Valuation of non-producing mining companies

It is not unusual for the valuations of mining companies and projects to be debated by mining investors, analysts and regulators. Difficulties understanding geological information, volatility of metals prices, high investment risks and poor historical returns on capital in the mining industry are among the reasons. An additional and important factor is the varying risk profile at different stages of a mining project. A non-zero probability of not advancing to production for a project with a positive feasibility study (FS) requires a careful analysis of its valuation methods and supportive data. Because each mining project is different, and public mining companies are a small part of the market, it's hard to compare them accurately. Once a company prepares a mineral resources report, the exploration costs cease to be a relevant value metric. We offer a practical valuation method for non-producing mining companies, accounting for development stage risks to determine market value. Recognizing the specific attributes of the mining industry, we show that the NPVs calculated using the expected cash flows and discount rates developed using the traditional CAPM framework provide realistic estimates of the project’s value, that compare well to the market indications for the peer groups. We are also investigating the large gap between the NPV values in technical reports and the actual market values of mining companies.