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Exploration Property Valuation – methods and
case studies
HONG KONG : BRISBANE : LONDON : VANCOUVER | www.miningassociates.com
A GLOBAL MINERALS & ENERGY BUSINESS
Valuations in Mining and Exploration: AIG Seminar 11th Oct 2016
Contact
Dr James Lally
Level 3, 455 Upper Edward StreetSpring Hill, QLD 4000, AUSTRALIA
Phone: +617 3831 9154 www.miningassociates.com
Presentation Overview
Valuation Methodologies most commonly applied to exploration properties:- Multiples of exploration expenditure- Kilburn Geoscience Rating- Comparable transactions
Case Studies:- Xanadu Mines (2014)- Auzex (June 2015)
Conclusions
Valuation methods discussed
Most commonly applied to exploration properties:- Multiples of exploration expenditure (Cost
Approach)- Kilburn Geoscience Rating (Cost Approach)- Comparable transactions (Market
Approach)
Multiples of Exploration Expenditure Also called MEE Presumption that property is worth what has
been spent on exploration “Prospectivity enhancement multiplier”, or
PEM applied to costs depending on results Should exclude/discount ‘unnecessary’ work
PEM
0-prospectivitydowngraded
1-prospectivitymaintained
3-JORC Resources
2-prospectivityenhanced
Note: some valuers use scale of 0-5 for PEM, with 3-5 range representing advancement of resources
Kilburn Geoscience Rating
Cost Approach Values a property depending on
‘numerical-geological’ rating system- Base Acquisition Cost (BAC) per unit area =
cost of applying for and maintaining licence- BAC multiplied by product of geological
ratings = prospectivity factor- Prospectivity factor multiplied by area = value
Goulevitch & Eupene, 1994
Comparable Transactions
Market Approach Search for recent (within 5 years
maximum, 2 years probably better) transactions for similar properties to the one being valued Can be difficult to get meaningful data,
especially when M&A activity slows down
Comparable Transactions
Usually have to normalise transaction values by deriving a $ per unit resource variable, or $ per unit area to get a ‘yardstick’ and apply to the property being valued
$ per resource variable generally gives fairly consistent results when enough data can be found
Example 1 – Xanadu Mines Kharmagtai: Porphyry
copper-gold deposits, advanced stage
Oyut Ulaan: porphyry copper-gold exploration Sharchuluut Uul: large lithocap of alteration in porphyry district, early stage exploration
Resources at Kharmagtai estimated, but never publically released.
MA valuation report October 2014 for private placement ASX:XAM www.xanadumines.com
Kharmagtai mineral resources not validated, so treated as an Exploration Target (150-250 Mt @ 0.40 - 0.60% Cu and 0.40 - 0.70 g/t Au)
Valuation methods applied:- Multiples of Exploration
Expenditure- Kilburn Geoscience Rating- Comparable transactions
Example 1 – Xanadu Mines
Kharmagtai geology & drilling
All projects had some amount of government-sponsored work completed, mostly pre-1990- Ignored in Multiples of Exploration
Expenditure because in open file and of dubious quality
Each of the 3 Licences were assessed independently (Kharmagtai, Oyut Ulaan, Sharchuluut Uul)
Xanadu - Multiples of Exploration Expenditure
Kharmagtai:- Past work from 1996-2013- Expenditure converted to 2014 costs- Used a “range” of expenditure, resource drilling only =
low end, total = high end PEM of 1.5 used, reflects unvalidated resources and
potential over-expenditure Exploration Phase Year Resource Definition
Drilling Only Total Expenditure (2014 costs, USD)
QGX 1996‐1998 $1,137,830 $ 1,786,000
Ivanhoe Mines Mongolia 2002‐2006 $10,326,663 $20,838,110
Asia Gold 2007‐2011 $2,157,125 $6,128,975
Xanadu 2014 $1,357,000 $2,247,000
Total $14,821,618 $30,753,085
Lower value x 1.5 PEM
Upper value x 1.5 PEM
Xanadu - Multiples of Exploration Expenditure
Oyut Ulaan- Expenditure figures only available for
Xanadu’s work 2012-2013: US$3.4M- Xanadu had purchased 90% in 2012
for total cash of US$0.9M- Total expenditure used was US$4.3M
Sharchuluut Uul- Pre-2010 work all open file, not
included- 2010-2013 total US$2.84M
PEM 1.0-1.5- Majority of work
maintained, or significantly added to value of property.
