1. General overview of valuation approaches and methodologies
The value of most businesses can be derived from their assets, some of which can be liquidated and converted into cash, whilst others lie in future earnings potential. Businesses that rely predominantly on intangible assets for value derivation, including intellectual property, are more difficult to evaluate and to explicitly define a value for.
The value of mining companies are largely dependent on the value of their underlying assets and projects which predominantly reflect the value of their mineral deposits, assuming that deposit(s) can be profitably exploited at some time in the future.
Frimpong (1991) discussed four main purposes to conducting mineral property valuations, being to:
- determine the viability, value and the inherent uncertainty of a mineral property;
- highlight technical, economic and operational guidelines for the optimal exploitation of the mineral property;
- help with decision-making around project financing, acquisitions and regulatory requirements and considerations; and
- give management sufficient flexibility to improve operating procedures and standards and to manage operating variances.
Lilford (2010) expanded this list to include:
- mergers, mineral asset disposals, stock exchange regulated fair and reasonable opinions or independent expert reports for minority shareholder protection, including litigation proceedings, which may include expert witnesses (valuation experts);
- financial security purposes for debt provisions or derivative financing by financial institutions;
- expropriation considerations resulting from changing legislation, dispossession claims and insurance claims;
- accounting purposes; and
- initial public offerings (IPOs or new listings) and other equity raising exercises including rights offers, private placements and management buyouts.
Many international conferences have discussed the importance of mineral property valuations including a Canadian Institute of Mining, Metallurgy and Petroleum (CIM) Annual Meeting on 8 March 2000, Quebec City, at which Mr K. Spence, who was Chairman of the Mineral Economics Society of the CIM at the time, stated:
There are varied methods and practices for valuing property, as there are industries in which they are applied. For example there are replacement value, insurance value, salvage value, appraised value, book value and fair market value.
(p. 1)
Fair market value represents the most commonly sought valuation result and is applied equally to the calculation of disposal and acquisition values as it is to the determination of fair and reasonable values and associated opinions as required by regulatory authorities.
A few definitions of fair market value exist, with a succinct definition provided by the Income Tax of Canada (Income Tax Act, R.S.C., 1985 (5th Supplement), c. 1):
… the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties, acting at arm’s length, neither party being under any compulsion to transact. (p. 6, CIMVal, April 2001)
The American Society of Appraisers defines fair market value as:
… the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.
The Canadian Courts define fair market value as:
… the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash.
(Minister of Finance vs Mann Estate 1972)
From these definitions, the three most important takeaways for mineral property valuations are:
- the independence of the parties to transact;
- the valuation and assessments being conducted by a neutral party at ...
