Valuation of Mineral Properties
FINEX ‘12
Deborah A. McCombe, P.Geo.
Executive Vice President & Principal Geologist
RPA
October 31, 2012
Toronto
Denver
Rock Solid Resources. Proven Advice.
London
Vancouver
Quebec City
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Overview
• Setting the stage
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Property value vs. stock price
Mineral property life cycle
Types of mineral properties
Valuation methods
• Valuation of mineral properties
• Option agreement terms analysis
• Market comparable transactions
• $ value per unit metal
• Valuation examples
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What is Being Valued?
• Important to distinguish between valuation of mineral property
and valuation of a company (and the company’s share price)
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Components of mining company share price:
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Mineral properties
Other assets and liabilities (e.g. cash and debt)
Commodity markets and general market sentiment
Quality of management
Market recognition and liquidity
• Focus of this presentation:
• Fair Market Value of mineral properties
• Non-producing properties of junior companies
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Fair Market Value or Market Value
• FMV or MV used for most purposes
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Value that would have been paid
Open and unrestricted market
Between informed and prudent parties
Acting at arms length
• Effective date of valuation critical
• Mining and exploration cyclical
• Value changes as property is advanced
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Exploration Property Values
Change Over Time, Depending on
Results
700,000
600,000
Value in $
500,000
400,000
300,000
Property A
200,000
100,000
Property B
0
1
2
3
4
5
6
Year
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Mineral Property Life Cycle
Stage
Properties
Value
Early exploration
Many
Low
Few
High
Drilling
Detailed Investigation
Feasibility Study
Production
Closure
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The Exploration Process
• Exploration is vital to replace depleted mines
• Exploration proceeds in stages designed to screen
properties for promising potential
• Each stage is designed for go/no go decision
• Each stage is progressively more expensive
• Property value changes with time, depending on
results of each exploration stage
• Only a very small number of exploration properties
become profitable mines
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Types of Mineral Properties
• Producing mineral properties (senior and some junior
companies
• Producing mines
• Development planned or under construction
• Mineral reserves ± mineral resources
• Non-producing mineral properties (senior and junior
companies)
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Early stage exploration properties
Drilling stage exploration properties
Properties with identified mineral resources
Prefeasibility or feasibility stage projects
Marginal development properties
Past producing mines
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So Why is a Non-Producing Mineral
Property Worth Anything?
• Non-producing properties represent potential for eventual
mineral production through
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Exploration discovery
Enhancement of existing mineral resources
Improved circumstances, (e.g. new roads or higher metal prices)
New ownership
• A market exists for non-producing mineral properties
• With mineral resources
• Without mineral resources
• Deals are commonly option or farm-in agreements
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Valuation Approaches
• Income Approach
• Based on expectation of income
• Discounted cash flow method and variations
• Market Approach
• Based on principle of substitution
• Sales comparison/comparable transactions
• Cost Approach
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Cost of equivalent property
Appraised value method
Multiple of exploration expenditures
Geoscience factor
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Valuation Approaches for
Different Types of Mineral Properties
Valuation
Approach
Income
Cost
Market
Valuation
Method
Development
Properties
Marginal
Development
Properties
Exploration
Properties
Discounted
Cash Flow
Yes
Maybe
No
Real Options
Yes
Yes
No
Appraised
Value
No
Yes
Yes
Geoscience
Factor
No
Maybe
Yes
Comparable
Transactions
Yes
Yes
Yes
Option
Agreement
Terms
Yes
Yes
Yes
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Comparable Transactions Analysis
for Valuation of Individual Properties
• No true comparables – mineral properties are unique
• Market size is small with relatively few transactions
• Can use transactions on a number of similar properties to
obtain a range of values
• Complex property deals need analysis to obtain a value of
the property
• Can adjust comparable transaction values by property area
or by metal contained in resource
• Transaction date is very important since market activity and
value change over time
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Selection of Comparable Transactions
• Use similar characteristics to those of subject
property:
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Commodity or group of commodities, e.g. gold
Political jurisdiction
Location, access, infrastructure
Property size
Geological setting
Mineral deposit type
Stage of exploration and exploration potential
Exploration results and targets
Activity on neighbouring properties
Similar resource tonnage and grade, if any
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Option Agreement Terms Analysis
• Analysis needed for valuation of market transactions
• Most non-producing mineral property transactions are option or
earn-in agreements to earn an interest in the property
• The option or earn-in period may last several years; three to four is
common
• Earn-in terms include cash, stock, work commitments and royalties
• Usually first year is firm and subsequent years optional
• Option agreement terms analysis:
• Schedule of payments and work commitments
• Estimate probability of realization of future commitments
• Date of the agreement is the valuation date
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Option Agreement Terms Analysis Example
• Published description of the deal:
• Hot Commodity Resources can earn a 60% interest in the Rocky
River Rare Earths property of Owl Enterprises by making
payments totalling $600,000 and expending a total of $2,500,000
on exploration over four years. The first year requires $50,000
cash on signing and an expenditure commitment of $250,000.
