8/12/2019 CIMVal Canadian Valuation Standards

1/26

Presentation to Ministry of Lands and Resources

(MOLAR) , Beijing China

November 30, 2005

Keith N. Spence, Co-Chairman

Canadian Ins t i tute of Mining , Metal lurg y and PetroleumSpecial Comm ittee on Valuation of Mineral Propert ies

(CIMVal)

President and CEO, Al l iance Pacif ic Resou rces Inc

CANADIAN (CIMVal) STANDARDS

AND GUIDELINES

FOR VALUATION OF MINERALPROPERTIES

8/12/2019 CIMVal Canadian Valuation Standards

2/26

2

Items to be Discussed

Background on Keith N. Spence Valuation vs Evaluation International Scene

What is Canadian CIMVal

Scope and Limitations

Definition of Value

Valuation Principles

Qualification of Valuators

Valuation Reports

Key Issues

Valuation Approaches and Methods

Some Problems with Valuations

8/12/2019 CIMVal Canadian Valuation Standards

3/26

3

Background on Kei th N. Spence

Co-Chairman & Co-Developer of Canadian Valuation Standards President and CEO of Alliance Pacific Resources, an exploration

company with operations in Xinjiang, China Geologist - Hons BSc, MBA; Both University of Western Ontario,

London, Canada Investment Banker for 14 years, specializing in Mining Finance,

Project Finance and Corporate Finance. Investment Banker at Royal Bank, Bank of Montreal, Bank of

Nova Scotia and Export Development Bank Financed or evaluated projects in Chile, Peru, Argentina, Bolivia,

Mexico, USA, Africa, Australia, Thailand, Indonesia, China andCanada.

CIM Distinguished Lecturer

CIM Fellow Award President, Mineral Economics Society

Board of Directors, PDAC (Canada)

International Advisory Board , CHINA MINING CONFERENCE

8/12/2019 CIMVal Canadian Valuation Standards

4/26

4

Valuat ion vs. Evaluat ion o f a

Mineral Property

Valuation - estimation of the value or worth of the mineralproperty in dollars or equivalent-

Question What is the value or worth of the Property ?

Evaluation - economic assessment of the mineral propertygenerally for an investment decision, for example, afeasibility study

Question Is this project econonically viable ? Is iteconomic to develop this project?

8/12/2019 CIMVal Canadian Valuation Standards

5/26

5

The In ternat ional Scene

Canadian CIMVal Standards & Guidelines- Developed and maintained bv Canadian Institute

of Mining, Metallurgy & Petroleum (CIM)

- CIM also maintains the rules for Classification ofReserves; eg Inferred Resources to Reserves

- Required by Toronto Stock Exchange (TSX-V)

Australian VALMIN Code

- Similar to CIMVal, supported by AusIMM

South African proposed SAMVal Code

- Similar to CIMVal, supported by SAIMM

8/12/2019 CIMVal Canadian Valuation Standards

6/26

6

The CIMVal Document

The document consists of two parts:

Standards (mandatory)

Guidelines(highly recommended)

8/12/2019 CIMVal Canadian Valuation Standards

7/267

Scope and Lim i tat ions

Reasons for valuation: mergers and acquisitions, nonarms length transactions, IPO pricing, listing support,support of audited financial statements, support forproperty agreements, fairness opinions, determination ofvendor considerations, litigation, expropriation, insuranceclaims

Valuations of mineral properties are required by regulatorybodies under certain circumstances. CIMVal Standard s isrecommended to be fo l lowed,for valuations of mineralproperties required by regulatory bo dies

Fairness Opin ions based on valuat ion of m inera lpropert iesshould also be governed by the CIMValStandards

8/12/2019 CIMVal Canadian Valuation Standards

8/268

Scope and Limitations Contd

Limited to valuat ion of m ineral prop ert ies, but do not covervaluation of corporations that hold the mineral properties

Mineral property means surface/subsu rface m ining r ights;including various types of claims, development or mininglicenses, prospecting permits, mining leases

Cover valuation of metal l ic and non-metal l icmineralproperties, including industrial minerals, placers, aggregates,coal, oil sands and uranium

CIMVal Standards do not cover oil and gas properties (SeparateStandards for Valuation)

8/12/2019 CIMVal Canadian Valuation Standards

9/269

Defini t ion o f Value

Fair Market Value (FMV)is the standard of value.

