Discounted Cash Flow Valuations of Production and Development Projects Mark Berry and Mike Thomas AMC Consultants Pty Ltd

Transcription

1 Discounted Cash Flow Valuations of Production and Development Projects Mark Berry and Mike Thomas AMC Consultants Pty Ltd AIG Friday Seminar: Valuations in Mining and Exploration 11 November 2016

2 Presentation overview Project definitions Valuation methods Discounted cash flow (DCF) method Specific issues associated with DCF method to comply with the 2015 VALMIN Code, with examples from recent valuations Conclusions

3 VALMIN 2015: Mineral Asset definitions Mineral Asset means all property including (but not limited to) tangible property, intellectual property, mining and exploration Tenure and other rights held or acquired in connection with the exploration, development of, and production from those Tenures. This may include the plant, equipment and infrastructure owned or acquired for the development, extraction and processing of Minerals in connection with that Tenure. Most Mineral Assets can be classified as either: a) Early-stage Exploration Projects Tenure holdings where mineralisation may or may not have been identified, but where Mineral Resources have not been identified; b) Advanced Exploration Projects Tenure holdings where considerable exploration has been undertaken and specific targets identified that warrant further detailed evaluation, usually by drill testing, trenching or some other form of detailed geological sampling. A Mineral Resource estimate may or may not have been made, but sufficient work will have been undertaken on at least one prospect to provide both a good understanding of the type of mineralisation present and encouragement that further work will elevate one or more of the prospects to the Mineral Resources category; From VALMIN Code, 2015

4 VALMIN 2015: Mineral Asset definitions (2) c) Pre-Development Projects Tenure holdings where Mineral Resources have been identified and their extent estimated (possibly incompletely), but where a decision to proceed with development has not been made. Properties at the early assessment stage, properties for which a decision has been made not to proceed with development, properties on care and maintenance and properties held on retention titles are included in this category if Mineral Resources have been identified, even if no further work is being undertaken; d) Development Projects Tenure holdings for which a decision has been made to proceed with construction or production or both, but which are not yet commissioned or operating at design levels. Economic viability of Development Projects will be proven by at least a Pre-Feasibility Study; e) Production Projects Tenure holdings particularly mines, wellfields and processing plants that have been commissioned and are in production. From VALMIN Code, 2015

5 Valuation methods From VALMIN Code, 2015

6 DCF method: approach Income-based valuation method. DCF methods estimate future free cash flow projections, then discount these (taking into account the time value of money) to produce a present day value estimate for the potential investment. Estimates the attractiveness of an investment opportunity. If the DCF valuation is higher than the actual cost of the investment, it suggests that the opportunity might be financially attractive.

7 DCF method: simple example Undiscounted cash flow total = $1,242k Discounted cash flow total = $1,055k (assuming 10% discount rate) From

8 DCF method: key inputs Key inputs to DCF method for minerals project valuation: Life-of-mine planning assumptions. Capital costs estimates. Operating costs estimates. Revenue estimates. Taxation and royalty payments. Discount rate. DCF methods are most relevant to Development Projects (where detailed studies have been completed to justify input assumptions), and Production Projects (where there is actual historical statistics to justify input assumptions). Less commonly, DCF methods are also applied to Pre-Development projects.

9 Example of life-of-mine assumptions for a DCF analysis of a Production Project From Anchor Resources Limited Offer Document, March 2016

10 Example of life-of-mine assumptions for a DCF analysis of a Development Project From Anchor Resources Limited Offer Document, March 2016

11 DCF method: some key issues with respect to the 2015 VALMIN Code Requirement to determine and confirm Reasonableness Reporting the basis of value Use of Ore Reserves and Mineral Resources Presenting range of values Financial modelling parameters Requirements associated with providing forecasts

12 Reasonableness requirements From VALMIN Code, 2015

13 Reasonableness requirements (2) From VALMIN Code, 2015

14 Reasonableness: examples From Quest Minerals Limited Notice of EGM and Explanatory Statement, October 2016 From Renascor Resources Notice of AGM and Explanatory Notes, October 2016