Further optional annual payments and work commitments are
shown in the following analysis table.
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Option Agreement Terms Analysis
Example
- Option to Earn a 60% Interest
Year of
Agt.
Commitment
Payment
Schedule
Expl. Exp
Schedule
Prob. of
Realiz’n.
Value
Component
1
Firm
$50K
$250K
100%
$300K
2
Optional
$100K
$500K
50%
$300K
3
Optional
$150K
$750K
25%
$225K
4
Optional
$300K
$1,000K
10%
$130K
Totals for 60% Int.
$600K
$2,500K
Value of 100% Interest in the Property (rounded)
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$955K
$1,600K
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Comparable Transactions Analysis
•
Compile information on properties with similarities to the subject property
•
Options agreement terms analysis to estimate value of comparable
properties
•
Express values of market comparable properties in terms of:
• Overall property value
• Value per hectare
• $ per oz Au or $ per unit metal in resource
•
Considerations in analysis of comparable values:
• Examine mean and median values
• Eliminate outliers
• Consider which properties are more similar to the subject
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Determine an appropriate range of values to apply to the subject property
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Analysis of Comparable Transactions
Example 1: South American Gold
Property
Property
Transaction
Date
Size in
hectares
Property
Value $M
$/hectare
A
2007
15,200
3.61
238
B
2007
11,500
2.18
190
C
2008
30,300
4.72
156
D
2007
49,700
5.91
119
E
2008
35,000
1.48
42
Mean
3.58
149
Median
3.61
156
Mean
1.53
176
Median
1.09
173
Recommended range to apply to subject
$150 to $200/hectare
Eliminate Property E:
Market value of 20,000 hectare subject property
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$3.0 to $4.0 million
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Analysis of Comparable Transactions
Example 2: Southwest USA Gold
Property
Property
Transaction
Date
Size in
hectares
Property
Value $M
$/hectare
F
2008
1,882
4.83
2,566
G
2007
6,985
9.82
1,406
H
2008
1,147
1.35
1,177
I
2007
1,236
1.22
987
J
2008
2,433
1.18
485
Mean
3.68
1,324
Median
1.35
1,177
Mean
4.13
1,190
Median
1.35
1,177
Eliminate F and J:
Recommended range to apply to subject
Market value of 2,000 hectare subject property
Rock Solid Resources. Proven Advice.
$1,000 to $1,400/hectare
$2.0 to $2.8 million
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Valuation by $ per Unit Metal in
Mineral Resource
• Use comparable properties for valuation
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Same commodity, e.g., gold, uranium, copper
Same political jurisdiction
Similar geological setting
Similar mineral deposit type
Similar size and grade of resource
Similar stage of exploration or development
• Determine $/unit metal for market comparables
• Analyze transaction terms to get property value
• Calculate units of metal in mineral resource estimate
• Calculate $ per unit metal, e.g., $/oz Au, $/lb U3O8 or $/lb Cu
• Analyze $/unit metal values to determine an appropriate
range of values for the subject property
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Analysis of Comparable Transactions
Example 3: West African Gold Property
Transaction
Date
Property Value
$M
Contained Gold
M oz
$/oz Gold
Au Price on
Trans Date
$/oz Au
$/oz as % of
Au Price
2009
200.0
4.04
49.53
1,180
4.20%
2008
54.5
1.26
43.19
960
4.50%
2008
31.3
0.92
33.98
864
3.93%
2009
240.0
8.41
28.54
1,062
2.69%
2009
565.0
22.57
25.03
1,040
2.41%
2009
4.8
0.25
19.64
917
2.14%
2008
31.5
2.74
11.48
915
1.26%
2009
2.0
0.32
6.17
889
0.69%
Mean
27.19
2.73%
Median
26.79
2.55%
Recommended range to apply to subject property
Market value of 1.5M oz property in late 2009 ($1,150/oz)
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$24-$30/oz or 2.2%-3.0% of Au price
$36M to $45M or $38M to $52M
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Analysis of Comparable Transactions
Example 4: Western USA Uranium
Property
Transaction
Date
Property Value
$M
Contained U3O8
M lbs
$/lb U3O8
Price on
Trans Date
$/lb U3O8
$/lb as % of
U Price
2008
16.9
6.1
2.79
60
4.65%
2010
259.5
136.8
1.90
62
3.06%
2010
20.0
15.7
1.27
42
3.03%
2009
13.7
15.6
0.88
43
2.04%
2010
30.1
66.5
0.45
60
0.75%
2008
2.8
6.5
0.42
78
0.54%
Mean
1.29
2.35%
Median
1.08
2.54%
Recommended range to apply to subject property
Market value of 30M lb property in late 2010 ($58/lb)
Rock Solid Resources. Proven Advice.
