Mining Company Valuation


Valuation Standards - Compliant to IVS, IFRS, FASB, USPAP

The 2005 edition of the International Valuation Standards (IVS) is the first edition to include specific standards addressing the valuation of assets in the minerals and petroleum industries.  It also provides asset valuation support to the International Financial Reporting Standards (IFRSs) for corporate reporting to the stock markets of the world.   

This paper proceeds to discuss the development of the IVS and IFRS standards, their implications to the minerals industry, and the implications to professionals who valuate mineral properties. That leads the extractive industries standards project of the International Valuation Standards Committee.   

The ISVC IVSC is an NGO (Non-Government-Organization) member of the United Nations and works cooperatively with member States, organizations such as the World Bank, OECD, International Federation of Accountants, International Accounting Standards Board and others, including valuation societies throughout the world to harmonize and promote agreement and understanding of valuation standards.   We produce the Mining Company Valuation Standards-Compliant to the current IVS, IFRS, FASB, USPAP.

Mining Company Valuation Definionts and Assumptions

Mining Life Cycle - Types of Assets           

1. Exploration      2. Planning and Construction      3. Production      4. Closure   

Reserves and Resources 

•Reserves are physical ore contained in the mine. 

•A reserve and resource statements charts the potential economic reserves a firm has a mining operation.


Key Terms   

Ore: Rocks mined for their metal; metal sold for economic returns  

Key Metrics: Grade, Production, Payability, Cash Costs and All-Sustaining Costs    

Net Present Value 

•Mining valuation is one big NPV analysis 

•However, no terminal value as mining operations must come to an end  


•    "Price to Net Asset Value" 

•    Compares Net Asset Value (a key mining metric) and Market Capitalization 

•    P/NAV assesses under/overvaluation of mining assets  


•"price to Cash Flow" 

•Assesses net cash flow to operations 

•Not to be mistaken with Free Cash Flow  

EV/Resource Ratio 

•"Enterprise Value to Resources" 

•Metric compared against crude estimate of resource (ore) value  

Total Acquistion Cost 

•The total cost of acquiring a unit of the finished mining good 

•Sums cost of acquisition, extraction and finishing 

Financial Model Assumptions 

•Assumptions: Costs, extraction ratios, capital costs, market prices, etc 

•Calculations for Revenue, Royalties, Operating Costs, Depreciation, Tax and Working Capital   

Mining Model  

Two main approaches to the mining model. 

•First: Mineral inventory - slow and constant depletion each year 

•Second: Detailed Mine Schedule - planned, specific volume each year  

Milling Schedule 

•Milling converts contained ore into usable metals 

•This is found by multiplying contained ore with the recovery and payablility ratio   

Valuation DCF Model 

•The first step is to pull out the proper Cash Flows from the financials 

•Another key step to mining DCF is selecting a proper discount rate   

Reconciliation and Takeaways 

•Sensitivity Analalysis 


•Valuations are sensitive to different assumptions

Main Factors for Mining Company Valuation

For Valuation of mining company enterprises, In terms of absolute valuation you should focus on the net asset value (NAV) method. The more common discounted cash flows (DCF) method cannot be used to value a natural resource company because the basic assumption behind DCF valuation is that the underlying asset or firm would generate income indefinitely and there will be a terminal value associated with the same.    

The valuation of typical mining company would grossly depend upon 4 main factors:   

Stage of Production: We need to look at the stage the Company is in, which can be exploration, mining or production. Resource/ reserve estimates of the Company can be measured with higher certainty if the Company is in production stage than if it is in mining or in exploration stage. And, as the famous Wall Street quote goes, “the market doesn’t value uncertainty”, so the Company is worth more per ounce if it is in production than if it is in mining stage.

Actual time to production: The closer the Company is to production, the higher the company is valued per ounce by the investors. Even if two companies are in the same mining stage, the Company is closer to production will be worth more per ounce, as the market will use a lower discount rate.

Resource estimates: The value of a firm is not only dependent upon amount of resource and reserve estimates but also the type of estimates. There are 3 types of estimates:  

a) Inferred resources  b

) Measured and Indicated resources:  

c) Proven & probable reserves

As a firm moves from closer to production, the amount of proven & probable reserves increases at the expense of indicated and inferred resources. The market puts a higher per ounce valuation on proven & probable reserves than on inferred and indicated resources. A mining company would have higher proportion of proven & probable estimates than an exploration firm, for example.

Price of resource (gold for example): Although the Company is not currently selling gold, its value would be directly proportional to the price of gold as market expects them to sell gold at a higher price in the future –even if it is 10 years from now-. In fact, if you were to place the price chart of the Company and the one for gold side by side, you would find a very strong correlation.  This is why many people see big mining companies as a “macro call”.


