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
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
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
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
Valuation methods
From VALMIN Code, 2015
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.
DCF method: simple example
Undiscounted cash flow total = $1,242k
Discounted cash flow total = $1,055k
(assuming 10% discount rate)
From https://gbr.pepperdine.edu/tag/discounted-cash-flow-method/
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 .
Example of life-of-mine assumptions for a
DCF analysis of a Production Project
From Anchor Resources Limited Offer Document, March 2016
Example of life-of-mine assumptions for a
DCF analysis of a Development Project
From Anchor Resources Limited Offer Document, March 2016
DCF method: some key issues with respect
to the 2015 VALMIN Code
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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
Reasonableness requirements
From VALMIN Code, 2015
Reasonableness requirements (2)
From VALMIN Code, 2015
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
Basis of value: Technical vs Market Value
From VALMIN Code, 2015
Example of conversion of Technical Value to
Market Value
From Coalbank Limited Notice of AGM and Explanatory Statement, October 2016
Using Reserves, Resources, and Exploration
Targets
From VALMIN Code, 2015
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.
Typical example of life-of-mine production
schedule using Reserves, Resources, and
Exploration Targets
Valuation ranges
From VALMIN Code, 2015
Valuation ranges: examples in published
reports
From various public reports, no details provided deliberately
Valuation ranges: example of sensitivity
analysis supporting a DCF analysis
From Anchor Resources Limited Offer Document, March 2016
DCF method: some important financial
parameters to estimate
•
Commodity prices
•
Exchange rates
•
Royalties (private and government)
•
Taxation
•
Discount rate
Example of commodity price assumptions
Gold price
Year
Gold price (real)
US$ per oz
2015 (October to December)
1,140
2016
1,150
2017
1,180
2018
1,150
2019
1,140
2020
1,130
2021 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
Exchange rate example: long-term (20 year)
historical trend for A$-US$
From http://www.tradingeconomics.com/australia/currency/forecast
Exchange rate example: short-term (5 year)
historical trend for A$-US$
From http://www.tradingeconomics.com/australia/currency/forecast
Exchange rate example: recent (1 year)
historical trend for A$-US$
From http://www.tradingeconomics.com/australia/currency/forecast
Exchange rate example: forecasting
From http://www.nab.com.au/business/international-and-foreign-exchange/financial-markets/exchange-rate-forecast
From http://www.tradingeconomics.com/australia/currency/forecast
Example of discount rate assessment
From Gryphon Minerals Limited Scheme Booklet, August 2016
DCF method: effect of discount rate
Present value of $100
Start of project
Discount rate
6%
8%
10%
12%
14%
16%
18%
20%
$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
Presenting forecasts in valuations
From VALMIN Code, 2015
Conclusions
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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.
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