Mineral Sector Valuations

Watts, Griffis and McOuat

Mineral Sector ValuationsMineral Sector Valuations

A Presentation on Market Based A Presentation on Market Based Valuation Practices in the Valuation Practices in the

Canadian Minerals IndustryCanadian Minerals IndustryNovember, 2006November, 2006

Joe Hinzer, P.Geo., PresidentJoe Hinzer, P.Geo., PresidentWatts, Griffis and McOuat LimitedWatts, Griffis and McOuat Limited


Market Valuation ApproachesMarket Valuation Approaches

Fair Market Value or Market Value

Is the value received from an unforced sale between a willing vendor and a willing buyer.


Market Valuation ApproachesMarket Valuation ApproachesMost 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”.



Other types of transactions, such as those noted below, do fit this definition

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 receivedExpropriation Value – Forced sale



Some of the basic principles are:Market based valuations are time and circumstance specific and there is no best method. The Qualified Valuator selects the method best suited and it must be logical / rational / reasonable, have regard for the development status of the project and purpose of the valuation. Cross-referencing of valuation techniques provides a test of the reasonableness.


Market Valuation ApproachesMarket Valuation ApproachesCanadian CIMVal guidelines require a Qualified Valuator, who is defined as:

A person who is a member of a self-regulating professional geoscience organization; and,

A person who has experience in making mineral property valuations; and,

A person who has experience in the type of mineral property that is the subject of the valuation (geology, mineralization, region)



There are two primary valuation methods There are two primary valuation methods used,used,

Comparable salesComparable sales Joint VenturesJoint VenturesSeveral secondary methods can be grouped Several secondary methods can be grouped

under the heading of,under the heading of, Yardstick or Rule of ThumbYardstick or Rule of Thumb


Market Valuation ApproachesMarket Valuation ApproachesCIMVal examples of Market Based Approaches:Valuation Approach

Valuation Method

Method Ranking Comments

Market Comparable Transactions Analysis Primary Widely used – based on substitution

Market Option Agreement Terms Primary Widely used but option terms must be

discounted over time

Market Net Value of In-Situ Metal Secondary Most 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


Market Valuation ApproachesMarket Valuation ApproachesSection 3.2 of CIMVal Standards & Guidelines states that the Valuator should first consider the stage of advancement or development of a mineral property:Exploration Stage - a property that has been

acquired, or is being explored, for mineral deposits – no resources or economic viability dataMineral Resource Stage - contains a Mineral Resource – no economic viable dataDevelopment Stage – is being prepared for mineral production – has economic viability studyProduction Stage – producing mine which has been fully commissioned (+/- plant).


Use of Valuation ApproachesUse of Valuation ApproachesCIMVal provides guidance on the use of valuation approaches:

Valuation Approach

STAGE

Exploration Resource Development Production

INCOME No In some cases Yes Yes

MARKET Yes Yes Yes Yes

COST Yes In some cases No No


Market Valuation ApproachesMarket Valuation ApproachesPrimary Market Approaches:

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


Market Valuation ApproachesMarket Valuation ApproachesCOMPARABLE TRANSACTION ANALYSIS

Direct cash payments for a mineral property

CTA is based on examples of transactions in the market place which may include combinations of:

Staged cash payments, rents and advance royaltiesIndirect cash transaction through shares, share options and warrantsEarn-in arrangements by obligation or optionRetention of royalties, carried interests and working interests



Geology

It is important that the two properties being compared are similar in respect:

Geographic location

CommodityStage of Advancement

Market conditions at time of valuation

Although similar does not mean the same, they should be more or less equally desirable.



Best Fit Strategy - the Valuator determines the discounted value for the single transaction that is most similar to the property being valued, and uses this to estimate its Fair Market Value.

There are two strategies when using Comparable Transaction Analysis:

Total Market Strategy - the Valuator determines a broad range of discounted property values and determines where the subject property fits in this group to estimate its Fair Market Value.


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.


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.




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




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.


Market Valuation ApproachesMarket Valuation ApproachesCTA – DESCRIPTION OF TRANSACTIONS

Summary of Most Relevant and recent Uranium Option Agreements

Property Name Property Description Agreement

DateInterest Earned Year

Agreement Terms (Payments)

Cash Work Commitment Shares

Wolly Grassroots exploration 5,712 ac. property in Athabasca basin and geophysics - 13 drill targets identified.

