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CANADIAN (CIMVal) STANDARDS AND GUIDELINES FOR VALUATION OF MINERAL PROPERTIES

CANADIAN (CIMVal) STANDARDS AND GUIDELINES FOR VALUATION OF MINERAL PROPERTIES. Keith N. Spence, Co-Chairman Canadian Institute of Mining, Metallurgy and Petroleum Special Committee on Valuation of Mineral Properties (CIMVal) President and CEO, Alliance Pacific Resources Inc.

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CANADIAN (CIMVal) STANDARDS AND GUIDELINES FOR VALUATION OF MINERAL PROPERTIES

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  1. CANADIAN (CIMVal) STANDARDS AND GUIDELINESFOR VALUATION OF MINERAL PROPERTIES Keith N. Spence, Co-ChairmanCanadian Institute of Mining, Metallurgy and Petroleum Special Committee on Valuation of Mineral Properties (CIMVal) President and CEO, Alliance Pacific Resources Inc Presentation to Ministry of Lands and Resources (MOLAR) , Beijing China November 30, 2005

  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

  3. Background on Keith 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 and Canada. • CIM Distinguished Lecturer • CIM Fellow Award • President, Mineral Economics Society • Board of Directors, PDAC (Canada) • International Advisory Board , CHINA MINING CONFERENCE

  4. Valuation vs. Evaluation of a Mineral Property • Valuation - estimation of the value or worth of the mineral property in dollars or equivalent- “Question – What is the value or worth of the Property ?” • Evaluation - economic assessment of the mineral property generally for an investment decision, for example, a feasibility study – “Question – Is this project econonically viable ? Is it economic to develop this project?”

  5. The International Scene • Canadian CIMVal Standards & Guidelines • Developed and maintained bv Canadian Institute of Mining, Metallurgy & Petroleum (CIM) • CIM also maintains the rules for Classification of Reserves; 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

  6. The CIMVal Document • The document consists of two parts: • Standards (mandatory) • Guidelines (highly recommended)

  7. Scope and Limitations • Reasons for valuation: mergers and acquisitions, non arm’s length transactions, IPO pricing, listing support, support of audited financial statements, support for property agreements, fairness opinions, determination of vendor considerations, litigation, expropriation, insurance claims • Valuations of mineral properties are required by regulatory bodies under certain circumstances. CIMVal Standards is recommended to be followed, for valuations of mineral properties required by regulatory bodies • Fairness Opinions based on valuation of mineral properties should also be governed by the CIMVal Standards

  8. Scope and Limitations Cont’d • Limited to valuation of mineral properties, but do not cover valuation of corporations that hold the mineral properties • Mineral property means surface/subsurface mining rights; including various types of claims, development or mining licenses, prospecting permits, mining leases • Cover valuation of metallic and non-metallic mineral properties, including industrial minerals, placers, aggregates, coal, oil sands and uranium • CIMVal Standards do not cover oil and gas properties (Separate Standards for Valuation)

  9. Definition of Value • Fair Market Value (FMV) is the standard of value. • Key elements of FMV are as follows: • Both seller and buyer are willing and not under compulsion to act • The transaction is at arm’s length • Both seller and buyer are informed or have reasonable knowledge of the relevant facts • Valuation should be based on a given point in time • Other types of value include; replacement value, salvage value, book value, depreciated value, net asset value, assessed value, insured value, etc. - But not recommended for CIMVal purposes.

