Valuation of Mining Projects
3. Exploration Valuation
SRK Exploration Services & SRK Consulting (UK) Limited
Contents
# Appraised Value Method
# Multiples of Exploration Expenditure
# Geoscientific Methods
# Geological Risk Method
# Use of Cost Approaches to Define Future Values
Cost Approaches
Exploration Approaches has four main methods
• Appraised Value – base on past and future expenditure
• Multiples of Exploration – base on past and future expenditure
• Geoscientific Rating - based on relative property characteristics
• SRK Geological Risk Method – based on probabilities of progressing to subsequent exploration stages (Income Approach)
Strengths
• Non technical and can be easily understood
• Relatively transparent
• Past expenditures (sunk costs) may be more relevant as tax loss pools
Weaknesses
• Requires experience and judgment
• Not all expenditure will add value
• May have spent little money and found valuable deposit
• Expenditure provide no tangible evidence of future value
• Future expenditure may not add value
• Does not address technical aspects of prospect
Cost Approaches
Cost Approach
• Value of a property is based on the premise that a property is worth what has been spent on it and what will
likely be spent on it
Cost Approaches
Appraised Value Method
Appraised Value Method
• Value of a property is based on the premise that a property is worth what has been spent on it and what will
likely be spent on it
• Methodology
• Meaningful past expenditures (3-5 yrs) are factored to current day costs and then multiplied by a
retained value factor.
• Warranted future costs are multiplied by a retained value factor.
• Adjustments are made for any royalties or ownership percentages.
• These components are summed to give an appraised value.
• Appraised value may be multiplied by a fair market value adjustment factor to give a fair market value.
Appraised Value Method
Appraised Value Method
• Past expenditure are factored based on their contribution to value or knowledge
Retained Portion Guidelines
100% Work has shown reasonable results that provide indication of the existence
of a potentially viable mineral deposit. Canadian practice does not appear to
include premiums (factors greater than 100%) for expenditures that have
added value.
75% Property with resources. Some future work is warranted.
50% Property with sub-economic resources, but may have some potential in
future depending on technology and economic conditions. No work
recommended.
25% Property with sub-economic resources, probably inactive, with very little
hope for development, but cannot write them off completely. No work
recommended.
0 to 10% Property with no resources, probably inactive, and negligible or very little
exploration potential.
Nominal value of $5,000 to Inactive property with indeterminate but low or negligible exploration
$10,000 potential.
Appraised Value Method
Appraised Value Method
• Fair market value adjustment if Example
Background: Alluvial tin deposit in Cape York, Australia. Previous exploration identified tin mineralisation anomalies. Future work planned. Risk include Wild Rivers
there are concerns about environmental legislation and native title claims.
• legal, Assessment: The first step is to list the original expenditures in meaningful order and update them to current day values. In this case a retained value factors range
from80% to 100% is assessed for all the work and is applied to give each expenditure its contribution to current value. The sum of these values gives a current day
appraised value of $1,506,400. It is determined that a fair market discount of 25% to 50% (factors of 50% to 75%) be applied to reflect future risks to give a current
• environmental, and day fair market value.
• social issues associated with
a property.
Description Original Expenditure Current Day Value Retained Value Factor Contribution to Value
2008 $145,000 $158,000 90% $142,200
2009 $75,000 $79,000 80% $63,200
2010 $380,000 $390,000 90% $351,000
2011 $450,000 $450,000 100% $450,000
Warranted Future Costs $500,000 $500,000 100% 500,000
Appraised Value 2011 $1,506,400
Fair Market Factor 50% to 75%
Fair Market Value 2011 $753,200 to $1,129,800
Multiples of Exploration Expenditure
Multiples of Exploration Value Method
• Value of a property is based on the premise that a property is worth what has been spent on it and what will
likely be spent on it
• Methodology essentially the same as the Appraised Value Method except:
• for the selection and application of the retained value factors which are referred to as the "Prospectivity
Enhancement Multiplier" (PEM).
