exploration property valuation – methods and case studies · presentation overview valuation...

Exploration Property Valuation – methods and

case studies

HONG KONG : BRISBANE : LONDON : VANCOUVER | www.miningassociates.com

A GLOBAL MINERALS & ENERGY BUSINESS

Valuations in Mining and Exploration: AIG Seminar 11th Oct 2016

Contact

Dr James Lally

Level 3, 455 Upper Edward StreetSpring Hill, QLD 4000, AUSTRALIA

Phone: +617 3831 9154 www.miningassociates.com

Presentation Overview

Valuation Methodologies most commonly applied to exploration properties:- Multiples of exploration expenditure- Kilburn Geoscience Rating- Comparable transactions

Case Studies:- Xanadu Mines (2014)- Auzex (June 2015)

Conclusions

Valuation methods discussed

Most commonly applied to exploration properties:- Multiples of exploration expenditure (Cost

Approach)- Kilburn Geoscience Rating (Cost Approach)- Comparable transactions (Market

Approach)

Multiples of Exploration Expenditure Also called MEE Presumption that property is worth what has

been spent on exploration “Prospectivity enhancement multiplier”, or

PEM applied to costs depending on results Should exclude/discount ‘unnecessary’ work

PEM

0-prospectivitydowngraded

1-prospectivitymaintained

3-JORC Resources

2-prospectivityenhanced

Note: some valuers use scale of 0-5 for PEM, with 3-5 range representing advancement of resources

Kilburn Geoscience Rating

Cost Approach Values a property depending on

‘numerical-geological’ rating system- Base Acquisition Cost (BAC) per unit area =

cost of applying for and maintaining licence- BAC multiplied by product of geological

ratings = prospectivity factor- Prospectivity factor multiplied by area = value

Goulevitch & Eupene, 1994

Comparable Transactions

Market Approach Search for recent (within 5 years

maximum, 2 years probably better) transactions for similar properties to the one being valued Can be difficult to get meaningful data,

especially when M&A activity slows down


Usually have to normalise transaction values by deriving a $ per unit resource variable, or $ per unit area to get a ‘yardstick’ and apply to the property being valued

$ per resource variable generally gives fairly consistent results when enough data can be found

Example 1 – Xanadu Mines Kharmagtai: Porphyry

copper-gold deposits, advanced stage

Oyut Ulaan: porphyry copper-gold exploration Sharchuluut Uul: large lithocap of alteration in porphyry district, early stage exploration

Resources at Kharmagtai estimated, but never publically released.

MA valuation report October 2014 for private placement ASX:XAM www.xanadumines.com

Kharmagtai mineral resources not validated, so treated as an Exploration Target (150-250 Mt @ 0.40 - 0.60% Cu and 0.40 - 0.70 g/t Au)

Valuation methods applied:- Multiples of Exploration

Expenditure- Kilburn Geoscience Rating- Comparable transactions

Example 1 – Xanadu Mines

Kharmagtai geology & drilling

All projects had some amount of government-sponsored work completed, mostly pre-1990- Ignored in Multiples of Exploration

Expenditure because in open file and of dubious quality

Each of the 3 Licences were assessed independently (Kharmagtai, Oyut Ulaan, Sharchuluut Uul)

Xanadu - Multiples of Exploration Expenditure

Kharmagtai:- Past work from 1996-2013- Expenditure converted to 2014 costs- Used a “range” of expenditure, resource drilling only =

low end, total = high end PEM of 1.5 used, reflects unvalidated resources and

potential over-expenditure Exploration Phase Year Resource Definition

Drilling Only Total Expenditure (2014 costs, USD)

QGX 1996‐1998 $1,137,830 $ 1,786,000

Ivanhoe Mines Mongolia 2002‐2006 $10,326,663 $20,838,110

Asia Gold 2007‐2011 $2,157,125 $6,128,975

Xanadu 2014 $1,357,000 $2,247,000

Total $14,821,618 $30,753,085

Lower value x 1.5 PEM

Upper value x 1.5 PEM


Oyut Ulaan- Expenditure figures only available for

Xanadu’s work 2012-2013: US$3.4M- Xanadu had purchased 90% in 2012

for total cash of US$0.9M- Total expenditure used was US$4.3M

Sharchuluut Uul- Pre-2010 work all open file, not

included- 2010-2013 total US$2.84M

PEM 1.0-1.5- Majority of work

maintained, or significantly added to value of property.