PEM 0.5-0.8- No mineralisation
defined to date- Increased
knowledge of target
Xanadu - Multiples of Exploration Expenditure
Xanadu - Kilburn Geoscience Rating
Scoring table used for Kilburn Geoscience Rating
Applied to Oyut Ulaan and Sharchuluut Uul, worked through for Kharmagtai as a comparison
Rating Off Property Factor On Property Factor Anomaly Factor Geological Factor
0.1 Unfavourable lithology
0.2 Unfavourable with structures
0.3 Generally favourable lithology (10‐20%)
0.5 Extensive previous exploration with poor results
Alluvium covered, generally favourable lithology
0.9 Poor results to date Generally favourable lithology (50%)
1 No known mineralisation No known mineralisation No targets outlined Generally favourable lithology (70%)
1.5 Minor workings Minor workings or mineralised zones exposed
Several well‐defined targets, initial results promising
2 Several old workings or exploration targets identified Several old workings Generally favourable lithology
2.5
3 Abundant workings/mines with significant historical production Abundant workings Several significant subeconomic
intersectionsSignificant mineralised zones
exposed in prospective host rocks
3.5 Abundant workings/mines with significant historical production
Several economic grade intersections on adjacent sections
4 Along strike from major mine(s)
4.5
5 Along strike from world class mine Significant historic production Several significant ore grade correlatable intersections
10 World class mine
Xanadu - Kilburn Geoscience Rating
Choice of BAC value was based on actual licence application and holding costs in Mongolia
Only fixed costs were licence rental fees, no minimum expenditure requirements
US$ 5/ha for mining leases (Oyut Ulaanand Kharmagtai), US$1.5/ha for Sharchuluut Uul.
Xanadu - Kilburn Geoscience Rating
For exploration properties, some Factors were given a range, rather than a fixed value, especially where there was uncertainty in informationProject Off Property Factor On Property Factor Anomaly Factor Geological Factor Prospectivity Index
Kharmagtai 2.0 1.5 5.0 3.0 45
Oyut Ulaan 2.0‐3.0 1.5 1.5‐3.0 1.5‐2.5 6.75‐33.75
Sharchuluut Uul 4.0‐5.0 1.25‐1.5 1.25‐1.5 1.5‐2.0 9.375‐22.5
Project Area (Ha) BAC (USD/Ha) PI Low PI High Value Low (USD) Value High
(USD)
Kharmagtai 6647.00 5 45 45 1,495,575 1,495,575
Oyut Ulaan 8800.77 5 6.75 33.75 297,025 1,485,130
Sharchuluut Uul 23630.00 1.5 9.375 22.5 330,490 793,175
PI – Prospectivity Index
Xanadu - Comparable transactions
Applied to Kharmagtai Acquisitions researched from previous 4
years (2010-2014) involving Cu/Cu-Au porphyry-style mineralisation at resources/pre-resources stage
Most deals involved 100% purchase Purchase amounts converted to cash value
equivalent at time of deal, not including any retained NSR
Project Location Project Stage Purchaser Acquisition
date %
Purchased
Purchase price
(USDM)*
Purchase price
(AUDM)
Implied USD/t Cu eq**
Resources***
Comment
Golden Grouse Mongolia Exploration Kincora
Copper 23/04/2012 100% 5.0 5.3 ‐
Not used –too early stage so no resource
Gabbs USA Resources Galielo Resources 02/02/2013 100% 3.88 4.28 12.07
Used, USD/t is OK but small area
Andash Kyrgyzstan DFS completed
Robust Resources 01/02/2013 80% 14.6
[18.25] 15.0
[18.75] 90.28
Comparable project but at DFS stage so USD/t is high
Arikepay Peru Exploration Target
Candente Copper 12/12/2013 100% 19.0 20.9 9.54
MA defined target USD/t
Payen Chile Exploration target
Coro Mining Corp
17/10/2012 100% 17.0 18.7 ‐
Early stage, very little drilling so no Target
size