• The main difference is the value assigned to the PEM, can be significantly larger than 100%.
• Meaningful past expenditures (3-5 yrs) are factored to current day costs and then multiplied by the
PEM.
• Warranted future costs are multiplied by a PEM
Multiples of Exploration Expenditure
Multiples of Exploration Value Method
• The PEM addresses any factoring for fair market value
Appraised Value PEM
Description of Work or Status
(Roscoe, 2002) (Schodde, 2002)
Previous exploration indicates that the area has limited potential for a major
discovery. 25% to 75% 50%
Existing data is sufficient to warrant further exploration. Further work is
expected to define targets of interest. 100% 100%
Have direct evidence of an interesting target. Further work is warranted to
evaluate the target. 100% 150%
A drill target has been defined by existing geological, geochemical and/or
geophysical data - 200%
Exploration is well advanced and limited infill drilling is likely to define a Mineral
Resource. - 250%
A substantial Mineral Resource has been defined. Further information is likely to
increase the size and quality of the Resource. - 350%
Multiples of Exploration Expenditure
• The PEM addresses any factoring for fair market value
Multiples of Exploration Expenditure
Expenditure Base ("EB") = Sum of past exploration expenditure plus committed exploration going forward
Multiple of Exploration Expenditure ("MEE")
0 No further exploration is justified
0-0.5 Exploration has significantly downgraded the tenement's prospectivity
0.5 - 1.0 Exploration has maintained (rather than enhanced) or slightly downgraded the prospectivity
1.0 - 1.3 Exploration has slightly enhanced the prospectivity
1.3 - 1.5 Data has considerably increased th eprospectivity
1.5 - 2.0 Drilling has found some interesting intersections
2.0 - 2.5 Exploration has definded a target with some drill intersections of economic interest
2.5 - 3.0 A small resource is likley to be defined by current drilling
3.0 - 5.0 A resource of variable significance has been defined with economic features
Multiples of Exploration Expenditure
Multiples of Exploration Value Method
Example
Background: Alluvial tin deposit in Cape York, Australia. Previous exploration identified tin mineralisation anomalies. Future work
planned. Risk include Wild Rivers environmental legislation and native title claims.
Assessment: The first step is to list the original expenditures in meaningful order and update them to current day values. In this case a
retained value factors range from 80% to 100% is assessed for all the work and is applied to give each expenditure its contribution to
current value. The sum of these values gives a current day appraised value of $1,506,400. It is determined that a fair market discount of
25% to 50% (factors of 50% to 75%) be applied to reflect future risks to give a current day fair market value.
Description Original Expenditure Current Day Value Contribution to Value
2008 $145,000 $158,000 $158,000
2009 $75,000 $79,000 $79,000
2010 $380,000 $390,000 $390,000
2011 $450,000 $450,000 $450,000
Warranted Future Costs $500,000 $500,000 $500,000
Appraised Value 2011 $1,577,000
PEM 48% to 72%
Fair Market Value 2011 $753,200 to $1,129,800
Geoscientific Rating Method
Geoscientific Rating Method
• Attempt to quantify various technical aspects of a property through applying multipliers to a base or intrinsic value (Goulevitch J & Eupene G
S, 1994 and Kilburn, 1990).
• Intrinsic value is the base holding cost (BHC), which represents “the average cost to identify, apply for, and retain a base unit of area of title.”
• Four key Technical Factors, either enhance or downgrade the BHC
• Off-property factor – nearby properties containing physical indications of favourable mining conditions such as old workings and/or
mines
• On-property factor – the property hosts favourable mining indications such as historic workings or mines. Importantly any
mineralisation capable of supporting a Mineral Resource estimate, compliant according to the guidelines of the JORC Code, will be
assessed using other valuation methods
• Anomaly factor – assesses the degree of exploration completed over the property and the number of resultant mineralised targets
identified
• Geological factor – assesses the area covered by and degree of exposure of favourable rock types and/or structures (if this is related to
the mineralisation style being assessed) within the property.
