RISK UNDERVALUATION IN MINERAL PROJECTS
Reporting to markets should (have to!) be complete, independent and competent.
Risk is a key factor; in most cases, along with commodity price, the most important variable defining a project’s value. The importance of a good estimate of the risk measure (the discount rate in DCF models) cannot be overemphasized.
Yet, something is wrong, very wrong:
- In most cases (in a sample of 77 documents reporting pre-feasibility, feasibility studies and valuation exercises of operating assets), the magical discount rates used in DCF are 5% and 8%, accounting for 26% and 27% of the cases (10% accounts for 17%). In 75% of the analised cases, the used discount rate is ≤ 8%. Let’s say you are an investor, would you accept a lower than 8% rate in most mineral projects?
- The 5% magical number is pervasive in gold projects. A new rule can almost be written; IF gold THEN 5%.
- Reports include countless pages of technical minutia and detail of doubtful utility for the average investor; yet only a handful of them has any discussion or justification of the chosen discount rate.
- Country risk is irrelevant; I will grant that the 77 sample is relatively small but the anecdotal evidence shows that the same risk is attributed to projects in the US and Canada or in Burkina Faso and Colombia.
Please bear in mind these are preliminary results; as more data is compiled, new trends may develop. Although I tried to have a random sample, diamond and gold projects may be overrepresented (20 and 21 out of 77, respectively).
I will present these and other results at SME’s Mining Finance Conference in NYC on May 1 and 2, a little more than a week from now. If you are attending, I would like to discuss in person the reasons behind this and how should this (can it?) be remediated – or shouldn’t reporting to markets be complete, independent and competent?
Being a member of SME and of the Society of Economic Geologists – SEG I will try to discuss this issue within these professional organisations. Your comments (in person or through online fora) are always welcome.
For those that missed it, World Gold Council released a report a few days ago about the gold trends in 2016. World Gold Council report highlights:
2016 was the second best year for ETFs on record. Global demand for gold-backed ETFs and similar products was 531.9t – the highest since 2009. Q4 saw outflows.
- The gold price ended the year up 8%. Having risen 25% by the end of September, gold relinquished some of its gains in Q4 following Trump’s conciliatory acceptance speech and the FOMC’s interest rate rise.
- 2016 saw a 7-year low for jewellery demand.bRising prices for much of the year, regulatory and fiscal hurdles in India and China’s softening economy were key reasons for weakness in the sector.
India’s shock demonetisation policy brought the market to a virtual standstill. An initial rush for gold following the policy announcement came to a swift halt in the ensuing cash crunch.
You may download the full report report here.
The six CIBJO Blue Books are definitive sets of grading standards and nomenclature for diamonds, coloured gemstones, pearls, coral, precious metals, and gemmological laboratories. They are compiled and then are consistently reviewed and updated by the relevant CIBJO Commissions, whose members include representatives of trade organisations and laboratories active in the respective areas of the industry. In the almost complete absence of jewellery industry standards endorsed by the International Standards Organisation (ISO), the CIBJO Blue Books are the most widely accepted set of globally accepted standards.
The updated versions can be downloaded from the following page on the CIBJO website: http://www.cibjo.org/introduction-to-the-blue-books/.
For individuals who are not members of a CIBJO-member organisation, each individual download will cost 9.90 Swiss francs. All six Blue Books (Diamond Book, Gemstone Book, Pearl Book, Coral Book, Precious Metals Book and Gemmological Laboratories Book) can be downloaded as a single package at a discounted rate of 49.90 Swiss francs. For individuals who are members of an organisation that belongs to CIBJO, he or she is entitled to receive the CIBJO Blue Books free of charge. They should contact the organisation of which they are members to arrange delivery of the relevant Blue Books by email.
(excerpts from a FEBRUARY 13, 2016 CIBJO press release – the underlining is ours)
According to REUTERS (WORLD NEWS | Tue Nov 22, 2016 | 1:47pm EST), The European Union agreed a deal on Tuesday to stem the flow of gold and other metals used to fund armed conflicts or produced in conditions that breach human rights.
EU importers of tin, tungsten, tantalum, gold and their ores will from 2021 have to carry out checks on their suppliers in legislation that will also apply to smelters and refiners.
Human rights campaigners said the agreement was a half-hearted first step, with imports of finished products that may contain the minerals not included and an end result that exempted a large number of companies.
To read it in full: http://www.reuters.com/article/us-eu-trade-conflict-id
Much ado about nothing, one of my favourite Shakespeare plays.
They left diamonds out of the picture, a pity. They included graphite, diamond’s darker and duller brother, though; curiously enough, both markets are very similar in value (diamond production marginally smaller, at close to $14B).
Portugal has a long tradition in the mining industry (in our European heartland and, during our long and rich History, in other territories in South America, Africa, Asia). Romans mined (gold and other metals, natural stone) in what is now the Portuguese territory and before them the Celts and Phoenicians.
The Portuguese mining industry is now built around three main pillars:
- The natural stone sector (with hundreds of active marble, granite and limestone quarries and high quality manufacturing centers – we are the largest per capita natural stone exporter: market research here).
- The metals (especially Au and W – in the country’s north and center – and Cu-Zn in VMS Iberian Pyrite Belt – in the south).
- Industrial rocks and minerals (kaolinite, felspar, aggregates, etc.).
There are several active exploration – evaluation projects (base metals, gold, tungsten) in the country and high potential for lithium and other mineral commodities. To know more about our mineral industry, just read Mineral Resources of Portugal, the latest official statistical information or, better still, contact us at firstname.lastname@example.org.
Portuguese infrastructure is first-class and where else do you find warmer people and weather and better food and wine?
A last minute decision – I am traveling to Toronto to attend PDAC 2016.
It’s the perfect place to meet and talk: Angola, Mozambique, Brazil and Portugal, diamond and other gems, Nb-Ta and other pegmatite minerals, tungsten, gold, ferrous and base metal deposits, industrial minerals, natural stone. Challenges and opportunities.
Where and when can we meet? email@example.com