$0.90 to $1.30/lb or 1.8%-2.8% of U price
$27M to $39M or $31M to $49M
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Comparable Transactions Analysis Using
Metal Transaction Ratio
• Valuation of properties with more than one metal in the
mineral resources (polymetallic deposits)
• Metal Transaction Ratio (MTR) is the ratio of the transaction
value to the gross in situ “dollar content” of all metals in the
resource
• Gross in situ “dollar content” uses metal prices as of the
transaction date
• Analogous to $ per unit metal expressed as % of metal price
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Analysis of Comparable Transactions
Example 6: South American Porphyry
Copper Property
Transaction
Date
Property
Value
$M
Metals in
Mineral
Resources
2010
733
Cu, Au
2007
403
2007
Contained
Copper
M lb
Cents/lb
Copper
Price on
Trans Date
$/lb Cu
$/lb as %
of Cu
Price
In Situ
“Value” of
Resources
$M
Metal
Transaction
Ratio
7,116
10.30
2.83
3.64%
29,638
2.47%
Cu, Au, Ag
8,275
4.87
3.55
1.37%
31,073
1.30%
791
Cu, Mo, Ag
22,088
3.58
3.35
1.07%
123,026
0.64%
2011
80
Cu, Au, Ag
2,927
2.73
4.54
0.60%
14,594
0.55%
2010
72
Cu, Au
2,627
2.73
3.33
0.82%
9,952
0.72%
2010
350
Cu, Mo, Au
21,996
1.59
3.25
0.49%
155,868
0.22%
2009
31
Cu, Au
2,188
1.40
1.48
0.94%
4,175
0.73%
2007
194
Cu, Mo
15,657
1.24
2.40
0.52%
61,832
0.31%
2009
26
Cu, Mo
2,422
1.07
3.14
0.34%
11,596
0.22%
Mean
0.80%
Median
0.64%
Mean without highest MTR
0.59%
Median without highest MTR
0.69%
Recommended MTR range to apply to subject property
0.55% to 0.75%
Market value of subject property with $50,000M in situ
metal
$275M to $375M
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Mineral Property Market Overview
• Market sample of gold property transactions
• 624 transactions on gold properties in Canada
• Property value range and statistics
• Property value per unit area
• Value per unit metal in resource
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•
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$/oz gold transacted
$/lb copper transacted
$/lb uranium oxide transacted
Metal transaction ratio
• Examples
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Values of 624 Gold Property
Transactions
in Canada 2003-09
160
Mean = $590,000
140
Number of Properties
Median = $176,000
120
100
80
60
40
20
0
<10K
10-30K
30-100K
100-300K
300K-1M
1M-3M
3M-10M
Property Value Range in C$
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$ per Hectare Values of 421 Gold Property
Transactions in Canada 2003-09
120
Mean = $494/ha
Number of Properties
100
Median = $177/ha
80
60
40
20
0
<10
10-30
30-100
100-300
300-1K
1K-3K
3K-10K
Property Value Range in C$/hectare
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Market Overview Observations
• Wide range of gold property values and $ per unit area
values
• Skewed distribution of values with numerous lows and few
highs (chart plotted in log intervals)
• Small properties have high $/ha values
• Large properties have low $/ha values
• Use comparable transactions rather than overall market to
value individual mineral properties
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Valuation by Unit Metal in Resource
• Can be expressed as:
• $ per ounce gold (Au)
• $ per pound copper (Cu)
• $ per pound uranium oxide (U3O8)
• Widely used yardstick for gold property transactions
• Applied to both properties and companies
• Gold equivalent ounces can include silver
• Sometimes expressed as % of metal price
• Can use Metal Transaction Ratio for polymetallic deposits
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US$ per Ounce Au Values
29 Transactions 2005-2008
No. of Transactions
12
10
Average = $54
Median = $36
8
6
4
2
0
<10
10 to 30
30 to 100
>100
US$ per ounce Au Eq
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Valuation by $ per Ounce Au
• Note large range in $/oz Au values (plotted on log scale)
• Little or no correlation with other factors:
•
•
•
•
Magnitude of deal in $
Magnitude of deal in total gold ounces
Gold grade of the deposit
Categories of resources and reserves
• Use of overall market average $/oz figures not reliable except
as secondary method or rule of thumb to check valuations by
other methods
• Use comparable transactions on similar properties to derive
an appropriate $/oz gold value for resources
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Final Words
• Value of exploration and other non-producing mineral
properties lies in their potential for hosting a viable mining
operation
• Comparable transactions method works reasonably well
using properties similar to the subject property
• Technical experience and judgement is a critical
requirement for valuation of non-producing mineral
properties
• Mineral property asset value is but one component of the
value of a mining company and the share price
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About RPA
• Technical advisors to investors in the mining industry
• Mining companies, banks, law firms, individual investors
• Extensive experience in all aspects of mine exploration,
finance, valuation, development, and operation
• Due diligence, M&A, exchange listings (Toronto, London,
Hong Kong, Australia)
• Offices in Toronto, London, Denver, Vancouver, Quebec
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Contact us:
Deborah A. McCombe, P.Geo.
Tel: +1 (416) 642-1476
+44 (0) 203-440-5775
Email: deborah.mccombe@rpacan.com
Toronto
Denver
Rock Solid Resources. Proven Advice.
London
Vancouver
Quebec City
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