14.   MINING ASSETS VALUATION

14.8  

Valuation of Mineral Rights and Non-LoM Mineral Resources

The valuation of Mineral Rights and non-LoM Resources are highly subjective and as such cannot be relied upon to the same degree of confidence as that derived from the LoM Plans which are supported by Mineral Resource and Mineral Reserve statements. Consequently these should only be considered as indicative and may materially differ based on the assumptions stated therein.

Further in considering the relative contribution of the Mineral Rights and Non-LoM Mineral Resources to the total value of the Material Properties, SRK note that this represents some 5% of the value of Kumba, some 13% of the value of Eyesizwe and some 8% of the value of Exxaro.

SRK has based its review of the Material Properties on information provided by Kumba and Eyesizwe, along with technical reports by previous owners or explorers of the properties, and other relevant published and unpublished data.

A desktop evaluation of the Exploration Properties was carried out. All reasonable enquiries have been made to confirm the authenticity and completeness of the technical data upon which this report is based.

Some of these projects include more than one mineral title or licence, but for the purposes of this valuation the individual projects were taken as single entities.

14.8.1 

Exploration Properties – Valuation Methodology

There are numerous recognised methods applied in valuing “mineral assets”. The most appropriate application of the various methods depends on careful consideration of several factors and the Valmin Code 2005 states that: “The Expert and Specialist must make use of valuation methods suitable for the Mineral or Petroleum Assets or Securities under consideration. Selection of an appropriate valuation method will depend on such factors as:

• the nature of the Valuation;
• the development status of the Mineral or Petroleum Assets; and
• the extent and reliability of available information.”

The Valmin Code 2005 classifies the level of asset development according to the following categories:

• “Exploration Areas” are properties where mineralisation may or may not have been identified, but where a Mineral Resource has not been identified.
• “Advanced Exploration Areas” are those where considerable exploration has been undertaken and specific targets have been identified that warrant further detailed investigation, usually by drilling, trenching or some form of detailed geological sampling. A Mineral Resource may or may not have been estimated but sufficient work will have been undertaken on at least one prospect to provide a good understanding of the type of mineralisation present and encouragement that further work will elevate the asset (or a part thereof) to the Resource category.
• “Pre-Development Projects” refers to properties where Mineral Resources have been estimated (possibly incompletely) but where a decision to proceed with development has not been made. Properties at the early assessment stage, properties for which a decision has been made not to proceed with development, properties on care and maintenance and properties held on retention titles are included in this category if Mineral Resources have been estimated, even if no further valuation, technical assessment or advanced exploration is being undertaken.
• “Development Projects” are properties for which a decision have been made to proceed with construction and/or production, but which have not been commissioned or are not operating at design levels.
• “Operating Mines” refers to mineral properties which have been commissioned and are in production.

Where previous and future committed exploration expenditures are known, or can be reasonably estimated, the Multiple of Exploration Expenditures (“MEE”) method can be applied to derive a cost-based technical value. The method requires establishing a relevant Expenditure Base (“EB”) from past and future committed exploration expenditure. A premium or discount is then assigned to the EB through application of a Prospectivity Enhancement Multiplier (“PEM”), which reflects the success or failure of exploration done to date and the future potential of the asset. The basic tenet of this approach is that the amount of exploration expenditure justified on a property is related to its intrinsic technical value. The MEE method is best applicable to Exploration and Advanced Exploration Areas.

Where Comparable Transactions relating to the sale, joint venture or farm-in/farm-out of mineral assets are known, such transactions may be used as a guide to, or a means of, valuation. For a transaction to be considered comparable it should be similar to the asset being valued in terms of location, timing and commodity, and the transaction regarded as of “arm’s length”. The Comparable Transactions method is best applicable to Exploration and Advanced Exploration areas, and Pre-Development Projects. Its application to more advanced mineral assets is generally restricted to recent sales (whole or part) of the actual assets under consideration.

Where a joint venture agreement has been negotiated, the Joint Venture Terms (or Farm-in/Farm-out) valuation method may be applied. In a typical staged earn-in agreement, the value assigned to each of the various stages can be combined to reflect the total, 100% equity, value. That is, the 100% equity value is the sum of all successive stages of earning in.

The equity stake that the Farminor (buying into the asset) acquires at any earn-in stage of the joint venture is taken as the value of the liquid assets (cash, shares or other considerations) transferred to the Farminee (selling part of the asset), plus the value of committed future exploration expenditure. The value of the future expenditure is commonly discounted (usually at a rate of 10% per annum) to present day value. In the case where the expenditure is discretionary, a range of probabilities (low and high) is applied to reflect the valuer’s opinion on the likelihood that the full future expenditure will be concluded.

Pre-development, Development and Mining Projects should have Measured and Indicated Resources estimated, with technical parameters known or reasonably determinable with regard to mining and mineral processing. In such cases, a technical value of the asset can be derived with a reasonable degree of confidence by compiling a DCF and determining the NPV.

Where Mineral Resources are classified in only the Inferred category, reflecting a lower level of confidence and understanding, the application of mining parameters is not practicable and it would be inappropriate to value such resources by applying the DCF/NPV approach. The argument also applies to a mineral asset where economic viability cannot be readily demonstrated for a resource assigned to a higher confidence category (e.g. a feasibility study that shows marginal or sub-economic financial returns). In these instances it is frequently appropriate to adopt the In Situ Resource (or “Yardstick”) method of technical valuation for such assets. The In Situ Resource technique involves application of a heavy discount to the value of the total in-situ metal contained within the resource. The actual range varies for different commodities, being typically between 2% and 4.5% for gold and diamonds, and between 0.5% and 3% for base metals (including platinum group elements), but may also vary substantially in response to a range of additional factors such as physiography, infrastructure and the proximity of a suitable processing facility. The depth (and hence cost) of a potential mining operation on the asset is also a determining factor.

Regardless of the technical application of various valuation methods and guidelines, the valuer should strive to adequately reflect the carefully considered risks and potentials of the various projects in the valuation ranges and the preferred values, with the overriding objective of determining the “fair market value”.

14.8.2 

Summary Valuation of Mineral Rights, Exploration Properties and Non-LoM Mineral Resources

The valuation method used links technical knowledge to an appropriate exploration value derived from economic studies of the known deposits. A summary of SRK’s valuation based on the current status of technical studies, completed exploration work and an assessment of the prospects for successful addition to the reserves for Kumba, Eyesizwe and Exxaro appear from Table 14.188 to Table14.190.

Notwithstanding the above, the indicative valuations ascribed above are ultimately based on an assumption of success that cannot be guaranteed. Further, the realisation of the majority of these exploration properties is unlikely to occur prior to 2010, the base macro-economic assumptions may be considerably more or less favourable which would in turn have a material impact on the valuations as presented.