25-Oct-2004 22.5% 1 $0 $500,000 $02 $0 $1,000,000 $03 $0 $1,000,000 $04 $0 $1,000,000 $05 $0 $1,000,000 $06 $0 $1,500,000 $0

Wheeler Grassroots exploration 28,920 ac. property in Key Lake area of Athabasca Basin – no targets – geological model only

26-Oct-2004 20% 1 $0 $500,000 $02 $0 $1,000,000 $03 $0 $1,500,000 $04 $0 $1,000,000 $05 $0 $1,500,000 $06 $0 $1,500,000 $0

Buckles grassroots exploration - 300 ac. in Elliot Lake area - has 17,458,000 tons @ 1.206 lbs U3O8 per ton (undiluted)

31-Jan-2005 60% 1 $50,000 $100,000 $124,0002 $50,000 $250,000 $124,000

3.5 $75,000 $500,000 $124,0004.5 $75,000 $1,000,000 $248,000


Market Valuation ApproachesMarket Valuation ApproachesCTA – DISCOUNTED VALUES OF TRANSACTIONS

Summary of Most Relevant and recent Uranium Option Agreements

Property Name Year

Agreement Terms (Payments)NPV of Cash

+ WorkProbability Discount Retained Value Total Retained

ValueCash Work Commitment Shares

Wolly

1 $0 $500,000 $0 $500,000 0% $500,0002 $0 $1,000,000 $0 $952,381 10% $857,1433 $0 $1,000,000 $0 $907,029 30% $634,9214 $0 $1,000,000 $0 $863,838 50% $431,9195 $0 $1,000,000 $0 $822,702 70% $246,8116 $0 $1,500,000 $0 $1,175,289 90% $117,529 $2,788,322

Wheeler

1 $0 $500,000 $0 $500,000 0% $500,0002 $0 $1,000,000 $0 $952,381 10% $857,1433 $0 $1,500,000 $0 $1,360,544 30% $952,3814 $0 $1,000,000 $0 $863,838 50% $431,9195 $0 $1,500,000 $0 $1,234,054 70% $370,2166 $0 $1,500,000 $0 $1,175,289 90% $117,529 $3,229,188

Buckles Twp

1 $50,000 $100,000 $124,000 $150,000 0% $274,0002 $50,000 $250,000 $124,000 $285,714 10% $368,743

3.5 $75,000 $500,000 $124,000 $521,542 40% $387,3254.5 $75,000 $1,000,000 $248,000 $928,625 60% $470,650 $1,500,718


Market Valuation ApproachesMarket Valuation ApproachesCTA – SUMMARY OF DISCOUNTED VALUES

Summary of Valuations for Comparable Properties

Property Name Nature of Acquisition Interest Earned

Retained Value

FMV of Property

Wolly 13 drill targets identified in Athabasca Basin 22.5% $2.8 million $12.4 million

Wheeler River Athabasca geological model only in Key Lake area 20% $3.2 million $16 million

Buckles Twp low grade resource 60% $1.5 million $2.5 million

Sheriff low grade resource 100% $2.2 million $2.2 million

Erdene large grassroots property (Mongolia) 65% $3.2 million $4.9 million

Macusani High grade U prospects (Peru) 50% $2.6 million $5.2 million

MacInnis Lake 28 high-grade showings in Nonacho Basin, NWT 50% $1.2 million $2.4 million

Havoc Lake Early exploration – new exploration model in NW Ontario

51% $370,000 $725,000

Wolfpup & Black Sturgeon

Early stage project in NW Ontario - strong geochemical anomalies

70% $1.5 million $2.1 million



Secondary Market Approaches (Rule of Thumb):

In-Situ Resource Analysis – market value of the mineral in the groundValue per unit area,Market Capitalization


Market Valuation ApproachesMarket Valuation ApproachesMost of these other valuation methods are not accepted as primary valuation techniques but can be used as a test of reasonableness.

The most common of these are:

Value per unit of area for a raw exploration property – use with caution to ensure areas are approximately comparable.Net value of in-situ resources (US$5-20 oz gold).


Market Valuation ApproachesMarket Valuation ApproachesCan be used for basic undeveloped exploration properties. Based on the Discounted Value of an Agreement divided by the size of the property. This gives an acquisition cost per unit of area (acres or hectares) which can be graphed to develop trend lines.

Summary of Values Derived from Cost per Unit Area for Comparable Properties

Property Name Property Size (acres) FMV of Property Value Per Unit Area

Wolly 5,712 $12.4 million $2,171

Wheeler River 28,920 $16 million $553

Buckles Twp est. 300 acres $2.5 million $8,333

Sheriff 24,275 $2.2 million $90

Erdene 3,133,000 $4.9 million $2

Macusani 72,300 $5.2 million $72

MacInnis Lake 18,954 $2.4 million $126

Havoc Lake approx. 10,960 $725,000 $66

Wolfpup-Black Sturgeon 8,400 $2.1 million $250


Market Valuation ApproachesMarket Valuation ApproachesThe subject property in the following case was the Agnew Lake Uranium Property and its valuation position was based on the trend line developed by the other properties.


Market Valuation ApproachesMarket Valuation ApproachesFrom the comparison we can conclude:

smaller properties which are focused on retaining a single mineral prospect demand a substantial premium based on unit area values.values can be very misleading in that two properties in the table stand out from the rest, Wolly and Buckles - the only factor that they share is that they are relatively small as compared with the othersthis technique should be used with caution as a secondary valuation approach


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.

Date post:	11-Feb-2016
Category:	Documents
Upload:	jera
View:	53 times
Download:	0 times

Mineral Sector Valuations

Documents