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Mineral Sector Valuations

Mineral Sector Valuations. A Presentation on Market Based Valuation Practices in the Canadian Minerals Industry November, 2006. Joe Hinzer, P.Geo., President Watts, Griffis and McOuat Limited. Market Valuation Approaches. Fair Market Value or Market Value .

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Mineral Sector Valuations

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  1. Mineral Sector Valuations A Presentation on Market Based Valuation Practices in the Canadian Minerals Industry November, 2006 Joe Hinzer, P.Geo., President Watts, Griffis and McOuat Limited Watts, Griffis and McOuat

  2. Market Valuation Approaches Fair Market Value or Market Value Is the value received from an unforced sale between a willing vendor and a willing buyer. Watts, Griffis and McOuat

  3. Market Valuation Approaches Most 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”. Watts, Griffis and McOuat

  4. Market Valuation Approaches Other types of transactions, such as those noted below, do fit this definition Investment Value - the value to the owner Forced Liquidation Value - the value if assets of a failed business are sold at auction Orderly Liquidation Value - net proceeds if assets of a business are sold over a period of time to maximize the proceeds received Expropriation Value – Forced sale Watts, Griffis and McOuat

  5. Market Valuation Approaches 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. Watts, Griffis and McOuat

  6. Market Valuation Approaches Canadian 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) Watts, Griffis and McOuat

  7. There are two primary valuation methods used, Comparable sales Joint Ventures Several secondary methods can be grouped under the heading of, Yardstick or Rule of Thumb Market Valuation Approaches Watts, Griffis and McOuat

  8. Market Valuation Approaches CIMVal examples of Market Based Approaches: Watts, Griffis and McOuat

  9. Market Valuation Approaches Section 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 data Mineral Resource Stage - contains a Mineral Resource – no economic viable data Development Stage – is being prepared for mineral production – has economic viability study Production Stage – producing mine which has been fully commissioned (+/- plant). Watts, Griffis and McOuat

  10. Use of Valuation Approaches CIMVal provides guidance on the use of valuation approaches: Watts, Griffis and McOuat

  11. Market Valuation Approaches Primary Market Approaches: 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 Joint Venture Terms Analysis - quite effective if there are examples available for the subject property Watts, Griffis and McOuat

  12. Market Valuation Approaches COMPARABLE TRANSACTION ANALYSIS CTA is based on examples of transactions in the market place which may include combinations of: Direct cash payments for a mineral property Staged cash payments, rents and advance royalties Indirect cash transaction through shares, share options and warrants Earn-in arrangements by obligation or option Retention of royalties, carried interests and working interests Watts, Griffis and McOuat

  13. Market Valuation Approaches COMPARABLE TRANSACTION ANALYSIS It is important that the two properties being compared are similar in respect: Geology Commodity Stage of Advancement Geographic location Market conditions at time of valuation Although similar does not mean the same, they should be more or less equally desirable. Watts, Griffis and McOuat

  14. Market Valuation Approaches COMPARABLE TRANSACTION ANALYSIS There are two strategies when using Comparable Transaction Analysis: 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. 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. Watts, Griffis and McOuat

  15. JOINT VENTURE TERMS ANALYSIS Market Valuation Approaches 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 property worth $5M, the property may become worth $6 M. – this is not a JV 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. Watts, Griffis and McOuat

  16. JOINT VENTURE TERMS ANALYSIS Market Valuation Approaches 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 Watts, Griffis and McOuat

  17. JOINT VENTURE TERMS ANALYSIS Market Valuation Approaches 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. Watts, Griffis and McOuat

  18. Market Valuation Approaches CTA – DESCRIPTION OF TRANSACTIONS Watts, Griffis and McOuat

  19. Market Valuation Approaches CTA – DISCOUNTED VALUES OF TRANSACTIONS Watts, Griffis and McOuat

  20. Market Valuation Approaches CTA – SUMMARY OF DISCOUNTED VALUES Watts, Griffis and McOuat

  21. Market Valuation Approaches Secondary Market Approaches (Rule of Thumb): In-Situ Resource Analysis – market value of the mineral in the ground Value per unit area, Market Capitalization Watts, Griffis and McOuat

  22. Market Valuation Approaches Most 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). Watts, Griffis and McOuat

  23. Market Valuation Approaches Can 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. Watts, Griffis and McOuat

  24. Market Valuation Approaches The 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. Watts, Griffis and McOuat

  25. Market Valuation Approaches From 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 others this technique should be used with caution as a secondary valuation approach Watts, Griffis and McOuat

  26. Suggested 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. Watts, Griffis and McOuat

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