Purpose of Valuation


Oil & Gas Company: Merger & Acquisitions, Financial Modelling, Asset Project Valuation, Feasibility Study

Financial Institutions & Investment Firms: FASB Financial Reporting, Financing

Legal & Tax: Economic Damages, Bankruptcy & Restructuring, Litigation Support, IRS Compliance Tax Reporting for Donation, Estate, Gift

Government: Eminent Domain, Federal & State Land Appraisal

Mineral Rights Owner: Royalty Rate, Estate, Gift, Trust Planning

Upstream Sector


Valuations for Oil and Gas Company Exploration and Production (E&P) is highly specialized. Significant scientific and technical issues are involved in the evaluation of information, due diligence, and nomenclature.   Activities within the upstream sector include searching for potential underground or underwater oil and gas fields, drilling exploratory wells, and drilling and operating wells that recover and bring to the surface crude oil, natural gas and related liquids.  E&P firms represent the “upstream” aspect of the energy industry. Pipeline and marketing firms are known as “midstream” companies, and refiners and petrochemical companies are considered “downstream” participants.

The primary assets of an E&P company are its oil and gas reserves, that is, hydrocarbons below the surface that have not yet been produced and are economically viable to extract. E&P firms are unique in that their primary asset base is depleting and therefore must be continually replaced through either drilling activities or acquisition. Ownership interests related to reserves can be held in a variety of forms including working interests, royalty (or mineral) interests, and overriding royalty interests.

Working interest owners share in the profits after the royalty interest payment, lease operating expenses, severance and ad valorem taxes, and capital expenditures associated with a property (lease/well) as well as the risks associated with drilling. The working interest must pay all of the costs of exploring for, developing, and producing oil and gas. Working interests can be further classified as “operating” or “non-operating” working interests. The operating working interest influences day-to-day operations of the well or lease.

When analyzing historical financial statements, it is useful to include historical production volumes as well as  the average hydrocarbon prices received for the periods in question. Since hydrocarbons are a commodity, the physical volumes indicate whether the company is producing more or less, regardless of revenue increases resulting from price increases.   Rather than EBITDA (earnings before depreciation, interest, taxes, and depreciation and amortization), analysts  usually consider EBITDAX a primary pricing metric for E&P companies. EBITDAX represents EBITDA before exploration costs for successful efforts companies.

A forward or current year indication of reserves, production, and EBIDAX should be utilized because of the frequency of reserve acquisitions and divestitures among the publicly traded E&P companies that could distort valuation indications.

Midstream Sector


The midstream sector starts at the gathering system, which collects oil and gas from the wellheads. Gathering systems range in size from small systems that process gas close to the wellhead, to large systems consisting of  thousands of miles of pipes that collect from hundreds of wells.  At the processing plant, various products (for example, natural gas liquids like ethane and butane) are separated from the oil and gas.

Conventional variations of the Income and Market approaches (e.g., DCF and EBITDA based multiples) may be appropriate in valuing midstream E&P companies, which are frequently incorporated as master limited  partnerships (“MLPs”).

An MLP is a limited partnership that is publicly traded on a stock exchange qualifying under Section 7704 of the Internal Revenue Code. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. MLPs traditionally pay out almost all available cash flow on a regular basis. They generally offer higher yields, stemming from their legal and tax structures as well as from the underlying companies’ operating business.

Most publicly traded companies are structured as C corporations that pay entity-level corporate taxes, but  MLPs pass through their taxable income to their unit holders rather than incur taxes at the entity level. As a result — and in contrast to C corporations, which must pay corporate income taxes, and whose shareholders are subject to taxes on any dividends received — MLPs avoid double taxation and offer higher distributions and yields to investors.  Traditionally, MLPs have provided distribution growth by increasing the volume of products processed on existing assets, reducing costs through improved operations and scale, making accretive acquisitions, developing new assets, and capitalizing on new trends.

Downstream Sector


Companies in the downstream sector are involved in refining crude oil and in selling and distributing natural gas and crude oil derived products such as liquefied petroleum gas, gasoline/petrol, jet fuel, diesel oil, other fuel oils, asphalt, and petroleum coke. The downstream sector includes refineries, petrochemical plants, petroleum product distribution companies, retail outlets, and natural gas distribution companies.

Conventional variations of the Income and Market approaches (e.g., DCF and EBITD Abased multiples) may be appropriate in valuing downstream companies. Although lower oil and gas commodity prices adversely impact the valuation of E&P companies, the valuation of downstream companies, such as refiners, often benefits from lower prices of the commodity feedstock.

The crude oil that E&P companies produce serves as a primary  feedstock for downstream companies, and lower feedstock prices may result in higher crack spreads for downstream companies.  Crack spread is the differential between the price of crude oil and the price of petroleum products extracted from it — that is, the profit margin a refinery can expect when it “cracks” crude oil. As a result, in the current oil and gas industry environment, downstream companies are expected to benefit from higher crack spreads in the near term, thus increasing their valuations. Another important factor affecting the crack spread is the relative proportion of various petroleum products produced by a refinery.