Valuation of mineral exploration properties

The measurement of exploration assets is generally divided into two broad categories: those with and without specific mineral resources. The valuation technique used is different in each case and in all cases depends on the level of knowledge about the continuity of the class and geology. Valuation is, therefore, more robust and quantitative, as the available data increase quality and quantity.

There are many reasons why mineral exploration and extraction companies should consider pricing their projects. This may include mergers, acquisitions, sales or simply an internal ranking of projects. During periods of depression in exploration, there are good opportunities for funded exploration companies to build good exploration asset portfolios at minimal cost.

During this process, it is important to obtain an independent view of what is fair and reasonable value for the project and to estimate its maximum potential value. Similarly, in times of reduced exploration expenditure, it is often helpful for companies to review existing projects and make a comparative valuation. This process helps to make important decisions about which projects should be maintained, removed, moth-balled, etc. and which projects can provide the best return on exploration expenditure.

With many years of experience in the valuation of exploration assets of SRK Exploration Services Ltd. (SRKES) has developed a robust technique that involves several stages. First of all, a technical review of each project is carried out. This would include a review of the geology of the project and exploration target model, as well as historical and planned activities.

Once this task has been completed, we seek to establish a number of minimum, maximum and technical values using a variety of data and interpretation techniques. In the course of this process, many of the following issues have been addressed;

o Historical exploration costs – in this technique, all funds spent on leased space are added together to ensure that the exploration costs have been incurred to date. Such expenditure may have been slightly successful or, in some cases, may not have been reasonable, and it is, therefore, necessary to apply a discount factor to reflect the perceived current market value of the geological data obtained.

o Project Status – For the purposes of valuation, the SRKES recognizes that exploration property progress includes five stages, bottom-up projects, indirect projects, advanced projects, resource definition projects and projects of full feasibility. The chances of successful realisation of the maximum potential value increase with the progress of the property and the achievement of positive results.

o Company Fit – The assessment of “matching the company” and the relative ability to carry out exploration work within a country/environment is intended to take into account the attractiveness of the project to the company and thus its value.

o Country risk – a “country risk” assessment that quantifies the risks associated with exploration activities in a given country.

o Maximum Potential Values – From a philosophical point of view, the maximum “potential” value of an exploration property may be associated with the target mineralisation sought, but a realistic picture of the geological potential must be established. The SRKES approach is to determine the maximum potential value of the property based on currently available geological data and our understanding of the geological models used.

o Minimum values – in normal circumstances, establishing minimum values for an exploration property is usually the simplest part of the valuation process. In the case of purchase of a property, the purchase price is the minimum value assigned to the property by the purchaser. Historical exploration expenses are also helpful in this process.

All this implies that the interested party is willing, able and informed. Each transaction reflects the needs of the buyer and the seller. These needs may be unique and may not reflect the whole industry. Based on knowledge and information on the state of the mineral properties concerned, several valuation methods need to be combined to ensure the dissemination of technical values.

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