Capital Quarter Winter 2019/2020: Valuations how you can benefit
Read time: 3 mins
Service: Capital markets Sector: Mining
Valuations: how you can benefitValuations are a critical part of the mining lifecycle. Cheryl Court highlights the key moments when you can use valuation techniques to improve both your understanding of risk areas and your assessment of a project.
Valuation insights provide vital input during initial exploration, the production phase, and also during subsequent closure of a mine. You can use these insights to inform your decision-making, whether on the viability of a mining project or subsequent fundraising, and also to meet financial reporting requirements.
Viability supportAt the exploration phase, you would already have commissioned a Competent Persons Report (CPR) to confirm viability of the mine. As valuers, we work closely with those who prepare the CPR to challenge assumptions about extraction rates, volumes available, mineral grades and the capabilities of chosen machinery. We analyse outcomes and run sensitivities over the results. This provides a fuller understanding of the impact from changes in assumptions which will, in turn, highlight the key drivers of value. Finally, these conclusions will help you to decide whether or not the mine should be developed.
Fairness from investorsFrom a fundraising perspective, we use our experience and available market data to challenge feasibility reports in order to determine whether the proposed investment is fair and reasonable for the investees. By reviewing and flexing base case scenarios we can establish the range of outputs required to meet with expected minimum returns.
Best E&E recognitionUnder IFRS 6, you can capitalise Exploration and Evaluation (E&E) costs. For most mining companies this will be a significant asset in your financial statements. Once you have identified your expenditure, you will record these assets at cost on initial recognition.
For subsequent measurements, you have a choice between the cost model (depreciation/amortisation of each asset when it’s ready for use) and the revaluation model (measured at fair value where there is an active market for comparable intangible assets). A valuer can help you to identify the active market and advise on the recognition approach.
E&E valuation challengesE&E assets must be assessed for impairment when facts and circumstances suggest their carrying amount exceeds their recoverable amount. At the development and production stage, more definitive information is available. You can engage valuers to assess the current worth of the mine’s assets, based on management-prepared assumptions which are sensitised against known market data.
Using the reports produced, you may need to make decisions on any impairment of value as a result of, say, delays in development, lower than expected extraction rates, or lower grades of available minerals.
Fair price machineryMining requires specialist plant and machinery, which companies often purchase second hand. If you plan to buy from a closed mine, you can use valuation support to make sure you pay a fair price, with a comparison to recent market data of a similar asset or replacement cost, depreciated for age and condition. The valuation will often involve a physical inspection and be carried out ex-situ, considering the costs to relocate the plant.
Appointing a valuer at these key stages will help to challenge mining expert reports. It will make it easier to consider the impact of value detractors – allowing detailed risk analysis throughout the project.