ETD Collection

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Subject: search.filters.subject.Mineral industries--Finance

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    Development of a best practice guideline for conducting comparable market valuation by benchmarking from gold deposit case study transactions
    (2019) Burger, Jacobus
    The comparable market valuation is an internationally accepted valuation method frequently used to value mineral assets. Valuation methods are generally associated with uncertainty. The uncertainty is associated with values of the input parameters used and assumptions made in the valuation process. Accordingly, national mining valuation codes were designed to provide guidance to the valuation process. These codes are principles-based and not prescriptive, leaving valuators (valuers) with a degree of uncertainty. The purpose of this research study was therefore, to establish a best practice guideline when using the comparable market valuation method to value a mineral project. The guideline is intended to partly reduce variation in approach by different valuators and so reduce the uncertainty in the valuation process. According to the APB (2013), when a transaction on a property is a ‘competitive substitute’ it is acceptable to be classified as comparable. Most transactions used in mineral property valuations will not be classified as being competitive substitutes, further substantiating the importance of determining a best practice guideline for the market comparable valuation method. Five steps were introduced, after investigating similarities between valuations of real estate and mineral properties, that form the best practice guideline for conducting the comparable market valuation. These five steps are: • Step 1: Construct a database to be used in valuation; • Step 2: Adjust values to real terms; • Step 3: Distribute unit values per Mineral Resource category; • Step 4: Perform sanity checks; and • Step 5: Identify and apply sensible adjustments. By building an extensive valuation transactions database, based on gold deposit case study transactions over a period of 12 years (2006 to 2017 inclusive), and following each proposed step, the industry average unit values per resource category were determined to be: • Inferred: 2.3 USD/oz; • Indicated: 13.3 USD/oz; and • Measured: 21.7 USD/oz. The best practice guideline developed in this research study was applied to a listed gold mining company case study. The non-diversified, South African listed gold mining company used for the case study was Pan African Resources (PAR), which has several operating gold mines as well as potential projects with compliant Mineral Resource statements containing 33.3 Moz of gold. The industry average unit values per resource category were applied to the gold case study after making project-specific adjustments to determine the project resource value of USD269.4 million. This equates to a project average unit value of 8.1 USD/oz, which is the probable value that a willing buyer would potentially expect to pay for the purchase of the Mineral Resource. The estimated market value of an asset determines the validity of any valuation. To justify the estimated value based on the comparable market valuation method, the estimated resource value was compared to the enterprise value of the listed gold mining company of USD242.7 million at the time of the valuation. This resulted in a variance of 11%. Given the fact that the share price fluctuated by approximately 15% to 17% higher or lower, preceding and succeeding the date of the valuation, an 11% variance can be deemed as acceptable. The value based on the comparable market valuation method following the proposed guideline using gold deposit case study transactions can, thus, be deemed as reliable and justifiable. It is recommended that mineral property valuators make use of the guideline when conducting the comparable market valuation. It is also recommended that the national mining valuation codes, which are accepted globally, can consider presenting valuators with a similar guideline to ensure transparency among valuators.
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    Ranking of Brownfield mining investment opportunities using the analytic hierarchy process
    (2018) Hamilton, Neil Eric
    As the shareholders of mining companies have become increasingly informed and active, the corporate values of companies have had to evolve to remain relevant and maintain shareholder confidence. It is no longer acceptable to deliver only good financial results, as such results must be obtained in an ethical and socially responsible manner. Traditional project valuation and ranking techniques, typically a discounted cash flow (DCF) styled approach, deliver traditional financial metrics such as net present value. A DCF approach however fails to account for changing shareholder values such as safety and social responsibility. This requires other approaches such as the Analytic Hierarchy Process (AHP) which has the potential to be a more inclusive tool in the ranking of mining projects. The ranking of Brownfield mining projects is complex, with varied and often competing priorities in the evaluation process. AHP is one of several multiple criteria decision making approaches that can be applied to such complex problems. AHP is a relatively simple process which breaks the complex decision into a hierarchal approach, with criteria given a weighting according to their relative importance while assessing several options or solutions to the overall goal. The aim of this research is to apply AHP to the ranking of Brownfield mining projects to provide an alternative and potentially more inclusive project ranking than that provided through a DCF approach. Three projects from a leading gold mining company were identified, analysed and ranked using the traditional metrics of NPV, IRR and Capital developed from project specific DCF models. The corporate values as presented in the vision / mission statements of the three largest gold mining companies were analysed for commonality. Common values within the mission statements were used to populate the AHP. The various criteria within the AHP were ranked against each other through the use of pairwise comparison. Data available through the DCF models as well as data available in public annual reports was used to populate the AHP. The outcomes of the study found that traditional DCF based metrics (values) are heavily favoured over the newer corporate values. As such the rankings of the AHP mirrored the ranking based on the DCF, however, the AHP is an inclusive process. As shown through the hypothetical scenarios presented, if there is a shift in the weighting of the corporate values, the AHP ranking will differ from the DCF rankings. With more inclusive corporate value systems as shareholder demands evolve, the traditional DCF approach to Brownfield project ranking is no longer inclusive of all corporate values. Additionally, the traditional DCF approach is unable to account for shifting priorities within established corporate values. An AHP approach not only allows the end user to include all corporate values but also allows the user to adapt to additional corporate values or a shift in the prioritisation of values. The research, through the scenarios considered, demonstrates the usefulness of using AHP under various conditions. AHP provides a viable and useful tool for the ranking of Brownfield projects.
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    An analysis of actual cost data for surface mine rehabilitation projects in South Africa and comparison with guideline values published by the Department of Mineral Resources
    (2018) Cornelissen, Hermanus Stephanus
    In 2004, the Department of Minerals and Energy (DME, predecessor to the current Department of Mineral Resources - DMR) published a guideline to calculate the amount that a mining right holder would require for financial provision at mine closure. This research report reviews the guideline, specifically focussing on the “rules-based approach” for determining the quantum of financial provision. Some authors have recorded the misapplication of this guideline in practice and their research supports a conclusion that the guideline does not provide adequately for the real costs of mine closure. This research report makes a comparison between the DME guideline master rates for mine closure costs and actual tendered prices for those same elements of mine closure in the period from 2009 – 2016. The analysis of the actual tender prices for the various master- and component rates in comparison with the DME guideline rates delivered mixed results. While the actual tender values exceeded the guideline master rates in most cases, there were notable exceptions where the actual tender results lagged the master rates. The data obtained from the actual tender prices for mine rehabilitation projects by a third party suggests that the use of CPI to escalate mine rehabilitation costs was very quickly overtaken in reality by higher annual costs and rate increases for most of the DME guideline master rates that relate to surface mining. It means that the DME guideline master rates were not reflective of actual rehabilitation costs by the time that the use of the DME guideline was superseded by the publication of new regulations by the Department of Environmental Affairs in November 2017. Whilst no perfectly linear and distinct relationship could be deduced, the results broadly support the findings of several authors that the actual costs to rehabilitate a mine are much more than the DME guideline document would lead a mine to provide for. The application of a rules-based approach remains an exercise mired in controversy and with many potential inaccuracies. The new NEMA regulations for financial provision completely negate the need for a guideline and relevant State Departments and mining companies alike are consequently dependant on third parties to prepare closure cost estimates.