Geoscientific Rating Method
Geoscientific Rating Method
• Rating Criteria
Geoscientific Rating Method
Geoscientific Rating Method
• Methodology
• Determine BHC = Identification, Application and Retention costs. Example Queensland BHC
= $435 per km2
• Factor multipliers applied sequentially to BHC to estimate the technical value
• A fifth factor reflecting the current state of the market is applied to estimate the Market
Value.
• Limitations
• Typically large properties having a high values while small properties have lower values,
which may not necessarily reflect the real exploration potential.
• Differences in calculating the BHC.
• Subjectivity of market values.
Geoscientific Rating Method
Geoscientific Rating Method
Example
Background: Alluvial tin deposit in Cape York, Australia. Previous exploration identified tin mineralisation anomalies.
Future work planned. Risk include Wild Rivers environmental legislation and native title claims.
Properties 100% basis
BHC (A$/km2) 435
Off Property Factors 1.5
On Property Factors 1.0
Anomaly Factors 1.0
Geological Factors 0.5
Technical Value (A$/km2) 326
Area of EPM (km2) 19.8
Technical Value (A$) 6,460
Application 0.8
Market 0.8
Fair Market Value (A$) 4,134
Geological Risk Method
Borrowed from the petroleum industry. Attempts to make the valuing of an exploration project as
transparent as possible. Uses the selection of a target NPV and works back from this through the use
of a simple equation.
EV = P × TV – C
where:
EV = prospect value
P = probability of advancing to next stage
TV = target value (NPV of deposit style)
C = cost of exploration TV and C are determined from analysis
of comparable historical data, P is
determined by a set of four geological
risk factors – Source, Pathway, Fluid
and Trap
Geological Risk Method
Geological Risk Probability “P”
= P1 (Source) x P2 (Pathway) x
P3 (Fluid) x P4 (Trap)
P is the link to the particular geological model being
tested.
The presence of favourable conditions are given
probability risk weightings between 0.5 and 1.0
Absence of favourable features are given weightings
between 0.0 and 0.5
Geological Risk Method Advantages:
• Transparent
• Systematic and semi–quantitative
• Repeatable
• Highlights critical issues and data gaps
Disadvantages:
• Reliant on amount of historical data
• Strongly dependant on geological model chosen
• Not always clean cut or easy
• Difficult for multiple commodities
• Variety of deposit styles in single valuation
• Sensitive to changing market conditions
• Does not allow for “external factors”
Appropriate use of the Cost Approach
When valuing an early stage exploration asset using a Cost or Probability method:
• Consider the objectives of the valuation (buyer vs. seller)
• Assess the most defendable approach to use
• Ensure the quality and quantity of historical data is well understood
• Gain as much knowledge of comparable and/or neighbouring projects
• Always involve a experienced exploration/resource geologists
• Carefully assess valid “in-the-ground” expenditure
• Consider each geological risk in a systematic manner
• Always use at least 3 methods to achieve a defendable value range
• Consider comparing against a Comparable Transaction method to measure market
sentiment
• If the valuation is to be used in a public documentation, ensure one of the valuation
guidelines are followed.
Project Ranking and Prioritisation
Careful valuation of exploration assets leads to:
• Understanding of critical issues geological gaps
• Semi–quantitative ranking between projects
• When aligned to a prospectivity mapping, aids in assessing optimum targeting
of resources and investment
Probability valuation can also allow for assessment of exploration success and
forward looking project value assessments as part of a wider exploration portfolio
140
Expenditure
120
Total Technical Value
Hud + Clav Tech Valuation
100
Nal Tech Valuation
80 Lyell Land Tech Valuation
USD M
60
40
20
0
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End of Session 3