  10. Valuation Principles • Materiality - inclusion or omission of information that might result in different conclusion of value • Transparency - information used (or excluded), the assumptions, methodology etc, must be set out clearly, along with the rationale • Independence -the valuator must to be independent of the commissioning entity

  11. Valuation Principles Cont’d • Competence -the valuator must be appropriately qualified and experienced to conduct the required valuation • Reasonableness -other appropriately qualified and experienced valuators would value the property at approximately the same range

  12. Qualifications of Valuators • Concept of Qualified Valuator (QV) : • Professional individual with at least 5 years mineral property valuation experience • Experience relevant to the subject property • Member of an approved self-regulatory professional organization, such as Professional Engineers or Geoscientists, or CICBV • Commissioning entity must establish that the QV is qualified, competent and independent

  13. Qualifications of Valuators Cont’d • QV is responsible for the overall valuation and the valuation report • QV may be assisted by Qualified Persons (QP), as defined in Canadian Securities Regulations • All technical input to the valuation is subject to data verification by a QP

  14. Valuation Reports • A QV is ultimately responsible for: • preparation of the Valuation Report and its conclusions • adhering to the principles of materiality, transparency and reasonableness including technical input • An approved technical report can be appended to the valuation report • All mineral reserve and mineral resource estimates must be disclosed and discussed in the valuation report

  15. Valuation Reports Cont’d • 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 Standards and Guidelines in their entirety • Site visit should be undertaken or explain why not • Effective date of the valuation

  16. Valuation Standards- Key Issues • CIMVal Standards mandatory • The Standards are considered to be mandatory but the guidelines are highly recommended, and allow for professional 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 Certificate of Qualifications

  17. Choice of Valuation Approaches and Methods • QV has responsibility for choice of valuation approaches and methods with explanation • All three generally accepted valuation approaches must be considered and more than one should be used (at least two must be used) • Valuation must be reported as a range of values to reflect subjectivity and uncertainty of the valuation process

  18. Valuation Approaches Three generally accepted approaches: • Income approach - based on principle of anticipation of benefits, usually DCF • Market approach – based on principle of substitution (also called Sales Comparison or Comparable Transactions) • Cost approach – based on principle of contribution to value • Valuation approach depends on the stage of exploration or development of the property

  19. Valuation Approaches and Stages of Mineral Properties

  20. Primary Valuation Methods • Income Approach • Discounted Cash Flow Method - very widely used • Real Options Method – not widely used but gaining rapidly in acceptance (some experts suggest it’s an Approach on its own) • Market Approach • Comparable Transactions Method – widely used • Option Agreement Terms – widely used • Cost Approach • Appraised Value Method – widely used but not accepted by all regulators • Geoscience Factor Method (developed by Kilburn) – not widely used – too subjective

  21. Secondary Valuation Methods • Market Approach • Value per unit of metal – widely used rule of thumb. Used to normalize or cross - check comparables • Market Comparables – Market capitalization of company holding the mineral property – Each property must be examined individually. Similar Properties ; similar Value.

  22. Mineral Resources and Reserves • Mineral Resource - a mineral deposit for which quantity (tonnes) and quality (grade) can be estimated. But not demonstrated to be economic. • Measured - highest confidence category • Indicated • Inferred - lowest confidence category • Mineral Reserve - that part of the mineral resource that can be extracted economically. • Proven - higher confidence category • Probable - lower confidence category

  23. Use of Mineral Resources in Income Approach Generally Acceptable Practices • Use of all proven and probable mineral reserves • Use of measured and indicated mineral resources in the 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)

  24. Use of Mineral Resources in Income Approach Cont’d • 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 treated appropriately for the substantially higher risk and uncertainty • Reserves and other resource categories are mined ahead of inferred resources in the DCF model • Use of potential or hypothetical “resources” is not acceptable

  25. Some Problems with Valuations • Use of unacceptable or dubious methods • Misapplication of acceptable methods • No explanation or justification for methods used • Lack of transparency • Statement of CIMVal compliance when actually not compliant Thank you !!

  26. CANADIAN CIMVal STANDARDS AND GUIDELINESFOR VALUATION OF MINERAL PROPERTIES Keith N. Spence, Co-ChairmanCanadian Institute of Mining, Metallurgy and Petroleum Special Committee on Valuation of Mineral Properties (CIMVal) President and CEO, Alliance Pacific Resources Inc Presentation to Ministry of Lands and Resources (MOLAR) , Beijing, China November 30, 2005

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