VALUATION OF PROJECTS
VALUATION METHODOLOGY
The range of values which can be estimated for the a typical mining Project mineral interests are based on current market prices for equivalent properties, the geological potential of the properties taking into account the possibility of outlining potential resources, and the probability of present value being derived from recognised areas of mineralisation and production. The valuation also takes account of previous and planned expenditure and commitments, and the expenditures and investment made by other parties to earn, acquire or retain their interests. The range of value estimated for each project allows for the sensitivity of the project values to expected variations in commodity prices and exchange rates, and for the changes in property market value with changing investment expectations, and valuations estimated for acquisition and listing for similar projects in the same geological environment.
Where production is in progress or planned based on quantified reserves and resources, financial analyses derive the net present value for the projects and the projected earnings, before and after tax. The valuation of exploration tenements, particularly those without any quantifiable resource, is highly subjective but a number of value indicator methods have been developed and are outlined below. To determine a fair market value for the mineral exploration interests under review, various methods are normally considered including Appraised Value Method, Comparable Transaction Method and Farm-In Commitment Method,.
F INANCIAL A NALYSIS M ETHODS
The most common valuation technique used by the equities market is to apply a multiple to
maintainable earnings or net profit after tax. Alternatives to the net profit include earnings before tax, depreciation and amortisation [EBITDA] or earnings before interest and tax [EBIT]. It is necessary that the project has positive earnings and preferable if they can be maintained for a
reasonable length of time with some future growth. The multiple to be applied must therefore reflect the “quality of the earnings” and relies on the availability and comparison with other comparable market data.
Discounted Cash Flow [DCF] methodology is based on the theory that the value of an asset
depends on its future net cash flows, discounted to their net present value [NPV] at an appropriate discount rate [the weighted average cost of capital]. This discount rate represents an opportunity cost of capital reflecting the expected rate of return which investors can obtain from investments having equivalent risks. DCF valuations are particularly applicable to asset with limited lives, such as mining operations.
Appraised Value Method
The Appraised Value Method is considered one of the methods most applicable to appraising the value of exploration properties, which have neither viable ore reserves nor any commercial
production possibilities on which to establish a value. Accordingly, the real value of an exploration property is its potential for the existence of an economically viable ore body. An objective way to value a property’s exploration potential is to equate it to the cost of exploration work that is warranted to assess that potential.
Appraising an exploration property with this method assumes that a relationship exists between the amount of exploration work performed on the property and the value of that property and that an exploration programme will either enhance or diminish the value of the property.
Past and future expenditures on a property of merit will produce a current dollar value for that property that is at least equal to the total amount expended. Any expenditure considered as
contributing to the value of the property are those, which are judged to be relevant, prudent, and which were incurred in accordance with normally accepted industry practices.
Evaluating the results of an exploration programme and their relevance to the appraisal process involves assessing such parameters as, the geological environment of the property and its exploration potential, the exploration procedures utilised and their applicability to the style of
mineralisation being sought or expected, the overall scope of the work performed or planned, the effectiveness of the work conducted, and the depth and experience of the management team involved in area selection and exploration programme planning and implementation.
As a result of this evaluation process, the valuer must decide as to what degree the exploration efforts have enhanced or diminished the value of the property. Only those expenditures deemed relevant to the overall value of the property are retained and used in the valuation process. In cases where inconclusive results are obtained, a subjective judgement may be made by the
appraiser either on the basis of his own experience or in consultation with other technical experts. It is important to consider the intention of the owners regarding their exploration plans for the
property and in this regard any funds committed to exploration work in the future budget period must be taken into account when arriving at an appraised value.
The expenditure on a project considered to be effective in terms of advancing the prospectivity of the areas is used, in conjunction with a subjective prospectivity enhancement multiplier, to derive a value of the project, which takes into account the valuer's judgment of prospectivity and the value of the database. Future planned committed expenditure is also considered as a measure of the
estimated investment value of the property, to which a future exploration multiplier can be applied. In this review, we take into account expenditure of previous explorers and their joint venture partners and also past and current expenditure on the Project.
Comparable Transaction Method
One of the better methods in determining property value is by conducting a comparable transaction analysis with other recent transactions on equivalent properties, preferably within similar geographic and geological environments, with the same exploration potential and style of mineralisation, and at the same stage of development. Such a transaction should be between parties dealing at arms length. The date of the comparable transactions should be as close as possible to the property’s valuation date as the time-related factors can affect the value. These transactions can be through a direct cash payment, a farm-in or option agreement or a combination of the above. Similar
transactions can be compared and expressed in a number of ways, for instance, dollars per unit area, price paid per unit of mineral commodity in the ground, or on expenditure commitments.