PEM 0.5-0.8- No mineralisation

defined to date- Increased

knowledge of target


Xanadu - Kilburn Geoscience Rating

Scoring table used for Kilburn Geoscience Rating

Applied to Oyut Ulaan and Sharchuluut Uul, worked through for Kharmagtai as a comparison

Rating Off Property Factor On Property Factor Anomaly Factor Geological Factor

0.1 Unfavourable lithology

0.2 Unfavourable with structures

0.3 Generally favourable lithology (10‐20%)

0.5 Extensive previous exploration with poor results

Alluvium covered, generally favourable lithology

0.9 Poor results to date Generally favourable lithology (50%)

1 No known mineralisation No known mineralisation No targets outlined Generally favourable lithology (70%)

1.5 Minor workings Minor workings or mineralised zones exposed

Several well‐defined targets, initial results promising

2 Several old workings or exploration targets identified Several old workings Generally favourable lithology

2.5

3 Abundant workings/mines with significant historical production Abundant workings Several significant subeconomic

intersectionsSignificant mineralised zones

exposed in prospective host rocks

3.5 Abundant workings/mines with significant historical production

Several economic grade intersections on adjacent sections

4 Along strike from major mine(s)

4.5

5 Along strike from world class mine Significant historic production Several significant ore grade correlatable intersections

10 World class mine


Choice of BAC value was based on actual licence application and holding costs in Mongolia

Only fixed costs were licence rental fees, no minimum expenditure requirements

US$ 5/ha for mining leases (Oyut Ulaanand Kharmagtai), US$1.5/ha for Sharchuluut Uul.


For exploration properties, some Factors were given a range, rather than a fixed value, especially where there was uncertainty in informationProject Off Property Factor On Property Factor Anomaly Factor Geological Factor Prospectivity Index

Kharmagtai 2.0 1.5 5.0 3.0 45

Oyut Ulaan 2.0‐3.0 1.5 1.5‐3.0 1.5‐2.5 6.75‐33.75

Sharchuluut Uul 4.0‐5.0 1.25‐1.5 1.25‐1.5 1.5‐2.0 9.375‐22.5

Project Area (Ha) BAC (USD/Ha) PI Low PI High Value Low (USD) Value High

(USD)

Kharmagtai 6647.00 5 45 45 1,495,575 1,495,575

Oyut Ulaan 8800.77 5 6.75 33.75 297,025 1,485,130

Sharchuluut Uul 23630.00 1.5 9.375 22.5 330,490 793,175

PI – Prospectivity Index

Xanadu - Comparable transactions

Applied to Kharmagtai Acquisitions researched from previous 4

years (2010-2014) involving Cu/Cu-Au porphyry-style mineralisation at resources/pre-resources stage

Most deals involved 100% purchase Purchase amounts converted to cash value

equivalent at time of deal, not including any retained NSR

Project Location Project Stage Purchaser Acquisition

date %

Purchased

Purchase price

(USDM)*

Purchase price

(AUDM)

Implied USD/t Cu eq**

Resources***

Comment

Golden Grouse Mongolia Exploration Kincora

Copper 23/04/2012 100% 5.0 5.3 ‐

Not used –too early stage so no resource

Gabbs USA Resources Galielo Resources 02/02/2013 100% 3.88 4.28 12.07

Used, USD/t is OK but small area

Andash Kyrgyzstan DFS completed

Robust Resources 01/02/2013 80% 14.6

[18.25] 15.0

[18.75] 90.28

Comparable project but at DFS stage so USD/t is high

Arikepay Peru Exploration Target

Candente Copper 12/12/2013 100% 19.0 20.9 9.54

MA defined target USD/t

Payen Chile Exploration target

Coro Mining Corp

17/10/2012 100% 17.0 18.7 ‐

Early stage, very little drilling so no Target

size

Taysan Philippines Resources Crazy Horse

Resources 12/11/2010 100% 16.7 18.3 10.06

Closest in stage and resource size

Frieda River

Papua New Guinea

Scoping study

completed

Pan Australian Resources

01/11/2013 80% 75.0 [93.75]

