Best practices in evaluating mining projects; and factors in having successful mining sector

Transcription

1 Best practices in evaluating mining projects; and factors in having successful mining sector KEITH N. SPENCE CEO, Global Mining Capital Corp. Chairman, PDAC International Affairs AMM Astana Mining and Metallurgy Congress Astana, Kazakhstan, May 25, 2017

2 My Background Chairman, PDAC International Affairs (Prospectors & Developers Association of Canada) - World s largest annual mining conference Co-Chairman and Co-Founder, Canadian Mining Valuation Standards and Guidelines - Canadian Institute of Mining, Metallurgy, Petroleum CEO, Global mining Capital - Private Equity investments in mining internationally. 2

3 Contents 1. Brief Market Update 2. Best practices in evaluating mining projects 3. Factors for a having successful mining sector 3

4 MARKET UPDATE 4

5 FINANCING FOR GLOBAL MINERALS INDUSTRY 5

6 FINANCING FOR GLOBAL MINERALS EXPLORATION (US$B) ,2 All exchanges globally; for exploration only; (US$B) 33,1% 14,3 38,8% 4,1 4,3 23,1% 19,5% 32,4% 5,9 2,3 1,9 2,0 1,2 1,4 0,9 2, % 50,3% 50% 40% 30% 20% 10% 6 Source: SNL Metals & Mining; modified by PDAC

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8 INCREASING DEPTH OF DISCOVERIES Average discovery depths now 125 meters from 95 meters recently Source: MinEx Consulting 8

9 BEST PRACTICES IN EVALUATING MINING PROJECTS 9

10 Why Do We Need Best Practices? The Poseidon bubble (1970) Australia: A nickel ore deposit that turned out to be of much lower grade than originally thought. Many fortunes were lost. The Bre-X Scandal (1997) Canada: A gold deposit in Indonesia, owned by a Canadian company, that turned out to be a fraud. Over $6 billion shareholders money, was lost. 10

11 Valuation vs Evaluation Valuation - Estimation of the value or worth of the mineral property. Question: How much is a property worth (in dollars)? Evaluation - Economic assessment of the mineral property generally for an investment decision, for example, a feasibility study. Question: Is this project economic? Go or No go Decision? 11

12 VALUATION How much is a project worth? 12

13 International Valuation Standards Canada - CIMVAL Standards & Guidelines Australian - VALMIN Code South African - SAMVAL Code IMVAL - International Mining Valuation Committee -Template 13

14 Reasons for a Valuation Mergers and acquisitions IPO pricing Stock exchange listing support Support of audited financial statements Fairness Opinions for a sale or purchase of a mining property Litigation Government expropriation Insurance claims 14

15 Definition of Value Fair Market Value (FMV) is the standard of value ( Also called Market Value in IMVAL) 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 15

16 Valuation Approaches (At least 2 Approaches must be used) Three generally accepted valuation approaches: Income approach - based on principle of anticipation of benefits (usually DCF) Market approach based on principle of substitution ( Market Comparables) Cost approach based on principle of contribution to value (Funds spent on the project) 16

17 Primary Valuation Methods Income Approach Discounted Cash Flow Method (DCF) Option Pricing Method/Real Option Method. Utilizing Black Scholes seminal work, that mining projects can be valued based on a series of options/decisions Market Approach Comparable Transactions Method Option Agreement Terms Cost Approach Appraised Value Method widely used but not accepted by all regulators Geoscience Factor Method not widely used 17

18 Types of Projects Valuation depends on the stage of development of the project: Exploration Projects Greenfield & Early stage exploration projects Mineral resource projects Advanced stage exploration projects/projects with identified mineral resources Pre-feasibility stage projects Past producing mines Development projects Feasibility study completed Development planned or under construction Contain mineral reserves and mineral resources Production projects 18

19 Stage Based Valuation VALUATION APPROACH EXPLORATION PROPERTIES MINERAL RESOURCE PROPERTIES DEVELOPMENT PROPERTIES PRODUCTION PROPERTIES Income No In some cases Yes Yes Market Yes Yes Yes Yes Cost Yes In some cases No No 19

20 Identifying Value Life Stages of Typical Mining Company Exploration Stage Development / Construction Stage Production Stage Illustrative Share Value Mispriced/Undervalued Area 20

21 EVALUATION Is the project economic? 21

22 Evaluation of Investment Risks Technical Risks Grade Metallurgy/Recovery Resource/Reserve Mining Type (open pit or underground) Water (absence or presence) Infrastructure Power 22

23 Evaluation of Investment Risks Market & Financial Risks Metal Prices Debt/Equity Mix Royalties Taxes 23

24 Evaluation of Investment Risks Regulatory & Soft Risks Political (expropriation, creeping expropriation, windfall taxes) Social (CSR, aboriginal communities ) Environmental (pre-existing biodiversity, spills, contamination, permits) 24

25 Stage-Based Economic Studies Life Stages of Typical Mining Company Exploration Stage Exploration Drilling Resource Estimate Development / Construction Stage Early Mid Stage Late Stage Development Development Construction Stage Preliminary Economic Assessment/Scoping Pre-Feasibility Study Feasibility Study Bankable Feasibility Study (BFS) Production Stage Production Illustrative Share Value Euphoria: share price will at times exceed what is reasonable Reality sets in and share price reflects true potential as work progresses Little news as scoping and feasibility studies progress Funding concerns Operational growing pains Feasibility Study complete Major banks commitment received Most of metallurgy, operational costs/risks are now known Commercial production removes risks and uncertainty Growth dependent on mine site 25growth & new projects

26 FACTORS FOR HAVING A SUCCESSFUL MINING SECTOR 26

27 A Regulatory Framework with World Class Standards Strong Disclosure Standards - Good information disclosure for public companies and information should be defendable ( standards) A national stock exchange with a vibrant mining sector (TSX, ASX, AIM, JSE) Very Accessible Land Acquisition System Ease of acquiring land for exploration (e.g.: claim staking, digital acquisition) 27

28 A Regulatory Framework with World Class Standards Qualified Person/Competent Person Concept - Personal responsibility (belong to a SRO or national regulatory body) Valuation Standards - IMVAL Standards Template ( Canada-CIMVAL, Australia-VALMIN, South Africa- SAMVAL etc.) Reserve/Resource Classifications - Using both economic and technical information as modifying factors - CRIRSCO Reserve Standards 28

29 CRIRSCO Reserve Standards 29

30 Conclusion Best practices in evaluating mining projects; for both valuation and evaluation A best practices regulatory framework to include; good and defendable information disclosure, a vibrant mining sector in a national stock exchange, reserve/resource classifications with an economic overlay, good valuation standards and easy exploration land access 30

31 Thank You!! 31

32 Best practice in evaluating mining projects; and factors in having successful mining sector KEITH N. SPENCE CEO, Global Mining Capital Corp. Chairman, PDAC International Affairs AMM Astana Mining and Metallurgy Congress Astana, Kazakhstan, May 25, 2017 THE END