Mining Valuations

Most mining assets that analysts attempt to value are already producing; if not producing, they will often have a pre-feasibility, feasibility or definitive feasibility study that has been published. But how do you value a mining deposit when nothing but a few drill holes exist and we only have a very simple resource statement to go off? There are three key issues:

Issue 1: DCF approach is tricky

A standard DCF approach in this example is a little tricky. Firstly, the actual amount of ore in the ground is still very uncertain. Even If you’ve got a simple resource statement, how much “credit” do you give to indicated or even inferred resources?

Second, the market value of the deposit will be a significant discount to the project NPV calculated to reflect financing and execution risks. Choosing an appropriate NPV multiple is highly subjective – fine if you’re dealing with companies with tens of billions of dollars in market capitalisation, not-so-fine if you’re dealing with a commercial dispute in which accuracy is important. Whilst still far from perfect, I like to use an EV/Resource multiple, taking an arbitrary discount on either (1) precedent transactions in a similar jurisdiction or (2) a discount versus listed peers in comparable jurisdictions.

Issue 2: Earnings metrics are meaningless

With the rising importance of hedge funds and “fast money” in public markets, there’s been a big push towards using multiples of earnings rather than NPV when valuing mining assets in my view, even in areas where a P/NPV multiple has been the “traditional” approach, such as with gold mines. The issue: Estimating EBITDA 4-5 years ahead for an asset that hasn’t even got a pre-feasibility study is essentially meaningless because the amount of uncertainty baked into your estimates is enormous. In most commercial disputes, this just isn’t going to be an appropriate basis of value.

Issue 3: Who knew what, when?

In some early-stage venture disputes, we’ve seen cases where shareholders claim that management teams (who also have significant shareholdings) have withheld information from the market. Determining the exact point in time that studies were completed and the information that should have been made public was known is fundamental to the value assigned to a deposit. Independent studies prove economic feasibility which provides additional certainty over the magnitude and timing of future cashflows.