82.5 [103.12] 6.94

Not used in purchase price as very large resource size

Not many transactions over period studied –still a depressed market

Three projects gave implied $/t Cu from 9.5-12, median 10.5

Applied to KharmagtaiExploration Target gave range US$9M-US$24M

As a direct comparison in size and grade, Taysan was closest to Kharmagtai

Xanadu - Comparable transactions

Xanadu – Final ValuationProject

Market Approach

Empirical Approach

Cost Approach

Preferred


Yardstick t/Cueq Expenditure Kilburn

Geoscience

Low USDM

High USDM

Low USDM

High USDM

Low USDM

High USDM

Low USDM

High USDM

Low USDM

PreferredUSDM

High USDM

Kharmagtai (90%)

$15 $17 $9 $24 $20.0 $41.5 ‐ ‐ $15 $32 $42

Oyut Ulaan (90%) ‐ ‐ ‐ ‐ $3.4 $5.1 $0.3 $1.4 $3 $4 $5

Sharchuluut Uul (100%) ‐ ‐ ‐ ‐ $1.4 $2.3 $0.3 $0.8 $1 $2 $2

Total $19 $38 $49

Kilburn values much lower than MEE for exploration licences

Comparable transactions and MEE values for Kharmagtai similar if only resource drilling considered

Example 2 – Auzex Portfolio of early stage

exploration projects in QLD, NSW and WA

WA project resource of 4.7Mt @ 2.0 g/t Au for 310,000oz (orogenic gold deposit)

Details of past exploration expenditure not available

Valuation method included comparable transactions of gold resources/exploration leases, with Kilburn as a check

MA valuation report June 2015 for merger of Auzex (private) with Explaurum (ASX:EXU) www.explaurum.com.au

Auzex – comparable transactions

Searched for transactions involving gold projects with resources in Australia from 2013-2015- Excluded any transactions involving mining

or mothballed mining assets

Ten transactions selected as being most comparable Implied A$/oz values calculated using

resources


5 deals value resources at A$4.5-5.2/oz, 4 were similar size and grade to Tampia

Linden highest value because PFS completed

Bird in Hand, Eagertonhigher grades (12.3, 8.5 g/t)

Kathleen Valley and Hermes purchasers had other projects in close proximity

Project State Purchaser Acquisition date

% Purchased

Purchase price

(AUDM)

Attributable resource ounces Au

Implied AUD/attributable resource ounce

Comment

Bird in Hand SA Terramin 19/7/2013 100% 4.0 237,000 16.9

Melrose/Darlot East WA Bullseye

Mining 13/1/2014 100% 1.5 340,000 4.4similar size and grade to Tampia

Tarcoola/Tunkilllia SA WPG

Resources 22/5/2014

100% Tarcoola,

72% Tunkillia

2.975 753,900 4.0

Kathleen Valley WA Ramelius Mining 10/6/2014 100% 3.645 130,000 28.0

Mt Adrah NSW Sovereign Gold 11/7/2014 100% 3.1 770,000 4.0

Walhalla VICA1

Consolidated Gold

24/8/2014 100% 1.29 268,000 4.8similar size and grade to Tampia

Egerton WA Gasgoyne Resources 24/9/2014 100% 0.75 24,000 31.3

Hermes WA Northern Star 24/2/2015 100% 1.95 212,000 9.2

similar size and grade to Tampia

Linden WA Fortuna Mining 13/4/2015 100% 7.0 131,000 53.4

Most advanced stage project, had PFS

completed

Mt Coolon QLD GBM Resources 13/4/2015 100% 1.48 283,000 5.2

similar size and grade to Tampia

Median / Mean (after removing Linden) 5.2 / 12.0


Searched for transactions involving exploration projects without resources from 2013-2015 Restricted to deals involving 100% of