Comparison of recent transactions of equivalent properties provides one of the better yardsticks to measure the value of the property because it relates the price to that which an informed investor would be willing to pay to obtain a similar property. In those cases where the transactions were not directly comparable, either a premium or a discount to the value is made as deemed appropriate.
A number of comparative projects which are considered to have economic equivalence to the
Vertex-Bariq properties has been compiled covering a range of similar exploration and development targets, types of mineralisation and prospectively. TWA reviewed some ten gold-copper-base metal development and exploration projects in South East Asia, nine similar projects in South and Central America and four projects in Australia. Listed in the references to this Report are published reports, which include some of these projects, while other information is in TWA files, and not published. Based on our experience and knowledge of these data, TWA has select acceptable comparative value estimates for each of the Vertex-Bariq projects reviewed in the Valuation Report, the
comparisons being interpolated from a number of the similar international projects which are collated in our records, covering a diversity of regions, but with sufficient similarity of geological, economic and mining conditions.
Farm-In Commitment Analysis
An exploration property may have significant untested geological potential requiring a large
exploration expenditure that the owner of the property cannot meet and as such will seek a joint venture partner to help with the exploration financing. It also may happen that an initial low budget exploration programme results in a significant discovery that requires the owner to seek a joint
venture partner that can provide the financing necessary to develop it fully. In cases such as these, the Appraised Value Method tends to undervalue the property because of the low level of past exploration expenditures relative to the overall potential of the property.
A more appropriate approach in these instances is to consider the terms of an arm’s length transaction for a farm-in option or agreement by a third party to earn an equity interest in the property. Such agreements can be used to calculate a value for the property. The terms of these agreements usually consist of a series of optional expenditure commitments over a number of years. The farm-in participants usually earn an equity interest in the project by paying all of the exploration expenditures during the earn-in period. Normally all expenditure commitments must be met in order to earn the equity. However, such farm-in commitments are not absolutely binding as usually there are rights to withdraw or in some cases there may be staged expenditure requirements earning an escalating equity interest.
A review of the terms of the agreement, as well as the geological potential of the property must be made in order to determine the value of a farm-in commitment and to assess the probabilities that some or all of the expenditure commitments will be met, particularly in a staged earn-in situation. In these cases a discount factor reflecting the estimated probabilities can be applied to the expenditure commitments.
VALUATION OF PROJECTS
VALUATION METHODOLOGY
The range of values which can be estimated for the a typical mining Project mineral interests are based on current market prices for equivalent properties, the geological potential of the properties taking into account the possibility of outlining potential resources, and the probability of present value being derived from recognised areas of mineralisation and production. The valuation also takes account of previous and planned expenditure and commitments, and the expenditures and investment made by other parties to earn, acquire or retain their interests. The range of value estimated for each project allows for the sensitivity of the project values to expected variations in commodity prices and exchange rates, and for the changes in property market value with changing investment expectations, and valuations estimated for acquisition and listing for similar projects in the same geological environment.
Where production is in progress or planned based on quantified reserves and resources, financial analyses derive the net present value for the projects and the projected earnings, before and after tax. The valuation of exploration tenements, particularly those without any quantifiable resource, is highly subjective but a number of value indicator methods have been developed and are outlined below. To determine a fair market value for the mineral exploration interests under review, various methods are normally considered including Appraised Value Method, Comparable Transaction Method and Farm-In Commitment Method,.
F INANCIAL A NALYSIS M ETHODS
The most common valuation technique used by the equities market is to apply a multiple to
maintainable earnings or net profit after tax. Alternatives to the net profit include earnings before tax, depreciation and amortisation [EBITDA] or earnings before interest and tax [EBIT]. It is necessary that the project has positive earnings and preferable if they can be maintained for a
reasonable length of time with some future growth. The multiple to be applied must therefore reflect the “quality of the earnings” and relies on the availability and comparison with other comparable market data.
Discounted Cash Flow [DCF] methodology is based on the theory that the value of an asset
depends on its future net cash flows, discounted to their net present value [NPV] at an appropriate discount rate [the weighted average cost of capital]. This discount rate represents an opportunity cost of capital reflecting the expected rate of return which investors can obtain from investments having equivalent risks. DCF valuations are particularly applicable to asset with limited lives, such as mining operations.
Appraised Value Method
The Appraised Value Method is considered one of the methods most applicable to appraising the value of exploration properties, which have neither viable ore reserves nor any commercial
production possibilities on which to establish a value. Accordingly, the real value of an exploration property is its potential for the existence of an economically viable ore body. An objective way to value a property’s exploration potential is to equate it to the cost of exploration work that is warranted to assess that potential.
