The following figure illustrates the application of various...

The following figure illustrates the application of various valuation methods throughout the project pipeline. However, it is important to note that mineral projects represent a continuum from early through late stage and therefore the transition from one method to another should demand a certain level of judgment.

Figure 1: Valuation methods depending on the stage of development on the mineral property. Source: Redrafted from InfoMine MVENMYN.

1. Appraised Value Method (Cost Approach)

The Appraised Value Method is based on the premise that the real value of an Exploration asset lies in its potential for the existence and discovery of an economic mineral deposit. The Appraised Value Method assumes that the amount of exploration expenditure is related to its value. Therefore, it is important to understand the definition of capital expenditure in mining industry (see Figure 3).

Table 2. Cost types in the mining industry. Source: Redrafted from Citigroup. Fitzpatrick, Sainsbury, Jansen, August 2007
The appraised value is the sum of the meaningful past exploration expenditures and warranted future costs. Only those past expenditures that are considered reasonable and that have contributed to identification of exploration potential are retained as contributors to value. Warranted future costs comprise a reasonable exploration budget to test the identified potential. However, the Exchanges do not generally accept the inclusion of warranted future expenditures for the purposes of the appraised value method. Also associated administrative costs will generally not be accepted.
Appraised Value = Retained Past Expenditures + (Warranted Future Costs)
Past expenditures are usually analyzed on an annual basis, using technical expertise to assess which expenditures to retain and which to reject in terms of identifying remaining exploration potential. Usually little of the expenditures (≥ 5 years) prior to the effective valuation date are typically retained. In the case of dual or multiple property ownership, the Appraised Value of the whole property is determined first, and then the value is apportioned to one or more of the property owners. Under this method, a property is deemed to be worth what has been spent on it, with a premium, if results are positive, or a discount if results are poor.
If we are valuing past producing mines which have some usable infrastructure available, we should take into account what the replacement value of this infrastructure might be at today’s prices and accordingly add some premium to the value of the mine. Authors Ross Lawrence and Hrayr Agnerian stipulate that the accumulation of such expenditures should be restricted to the past 3-4 years, rather than to all historic costs, with the accumulation basis ranging from 100% positive results, to 25% for negative results but with some exploration potential, to 0%-10% with little or no potential.
The appraised value method is best applied to properties which are actively being explored. It is more difficult to apply the method to properties that have been idle for some years, especially those which have had substantial expenditures in the past.
One advantage of the Appraised Value Method is that exploration cost information and technical data are readily available for most exploration properties and marginal development properties. It is a good way of comparing the relative values of exploration properties.
The main disadvantage is that experienced judgment is required to separate the past expenditures considered to be productive from those considered not to contribute to the value of the property, and to assess what is a reasonable future exploration program and cost. This leaves the method open to misuse and possible abuse. Thus, it is prudent to compare the Appraised Value of an exploration property with values obtained from other methods, particularly those which use Market Approach.
2. Comparable Transactions (Market Approach)
Comparable methods allow the value estimated for a mining project to be benchmarked against mining project values established in the market. Comparable methods thus are a key tool for ensuring value estimates that are congruent with what the market would actually pay. The comparable transaction method uses the transaction price of comparable properties to establish a value for the subject property. The following table describes the main factors that determine of the value an exploration property:

Some of the limitations of the Market Approach include:

• Limited number of transactions for mineral properties.
• Absence of ‘true project comparables’ (unlike in the oil & gas industry), where each property is unique with respect to key factors such as geological attributes, mineralization occurrences, costs and stage of exploration.
• Effective date of valuation is important (value of a property will vary widely from day to day, week to week and year to year because of the volatility of mineral price).