project (simpler) Calculated implied A$/km2 value


Wide range of $/km2 values from A$38 to A$387,500 Broad negative correlation between

licence size and implied value Higher values driven in part by

‘nearology’ Filtering list narrowed value range to

A$38-A$2,2024/km2

Used A$500-A$1000 for valuation

Auzex – Kilburn Geoscience Rating

Used Kilburn method for licences other than Tampia ML BAC defined as range from A$350-

A$550 per km2 to reflect licence application fees, holding fees, minimum expenditure and access costs in Australia

Auzex – Final valuation

MA Preferred values were towards lower end of ranges to reflect location of Auzexprojects relative to existing infrastructure

Kilburn values highest, but ranges overlap with yardstick values Tampia resources contribute most to value

Project Market Approach

Cost Approach

Preferred Market Value


Yardstick AUD/oz or AUD/km2

Kilburn Geoscience

Low AUDM

High AUDM

Low AUDM

High AUDM

Low AUDM

High AUDM

Low AUDM

Preferred AUDM

High AUDM

Tampia Resources

1.29 1.5 1.1 2.5 ‐ ‐ 1.1 1.5 2.5

Tampia Exploration ‐ ‐ 0.09 0.34 0.08 1.3 0.1 0.3 1.3

North Queensland Exploration

‐ ‐ 0.18 0.68 0.26 2.6 0.2 0.5 2.6

Kingsgate 0.01 0.01 0.01 0.22 0.01 0.01 0.2

Total 1.4 2.3 6.6

Conclusions

All methods discussed are highly subjective in their application- Hence need for experienced practitioners

under VALMIN

Under VALMIN need to use more than one method to arrive at a valuation, or state reasons for not doing so

Conclusions

Multiples of exploration expenditure method a simple premise- Have to carefully examine work included to

decide if it all added value- Decision of PEM value to apply highly

subjective - More likely a reasonable indication of value

if there are positive results

Conclusions

Kilburn method has some problems- Sensitive to choice of BAC, which may be

different depending on jurisdiction - Underlying assumption that larger areas

are worth more Xanadu projects (small licences) given low

values, Auzex Queensland projects (large areas) given high values

- Rating system applied to entire licence

Conclusions

Comparable transactions appear to be a reasonable method for early stage resources- But need to be careful to filter transactions that

don’t apply and understand reasons for outliers- Can be difficult to find sufficient recent

transactions- Market conditions can change quickly

Applying to exploration properties more problematic because of size-value relationship

Alternative market method Edison Research provides a snapshot of

market values for resources- Uses Enterprise Value (EV) of listed companies

with single resource projects - EV / resource metal units = $/metal unit- Distinguishes between resource categories and

markets (London, TSX, ASX)- Can provide check on yardstick values

May deliver negative values for resource categories! Commonly only a small number of companies can be

valued this way

www.edisoninvestmentresearch.com

Alternative market method

Edison reports published annually 2015 report values:

- Inferred gold resource $/oz in agreement with comparable transactions for Auzex

- Copper resource $/t higher than for Xanadu

Measured Indicated Inferred Total

Gold $/oz -11 19.8 4.5 10.1

Copper $/t 59 27.3 39.8 42.01

April 2016

HONG KONG | BRISBANE | LONDON | VANCOUVER

www.miningassociates.com

A GLOBAL MINERALS & ENERGY BUSINESS

November 2016

Consulting | Capital | Operations

Mining Associates Group

Suite A, 26th Floor, Chinaweal Centre414-424 Jaffe RoadCauseway Bay, Hong Kong SART: +852 2430 7575F: +852 2430 7508W: www.miningassociates.com

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