CHAPTER 18 VALUATION OF MINERAL PROJECTS AND MINING COMPANIES FROM PROSPECT TO MINE TO RECLAMATION: WILL THE PROJECT MAKE MONEY?

• Jurisdiction: United States

Due Diligence in Mining and Oil & Gas Transactions
(Apr 2010)
CHAPTER 18
VALUATION OF MINERAL PROJECTS AND MINING COMPANIES FROM PROSPECT TO MINE TO RECLAMATION: WILL THE PROJECT MAKE MONEY?
Bernard Guarnera
Christopher Wyatt
Behre Dolbear Group Inc.
Denver, Colorado

BERNARD J. GUARNERA is the President and Chief Executive Officer of Behre Dolbear & Company Inc. based in Denver. He has more than 40 years of experience with mining and consulting firms in the international mineral industry, focusing on the valuation of developed and undeveloped mineral properties, negotiations for sales and acquisitions, structuring of mineral development and lease agreements, and economic geology. Mr. Guarnera's valuation expertise spans all commodities and geographic areas, with recent emphasis on base and precious metals and past emphasis on energy minerals. He is a Certified Mineral Appraiser with the American Institute of Mineral Appraisers. Mr. Guarnera has lectured and instructed the mining engineering group of the Internal Revenue Service on mineral valuation techniques and has also presented seminars and instruction on mineral valuations to the American Institute of Rural and Farm Appraisers and financial institutions. Mr. Guarnera has provided expert witness testimony on mineral property values on several occasions.

CHRISTOPHER WYATT is Vice President of Behre Dolbear Company, Inc. He has more than 20 years of experience in the international mineral industry, where he held operational and executive level management positions. He has managed and directed industrial minerals operations, including producers of hard rock industrial garnet and heavy mineral sands. He has additional experience in gold, coal, and other industrial minerals. He joined Behre Dolbear in 2007 where he is a member of their valuation team. He is a Registered Member of the Society for Mining, Metallurgy, and Exploration and Qualified Professional with the Mining & Metallurgical Society of America. He earned a BS in Mineral Engineering from the University of California, Berkeley, and an MBA from California Polytechnic University, San Luis Obispo, and an MS in Mineral Economics from the Colorado School of Mines.

Due Diligence in Mining and Oil & Gas Transactions

Valuation of Mineral Projects and Mining Companies

(From Prospect to Mine to Reclamation: Will the Project Make Money?)

Behre Dolbear

founded 1911 MINERALS INDUSTRY ADVISORS

Valuation Methods

• Valuation methods discussed will be for properties ranging from exploration stage, development stage, those in production, as well as entire corporate entities

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• Applicable to

✓ Metallic

✓ Non-metallic

✓ Energy minerals

Basic Assumptions

• Fair market value

• All lands have an inherent value for minerals, which might occur therein

• Market and marketability

✓ Does a 10% copper concentrate have a market

✓ A 25% copper concentrate may not be marketable, if it has high mercury or arsenic content

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• Economic realism

✓ Granite would probably not be valued on the basis of constituents, e.g., feldspar for glass sand

✓ Valued on reality, that major use would be aggregate and/or dimension stone

• Mineral development is "highest and best use"

Existing Mineral Valuation Codes

• VALMIN: Australasian Institute of Mining and Metallurgy (statutory)

• CIMVAL: Canadian Institute of Mining and Metallurgy (recommended but not statutory)

• SAMVAL: South Africa (statutory)

• International Valuation Standards Committee (suggested but not mandatory)

• Stock Exchange of Hong Kong: Requires either VALMIN, CIMVAL, or SAMVAL

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Valuation Method Selected Based Upon Data Available and What Is Being Valued

Applicable Valuation Methods

Exploration Stage	Development Stage	Feasibility Stage	Operating Properties	Company	Reclamation	Royalty Properties
Income Approach Cash Flow	X	X	X	X	X
Market-Petaled Transactions	X	X	X	X	X
Market Multiples	X	X	X
Option/Real Option Values	X
Mate Carlo	X	X
Replacement Cost	X	X

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Any Valuation Should Utilize More Than One Valuation Method

Income Approach

• Should yield a "True Value" over the long term; also called a "Technical Value" (VALMIN)

• Assuming data used in cash flow model is valid, disputes to the valuation will focus on

✓ The commodity price used

✓ The discount rate used

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Market-Related Transactions (Comparable Sales)

• Problem is lack of comparability as no two properties are truly alike (differ in grade, mining method, processing method, infrastructure, political risk, etc.)

• Results need to be adjusted to bring to "comparability"

• Lack of information can be a detriment

• Will be higher than Income Approach valuation in up cycle and lower in down cycle

• Preferred method by International Valuation Standards Committee

Market Capitalization Valuations

• Market capitalization per ounce (pound) of proven and probable reserves

• Market capitalization per ounce (pound) of annual production

• Multiples of cash flow

• Multiples of...