Taysan Philippines Resources Crazy Horse
Resources 12/11/2010 100% 16.7 18.3 10.06
Closest in stage and resource size
Frieda River
Papua New Guinea
Scoping study
completed
Pan Australian Resources
01/11/2013 80% 75.0 [93.75]
82.5 [103.12] 6.94
Not used in purchase price as very large resource size
Not many transactions over period studied –still a depressed market
Three projects gave implied $/t Cu from 9.5-12, median 10.5
Applied to KharmagtaiExploration Target gave range US$9M-US$24M
As a direct comparison in size and grade, Taysan was closest to Kharmagtai
Xanadu - Comparable transactions
Xanadu – Final ValuationProject
Market Approach
Empirical Approach
Cost Approach
Preferred
Comparable Transactions
Yardstick t/Cueq Expenditure Kilburn
Geoscience
Low USDM
High USDM
Low USDM
High USDM
Low USDM
High USDM
Low USDM
High USDM
Low USDM
PreferredUSDM
High USDM
Kharmagtai (90%)
$15 $17 $9 $24 $20.0 $41.5 ‐ ‐ $15 $32 $42
Oyut Ulaan (90%) ‐ ‐ ‐ ‐ $3.4 $5.1 $0.3 $1.4 $3 $4 $5
Sharchuluut Uul (100%) ‐ ‐ ‐ ‐ $1.4 $2.3 $0.3 $0.8 $1 $2 $2
Total $19 $38 $49
Kilburn values much lower than MEE for exploration licences
Comparable transactions and MEE values for Kharmagtai similar if only resource drilling considered
Example 2 – Auzex Portfolio of early stage
exploration projects in QLD, NSW and WA
WA project resource of 4.7Mt @ 2.0 g/t Au for 310,000oz (orogenic gold deposit)
Details of past exploration expenditure not available
Valuation method included comparable transactions of gold resources/exploration leases, with Kilburn as a check
MA valuation report June 2015 for merger of Auzex (private) with Explaurum (ASX:EXU) www.explaurum.com.au
Auzex – comparable transactions
Searched for transactions involving gold projects with resources in Australia from 2013-2015- Excluded any transactions involving mining
or mothballed mining assets
Ten transactions selected as being most comparable Implied A$/oz values calculated using
resources
Auzex – comparable transactions
5 deals value resources at A$4.5-5.2/oz, 4 were similar size and grade to Tampia
Linden highest value because PFS completed
Bird in Hand, Eagertonhigher grades (12.3, 8.5 g/t)
Kathleen Valley and Hermes purchasers had other projects in close proximity
Project State Purchaser Acquisition date
% Purchased
Purchase price
(AUDM)
Attributable resource ounces Au
Implied AUD/attributable resource ounce
Comment
Bird in Hand SA Terramin 19/7/2013 100% 4.0 237,000 16.9
Melrose/Darlot East WA Bullseye
Mining 13/1/2014 100% 1.5 340,000 4.4similar size and grade to Tampia
Tarcoola/Tunkilllia SA WPG
Resources 22/5/2014
100% Tarcoola,
72% Tunkillia
2.975 753,900 4.0
Kathleen Valley WA Ramelius Mining 10/6/2014 100% 3.645 130,000 28.0
Mt Adrah NSW Sovereign Gold 11/7/2014 100% 3.1 770,000 4.0
Walhalla VICA1
Consolidated Gold
24/8/2014 100% 1.29 268,000 4.8similar size and grade to Tampia
Egerton WA Gasgoyne Resources 24/9/2014 100% 0.75 24,000 31.3
Hermes WA Northern Star 24/2/2015 100% 1.95 212,000 9.2
similar size and grade to Tampia
Linden WA Fortuna Mining 13/4/2015 100% 7.0 131,000 53.4
Most advanced stage project, had PFS
completed
Mt Coolon QLD GBM Resources 13/4/2015 100% 1.48 283,000 5.2
similar size and grade to Tampia
Median / Mean (after removing Linden) 5.2 / 12.0
Auzex – comparable transactions
Searched for transactions involving exploration projects without resources from 2013-2015 Restricted to deals involving 100% of
project (simpler) Calculated implied A$/km2 value
Auzex – comparable transactions
Wide range of $/km2 values from A$38 to A$387,500 Broad negative correlation between