15 Basis of value: Technical vs Market Value From VALMIN Code, 2015

16 Example of conversion of Technical Value to Market Value From Coalbank Limited Notice of AGM and Explanatory Statement, October 2016

17 Using Reserves, Resources, and Exploration Targets From VALMIN Code, 2015

18 Using Reserves, Resources, and Exploration Targets (2) Under the 2005 VALMIN Code, it was common for valuers to include some component of non-reserve and non-resource material at the back end of the life-of-mine plan to take into account an expectation of future exploration success. This was generally an expert judgement assessment. Under the 2015 VALMIN Code, this practice cannot be done unless an Exploration Target has been published and that Exploration Target has been incorporated into a published Production Target. Nominally, this means that income valuations undertaken in accordance with the 2015 VALMIN Code are likely to be somewhat lower than equivalent income valuations undertaken in accordance with the 2005 VALMIN Code.

19 Typical example of life-of-mine production schedule using Reserves, Resources, and Exploration Targets

20 Valuation ranges From VALMIN Code, 2015

21 Valuation ranges: examples in published reports From various public reports, no details provided deliberately

22 Valuation ranges: example of sensitivity analysis supporting a DCF analysis From Anchor Resources Limited Offer Document, March 2016

23 DCF method: some important financial parameters to estimate Commodity prices Exchange rates Royalties (private and government) Taxation Discount rate

24 Example of commodity price assumptions Gold price Year Gold price (real) US$ per oz 2015 (October to December) 1, , , , , , onwards 1,120 Assumptions vary by 13% in less than 6 months From Anchor Resources Limited Offer Document, March 2016, and Gryphon Minerals Limited Scheme Booklet, August 2016

25 Exchange rate example: long-term (20 year) historical trend for A$-US$ From

26 Exchange rate example: short-term (5 year) historical trend for A$-US$ From

27 Exchange rate example: recent (1 year) historical trend for A$-US$ From

28 Exchange rate example: forecasting From From

29 Example of discount rate assessment From Gryphon Minerals Limited Scheme Booklet, August 2016

30 DCF method: effect of discount rate Present value of $100 Discount rate 6% 8% 10% 12% 14% 16% 18% 20% Start of project $100 $100 $100 $100 $100 $100 $100 $100 1 year after start $94 $93 $91 $89 $88 $86 $85 $83 2 years after start $89 $86 $83 $80 $77 $74 $72 $69 3 years after start $84 $79 $75 $71 $67 $64 $61 $58 4 years after start $79 $74 $68 $64 $59 $55 $52 $48 5 years after start $75 $68 $62 $57 $52 $48 $44 $40 6 years after start $70 $63 $56 $51 $46 $41 $37 $33 7 years after start $67 $58 $51 $45 $40 $35 $31 $28 8 years after start $63 $54 $47 $40 $35 $31 $27 $23 9 years after start $59 $50 $42 $36 $31 $26 $23 $19 10 years after start $56 $46 $39 $32 $27 $23 $19 $16 15 years after start $42 $32 $24 $18 $14 $11 $8 $6 20 years after start $31 $21 $15 $10 $7 $5 $4 $3 25 years after start $23 $15 $9 $6 $4 $2 $2 $1

31 Presenting forecasts in valuations From VALMIN Code, 2015

32 Conclusions DCF valuation methods are regularly used to value Production and Development projects, in accordance with the VALMIN Code. As with all valuation methods, there is much art, black magic, and smoke and mirrors involved with determining many of the key inputs into a DCF valuation. Therefore, it is always preferable to use a second valuation method to compare with the DCF valuation.

33 AMC the business of mining Geotechnical Engineering Corporate Consultancy Business Improvement Mining Geology Coal & Energy Feasibility Studies Our Experience More than 6,500 projects across more than 92 countries