeniably subjective, there must be some basis of objective rationality to it, else it becomes nothing more than financial engineering of the “What-number-did-you-have-in-mind?” school. Too often, one sees blatant abuse of logic in choice of inputs, no matter what method is used. Investors (and regulators) expect the mining and financial industries to be vigilant against the use of inappropriate methodology or use of illogical steps within the chosen valuation method.

The author contends that the choice of a specific valuation method, within the broad categories of Market, Cost or Income Methods, depends more on the jurisdiction and a valuer’s familiarity with it, rather than its real merit. He also admits that an honest subjective experiential valuation is often better than an sophisticated one out of a computer.

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An Outline of Market-Based Approaches for Mineral Asset Valuation Best Practice

MJ LAWRENCE, BSC (HONS1), GDPSM, FAUSIMM(CPGEO), FAIG, FIMM, AIAMA, MMICA, MANAGING DIRECTOR, MINVAL ASSOCIATES PTY LIMITED, CROYDON, NSW CHIEF VALUER, MJ LAWRENCE HOLDINGS PTY LIMITED & MINERAL INDUSTRY SERVICES, BURWOOD, NSW, CHAIR, VALMIN COMMITTEE & CONVENOR VALMIN 2001

Taking the conventional tripartite classification of valuation approaches (ie, those that are market-based, income-based and cost-based), this paper outlines the various methods that fall into the Market Approach as they are applied to the valuation of Mineral Assets. The Comparable Sales, Yardstick (Transactional/Rules of Thumb) and Joint Venture Terms Methods are described.

The concept of Fair Market Value is explored from the Australasian point of view and in the context of the VALMIN Code (1998). A Glossary has been included to facilitate debate over what constitutes Market Value and other important valuation terms and concepts are also examined. Some definitions (eg, Real Property, Value-in-Use, Highest-and-Best-Use) are described using the existing International Valuation Standards (IVS) as a basis; and the USA’s Uniform Standards of Professional Appraisal Practice are introduced. It is clear that the greatest challenges today facing the globalisation of a VALMIN-type Code for the international Minerals Industry are the influence of Real Estate Valuers and the US jurisdictional idiosyncrasies. This is mainly due to their fixation on real property rights and a preference for using comparative sales techniques (to the exclusion of Income-based approaches); and a regulatory reluctance in the US to accept the principle that Resources have considerable value. The influence that the US has with the International Accounting Standards Board (and to a lesser degree with the IVS Committee) must be countered.

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Mineral Property Valuation, or “What number did you have in mind?

M J LAWRENCE AND G J A DEWAR, MINVAL ASSOCIATES

The Australian Corporations Law generally requires Independent Expert Reports to be presented in support of capital raising or in defence of mergers and takeovers. The introduction of the VALMIN Code in 1995 (and its recent revision issued as the VALMIN Code, 1998) made Assessment and Valuation Reports in these circumstances much more comprehensible than before because of its key requirements for transparency and materiality. By forcing the Independent Valuer to provide an explanation of the reasoning behind the estimation of a particular resource asset, VALMIN allows the reader to clearly see any error or illogicality in the valuation methodology used and to seriously question or even reject the resulting value. Even though many elements of resource asset valuation practice are undeniably subjective, there must be some basis of objective rationality to it.

Independent resource asset Valuers are the essential link between mineral explorers/miners on the one hand and brokers/analysts/fund managers/investors on the other. The minerals and financial industries both expect them to not use inappropriate or invalid valuation methods and illogical steps within these methods. This paper examines some of the less sensible ways in which some of the main techniques that Valuers commonly use to assess the fair market value of mineral properties have been applied in recent instances. The authors hope to discourage the adoption or perpetration of the “What-number-did-you-have-in-mind?” approach.

It is MINVAL’s view that as many methods as possible should be used in any resource asset valuation. If any of the resulting estimates are in approximate agreement (particularly if they were derived using the less subjective of the available methods), ie, if they cluster, they are probably more persuasive as being the Preferred Value of the asset than outlier values within the Valuation Range.

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