Practical Problems in Mining Valuations

Abstract

The valuation of mining projects, particularly those in pre-production stages, is more complex than is generally recognised. This complexity arises from the need to properly and adequately allow for a multitude of idiosyncratic factors associated with this type of asset whilst simultaneously applying appropriate technical valuation principles. Mining projects have finite lives and idiosyncratic features. They experience changes in risk profile as they move through different stages of development. Owners of mining projects (particularly those in advanced development stages) typically face large initial capital outlays which are close to certainty outgoings, but are often severely constrained by the lack of funding required to meet these substantial capital costs. In addition, even in cases where project finance is available, providers of debt finance generally require significant upfront cash equity capital over and above the value of ore reserves as a precondition to lending (in many cases almost regardless of the quality and value of the ore deposit). Despite the importance of these idiosyncratic features to the outcome of mining valuations, they have, in the writers’ view, not received adequate technical consideration and proper treatment in valuation practice.