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.
A caminho do trabalho – garimpo na Lunda Norte
Um projecto de prospecção e exploração de diamantes de aluvião levou-me, de novo, a Angola.
Estreámos uma nova tecnologia (um drone acabado de comprar; como vivemos até agora sem um?), revimos velhos amigos e fizemos novos conhecimentos, falámos com garimpeiros e ouvimos a chamada muçulmana para as orações às 4 da manhã no Lucapa, experimentámos uma (para nós) inédita viagem por estrada Camissombo – Moquita – Lucapa – Saurimo – Malanje – Luanda, atravessámos e viajámos no rio Luachimo.
Viajo (e trabalho) há vinte cinco anos para Angola; nenhuma viagem foi tão intensa. Os filmes e as fotos que irei publicando ao longo das próximas semanas são para mim forma de não esquecer; para quem já lá viveu, pretexto para recordar.
A Sínese é uma empresa especializada em Geologia Económica e Análise e Sistemas Inteligentes. Fundada em 1995, a Sínese realizou estudos técnicos, económicos e de mercado, desenvolveu sistemas de informação especializados, concebeu e implementou projetos de prospecção, avaliação, mineração de recursos minerais em diversos países e continentes – Europa (Portugal), África (Angola, República do Congo, África do Sul, Angola) e nas Américas (Canadá, Estados Unidos, Brasil, Argentina, Uruguai e Equador).
Em particular, a Sínese esteve envolvida em inúmeros projetos ligados à prospecção e mineração de diamantes jazigos aluvionares e quimberlíticos em Angola e no Brasil, de pedra natural em Portugal, no Brasil e em Angola e de ouro e/ou nióbio e tântalo (nomeadamente aluvionares) em Portugal e na República do Congo, manganês e outros metais no Brasil.
A Sínese, coordenada por Luís Chambel – email@example.com , é constituída por uma equipa coesa, flexível e altamente qualificada, com especialistas em diversas disciplinas técnicas e científicas, desde a Engenharia de Minas, Geológica Económica e Aplicada, Sistemas de Informação Geológica, Estatística e Análise de Dados.
Novas datas para a Feira de Vitória – 6 a 9 de Junho 2017
News release just received:
Vitoria Stone Fair | Marmo+mac Latin America 2017 will take place from 6 – 9 June 2017, in Espirito Santo – Brazil. The event is considered the largest stone exhibition in Latin America and the most objective, economical and efficient way to develop business in Brazil, Latin America and the global stone sector.
The fair brings together an exuberant showcase, with several types of materials with colors and unique textures. Also, novelties in machinery, equipment and stone accessories for the industry. The event attracts buyers from all continents, from importers to exporters, looking for machinery, accessories and services.
Vitória Stone Fair website
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).
A short updated summary
Portugal is an old and important natural stone producer and exporter – 380 M USD in 2015 (roughly over 70% of it as finished products) being, on a per capita basis, the largest world exporter. The country’s stone exports have a high added value, its average price being one of (if not) the largest in the world.
The Portuguese natural stone production is diversified, ranging from marble and limestone quarried in the South and Centre of the country to granites in the Centre and North of Portugal. The country also has an important stone manufacturing base, with factories located near Lisbon (Pero Pinheiro) and in the main quarrying centres. The country is also a manufacturer of specialized equipment and machinery for the stone industry.
The natural stone industry is fragmented, being composed mostly of family owned businesses.
All these factors (abundant, diversified sources, widespread know-how, relatively low capital intensive) contributed along millennia to a stone culture in the country – Portugal has the largest concentration of pre-historic stone monuments in Europe and natural stone is used in virtually every single house in Portugal.
The country is well placed to be a trade platform between Europe, Africa and the Americas (with all of which Portugal has important historical, cultural and economic ties), with good transport infrastructure (notably the Sines deep water harbour and an excellent road network) and competitive specialized manpower.
You may download this in pdf format (and tables) from here The Portuguese Natural Stone industry – a short summary. You may also read more here, here and elsewhere in this blog (just use the search tool, here). For more detailed information drop me a line at firstname.lastname@example.org.