licence size and implied value Higher values driven in part by
‘nearology’ Filtering list narrowed value range to
A$38-A$2,2024/km2
Used A$500-A$1000 for valuation
Auzex – Kilburn Geoscience Rating
Used Kilburn method for licences other than Tampia ML BAC defined as range from A$350-
A$550 per km2 to reflect licence application fees, holding fees, minimum expenditure and access costs in Australia
Auzex – Final valuation
MA Preferred values were towards lower end of ranges to reflect location of Auzexprojects relative to existing infrastructure
Kilburn values highest, but ranges overlap with yardstick values Tampia resources contribute most to value
Project Market Approach
Cost Approach
Preferred Market Value
Comparable Transactions
Yardstick AUD/oz or AUD/km2
Kilburn Geoscience
Low AUDM
High AUDM
Low AUDM
High AUDM
Low AUDM
High AUDM
Low AUDM
Preferred AUDM
High AUDM
Tampia Resources
1.29 1.5 1.1 2.5 ‐ ‐ 1.1 1.5 2.5
Tampia Exploration ‐ ‐ 0.09 0.34 0.08 1.3 0.1 0.3 1.3
North Queensland Exploration
‐ ‐ 0.18 0.68 0.26 2.6 0.2 0.5 2.6
Kingsgate 0.01 0.01 0.01 0.22 0.01 0.01 0.2
Total 1.4 2.3 6.6
Conclusions
All methods discussed are highly subjective in their application- Hence need for experienced practitioners
under VALMIN
Under VALMIN need to use more than one method to arrive at a valuation, or state reasons for not doing so
Conclusions
Multiples of exploration expenditure method a simple premise- Have to carefully examine work included to
decide if it all added value- Decision of PEM value to apply highly
subjective - More likely a reasonable indication of value
if there are positive results
Conclusions
Kilburn method has some problems- Sensitive to choice of BAC, which may be
different depending on jurisdiction - Underlying assumption that larger areas
are worth more Xanadu projects (small licences) given low
values, Auzex Queensland projects (large areas) given high values
- Rating system applied to entire licence
Conclusions
Comparable transactions appear to be a reasonable method for early stage resources- But need to be careful to filter transactions that
don’t apply and understand reasons for outliers- Can be difficult to find sufficient recent
transactions- Market conditions can change quickly
Applying to exploration properties more problematic because of size-value relationship
Alternative market method Edison Research provides a snapshot of
market values for resources- Uses Enterprise Value (EV) of listed companies
with single resource projects - EV / resource metal units = $/metal unit- Distinguishes between resource categories and
markets (London, TSX, ASX)- Can provide check on yardstick values
May deliver negative values for resource categories! Commonly only a small number of companies can be
valued this way
www.edisoninvestmentresearch.com
Alternative market method
Edison reports published annually 2015 report values:
- Inferred gold resource $/oz in agreement with comparable transactions for Auzex
- Copper resource $/t higher than for Xanadu
Measured Indicated Inferred Total
Gold $/oz -11 19.8 4.5 10.1
Copper $/t 59 27.3 39.8 42.01
April 2016
HONG KONG | BRISBANE | LONDON | VANCOUVER
www.miningassociates.com
A GLOBAL MINERALS & ENERGY BUSINESS
November 2016
Consulting | Capital | Operations
Mining Associates Group
Suite A, 26th Floor, Chinaweal Centre414-424 Jaffe RoadCauseway Bay, Hong Kong SART: +852 2430 7575F: +852 2430 7508W: www.miningassociates.com
Tony Page l CEOMining [email protected]
Tom Bispham l Managing DirectorMA [email protected]