Key elements of FMV are as follows:

Both seller and buyer are wi l l ing and not under compuls ionto act

The transaction is at arms length

Both seller and buyer are in form ed or have reasonableknowledgeof the relevant facts

Valuation should be based on a given point in t im e

Other types of value include; replacement value, salvagevalue, book value, depreciated value, net asset value,assessed value, insured value, etc. - But not recommendedfor CIMVal purposes.

8/12/2019 CIMVal Canadian Valuation Standards

10/2610

Valuat ion Princip les

Materiality

- inclusion or omission of informationthat might result in di f ferent co nclus ionof value

Transparency

- information used (or excluded), theassumptions, methodology etc, must be set outclearly, along with the rationale

Independence-the valuator must to be independent of thecommissioning entity

8/12/2019 CIMVal Canadian Valuation Standards

11/26

11

Valuation Principles Contd

Competence

-the valuator must be appropriately

qualified and experiencedto conduct the

required valuation

Reasonableness

-other appropriately qualified and experienced

valuators would value the property atapprox imately the same range

8/12/2019 CIMVal Canadian Valuation Standards

12/26

12

Qual if icat ions o f Valuators

Concept of Qualified Valuator (QV):

Professional individual with at least 5 yearsmineral property valuation experience

Experience relevant tothe subject property

Member of an approved self-regulatoryprofessional organization, such asProfessional Engineers or Geoscientists, orCICBV

Commissioning entity must establish that theQV is qualified, competent and independent

8/12/2019 CIMVal Canadian Valuation Standards

13/26

13

Qual if icat ions o f Valuators

Contd

QV is responsible for the overall valuation andthe valuation report

QV may be assisted by Qualified Persons(QP),as defined in Canadian SecuritiesRegulations

All technical input to the valuation is subject todata verification by aQP

8/12/2019 CIMVal Canadian Valuation Standards

14/26

14

Valuat ion Reports

A QV is ultimately responsible for: preparation of the Valuation Report and its

conclusions

adhering to the principles of materiality,transparency and reasonableness includingtechnical input

An approvedtechnical report can be appended tothe valuation report

All mineral reserve and mineral resource estimatesmust be disclosed and discussed in the valuationreport

8/12/2019 CIMVal Canadian Valuation Standards

15/26

15

Valuation Reports Contd

List factors, critical issues, key risks and assumptions

Discuss all valuations within the last 24 months

Certificates of Qualifications for QV and QP(s)

Statement that the valuation complies with the Standardsand Guidelines in their entirety

Site visit should be undertaken or explain why not

Effective date of the valuation

8/12/2019 CIMVal Canadian Valuation Standards

16/26

16

Valuat ion Standards

- Key Issues

CIMVal Standards mandatory

The Standards are considered to be mandatory but theguidelines are highly recommended, and allow forprofessional judgement

How much valuation experience should a QV have?

The Standards state five years valuation experience

Is a business entity allowed to sign the Valuation Report or

just an individual QV? The CIMVal Standards allow a business entity as well as an

individual to sign the report but a QV must sign a Certificateof Qualifications

8/12/2019 CIMVal Canadian Valuation Standards

17/26

17

Choice of Valuat ion App roaches

and Methods

QV has responsibility for choice of valuationapproaches and methods with explanation

All three generally accepted valuationapproaches must be considered and more thanone should be used (at least two must be used)

Valuation must be reported as a range of valuesto reflect subjectivity and uncertainty of thevaluation process

8/12/2019 CIMVal Canadian Valuation Standards

18/26

18

Valuat ion App roaches

Three generally accepted approaches:

Income approach- based on principle ofanticipation of benefits, usually DCF

Market approachbased on principle ofsubstitution (also called Sales Comparison orComparable Transactions)

Cost approachbased on principle ofcontribution to value

Valuation approach depends on the stage ofexploration or development of the property

8/12/2019 CIMVal Canadian Valuation Standards

19/26

19

Valuat ion App roaches and

Stages of Mineral Propert ies

VALUATION

APPROACH

EXPLORATIONPROPERTIES

MINERAL

RESOURCE

PROPERTIES

DEVELOPMENT

PROPERTIES

PRODUCTION

PROPERTIES

Income No In some cases Yes Yes

Market Yes Yes Yes Yes

Cost Yes In some cases No No

8/12/2019 CIMVal Canadian Valuation Standards

20/26

20

Primary Valuat ion Methods

Income Approach Discounted Cash Flow Method - very widely used

Real Options Methodnot widely used but gainingrapidly in acceptance (some experts suggest its an

Approach on its own)

Market Approach Comparable Transactions Methodwidely used

Option Agreement Termswidely used

Cost ApproachAppraised Value Methodwidely used but not

accepted by all regulators Geoscience Factor Method (developed by Kilburn)

not widely usedtoo subjective

8/12/2019 CIMVal Canadian Valuation Standards

21/26

21

Secondary Valuat ion Methods

Market Approach

Value per unit of metalwidely used rule of

thumb. Used to normalize or cross - check

comparablesMarket ComparablesMarket capitalization

of company holding the mineral property

Each property must be examined individually.

Similar Properties ; similar Value.

8/12/2019 CIMVal Canadian Valuation Standards

22/26

22

Mineral Resources and

Reserves

Mineral Resource - a mineral deposit for whichquantity (tonnes) and quality (grade) can beestimated. But not demonstrated to beeconomic. Measured - highest confidence category

Indicated

Inferred - lowest confidence category

Mineral Reserve - that part of the mineralresource that can be extracted economically.

Proven - higher confidence category Probable - lower confidence category

8/12/2019 CIMVal Canadian Valuation Standards

23/26

23

Use of Mineral Resources in

Income App roach

Generally Acceptable Practices

Use of all proven and probable mineral reserves

Use of measured and indicated mineral resources inthe following circumstances:

Mineral resources are current and confirmed by a QP

Mineral reserves are mined ahead of resources in DCF

QP estimates or confirms technical parameters in DCF

QP states that the mineral resources in the DCF are likely to

be economically viable Recognize higher risk of using mineral resources by

adjusting appropriately (eg: probability factors)

8/12/2019 CIMVal Canadian Valuation Standards

24/26

24

Use of Mineral Resources in

Income Approach Contd

Use of inferred mineral resources:

With great care, but

Not if they are the dominant resource category

Inferred resources should not be used to make the property

economically viable

Any use must be justified in the valuation report and treatedappropriately for the substantially higher risk and uncertainty

Reserves and other resource categories are mined ahead ofinferred resources in the DCF model

Use of potential or hypothetical resources is notacceptable

8/12/2019 CIMVal Canadian Valuation Standards

25/26

25

Some Prob lems w ith Valuat ion s

Use of unacceptable or dubious methodsMisapplication of acceptable methods

No explanation or justification for methodsused

Lack of transparencyStatement of CIMVal compliance when

actually not compliant

Thank you !!

8/12/2019 CIMVal Canadian Valuation Standards

26/26

Presentation to Ministry of Lands and Resources

(MOLAR) , Beijing, China

November 30, 2005

Keith N. Spence, Co-Chairman

Canadian Ins t i tute of Mining , Metal lurg y and PetroleumSpecial Comm ittee on Valuation of Mineral Propert ies

(CIMVal)

President and CEO, Al l iance Pacif ic Resou rces Inc

CANADIAN CIMVal STANDARDS

AND GUIDELINES

FOR VALUATION OF MINERALPROPERTIES