Appraising an exploration property with this method assumes that a relationship exists between the amount of exploration work performed on the property and the value of that property and that an exploration programme will either enhance or diminish the value of the property.
Past and future expenditures on a property of merit will produce a current dollar value for that property that is at least equal to the total amount expended. Any expenditure considered as
contributing to the value of the property are those, which are judged to be relevant, prudent, and which were incurred in accordance with normally accepted industry practices.
Evaluating the results of an exploration programme and their relevance to the appraisal process involves assessing such parameters as, the geological environment of the property and its exploration potential, the exploration procedures utilised and their applicability to the style of
mineralisation being sought or expected, the overall scope of the work performed or planned, the effectiveness of the work conducted, and the depth and experience of the management team involved in area selection and exploration programme planning and implementation.
As a result of this evaluation process, the valuer must decide as to what degree the exploration efforts have enhanced or diminished the value of the property. Only those expenditures deemed relevant to the overall value of the property are retained and used in the valuation process. In cases where inconclusive results are obtained, a subjective judgement may be made by the
appraiser either on the basis of his own experience or in consultation with other technical experts. It is important to consider the intention of the owners regarding their exploration plans for the
property and in this regard any funds committed to exploration work in the future budget period must be taken into account when arriving at an appraised value.
The expenditure on a project considered to be effective in terms of advancing the prospectivity of the areas is used, in conjunction with a subjective prospectivity enhancement multiplier, to derive a value of the project, which takes into account the valuer's judgment of prospectivity and the value of the database. Future planned committed expenditure is also considered as a measure of the
estimated investment value of the property, to which a future exploration multiplier can be applied. In this review, we take into account expenditure of previous explorers and their joint venture partners and also past and current expenditure on the Project.
Comparable Transaction Method
One of the better methods in determining property value is by conducting a comparable transaction analysis with other recent transactions on equivalent properties, preferably within similar geographic and geological environments, with the same exploration potential and style of mineralisation, and at the same stage of development. Such a transaction should be between parties dealing at arms length. The date of the comparable transactions should be as close as possible to the property’s valuation date as the time-related factors can affect the value. These transactions can be through a direct cash payment, a farm-in or option agreement or a combination of the above. Similar
transactions can be compared and expressed in a number of ways, for instance, dollars per unit area, price paid per unit of mineral commodity in the ground, or on expenditure commitments.
Comparison of recent transactions of equivalent properties provides one of the better yardsticks to measure the value of the property because it relates the price to that which an informed investor would be willing to pay to obtain a similar property. In those cases where the transactions were not directly comparable, either a premium or a discount to the value is made as deemed appropriate.
A number of comparative projects which are considered to have economic equivalence to the
Vertex-Bariq properties has been compiled covering a range of similar exploration and development targets, types of mineralisation and prospectively. TWA reviewed some ten gold-copper-base metal development and exploration projects in South East Asia, nine similar projects in South and Central America and four projects in Australia. Listed in the references to this Report are published reports, which include some of these projects, while other information is in TWA files, and not published. Based on our experience and knowledge of these data, TWA has select acceptable comparative value estimates for each of the Vertex-Bariq projects reviewed in the Valuation Report, the
comparisons being interpolated from a number of the similar international projects which are collated in our records, covering a diversity of regions, but with sufficient similarity of geological, economic and mining conditions.
Farm-In Commitment Analysis
An exploration property may have significant untested geological potential requiring a large
exploration expenditure that the owner of the property cannot meet and as such will seek a joint venture partner to help with the exploration financing. It also may happen that an initial low budget exploration programme results in a significant discovery that requires the owner to seek a joint
venture partner that can provide the financing necessary to develop it fully. In cases such as these, the Appraised Value Method tends to undervalue the property because of the low level of past exploration expenditures relative to the overall potential of the property.
A more appropriate approach in these instances is to consider the terms of an arm’s length transaction for a farm-in option or agreement by a third party to earn an equity interest in the property. Such agreements can be used to calculate a value for the property. The terms of these agreements usually consist of a series of optional expenditure commitments over a number of years. The farm-in participants usually earn an equity interest in the project by paying all of the exploration expenditures during the earn-in period. Normally all expenditure commitments must be met in order to earn the equity. However, such farm-in commitments are not absolutely binding as usually there are rights to withdraw or in some cases there may be staged expenditure requirements earning an escalating equity interest.
A review of the terms of the agreement, as well as the geological potential of the property must be made in order to determine the value of a farm-in commitment and to assess the probabilities that some or all of the expenditure commitments will be met, particularly in a staged earn-in situation. In these cases a discount factor reflecting the estimated probabilities can be applied to the expenditure commitments.