Two Miners at the Drill Face
Artwork by Dimitri Nikashin

Valuations

Our experience in feasibility studies and mine planning since 1980 allows us to develop financial models and fair value assessment for the life of mine dictated by its resource and reserve and taking into account the 3-D geometry of the orebody in choosing the optimal mining method to extract the ore.

Valuations for mining projects and mining shares are done using the time honoured Discounted Cash Flow method used by all international mining companies in deciding whether a project has the economic returns with sufficient confidence for it to become a mine.  This method also permits the calculation of an Internal Rate of Return (IRR) and then a net present value (NPV) for the project or share at various discount rates.

The discount rates are a measure of the risk that the client determines for his or her particular company.

The IRR is the measure of the return on the project when using a particular mining method and is the rate when the capital expenditure equals the annual free cashflow stream over the life of mine when that cashflow is discounted at a certain rate.

For a listed share, the IRR is determined by replacing the capital expenditure with the market capitalisation of the share and discounting the dividend stream (which should equal the free cashflow) at a certain rate that equals the market cap.

Most mining companies today have a hurdle rate +20% IRR on new projects, which compares to the IRR of a listed share.

In determining target prices (TP) of a share, we calculate the weighted average cost of capital of the company and use this as the discount rate at which we discount the future cashflows of the company over the life of the mine to arrive at the TP.

In determining the value of a new Greenfields or Brownfields project, we use around 17.5% to 20% real rate of return of the future cashflows of the prospective mine to determine a value for the company. These cashflows are usually heavily negative over the years of developing the mine, but then become positive to very positive as a result of the inherent grade, working cost and capex of the orebody, resulting in an NPV value that is used in making the decision on whether to proceed with the mine or not.