Equity fund raising and the role of share performance metrics in the valuation of mineral projects

This paper considers the interrelationship between share performance metrics of listed companies with mineral assets and the financial models of the underlying mining operations or projects in undertaking a valuation. The SAMVAL Code also refers to the Intrinsic Value based on the unique technical characteristics of the asset being considered. This is probably a useful basis for determining the value of a project given that the actual value of a mineral deposit is only revealed after a commercially viable mining operation has been established. The most objective basis for undertaking a valuation of a mineral project is to have a Net Present Value (NPV) derived from a discounted cash flow (DCF) model. This requires a deposit with an indicated resource as defined by the reporting codes. Valuations of public companies are derived from a range of share performance metrics which includes Enterprise Value (EV) = Market Capitalisation + Debt – Cash & Cash Equivalents – Investments. An EV/NPV ratio integrates share performance indicators with a DCF model that provides a benchmark for a valuation of the company. Share performance metrics which include share price, earnings per share and price earnings ratios providing the basis for applying the Capital Asset pricing Model (CAPM) to determine the cost of equity used in the selection of a discount rate. These in turn would be linked to cash on the balance sheet and a dividend stream which plays an important role in providing credibility when raising fresh investment through a rights issue when seeking fresh investment. While the intrinsic value of a mineral project is still a key consideration, understanding the interrelationship between technical and financial risk is needed to truly understand the long-term value of an asset. This helps companies make better investment (or divestment) decisions. The paper covers the treatment of stock markets and their role in equity fund raising and share performance metrics. The link between the valuation of a project based on a DCF model and the link to pricing rights issue to ensure they are accretive and not dilutive to existing shareholders is considered - a key driver in the markets. Case studies based on a single operation copper mining company that is listed on a stock exchange allowing integration of share performance metrics with a DCF model, a construction stage nickel laterite project accretive equity raising and a rescue fund raising for a PGE mining company are considered. The biggest risk in a mining project at the construction stage is that the expected capital cost of the project becomes higher than originally determined and that the start of initial production is also delayed. The project would not then achieve the performance indicators on which the original decision to develop it was made. While a fresh injection of equity capital into a going concern may fail to secure the viability of the business, this does offer an acquisition opportunity for a mining company with relevant capability where technical synergies are present. Deterministic estimates of technical assumptions will be associated with an uncertainty which is amenable to stochastic valuation methodology, such as Monte Carlo simulation that will assist in quantifying uncertainty.