Background to this Series of Posts

I concluded in mid-2005 the U.S.$ was going to fall against other world currencies, and focused on the mining and oil & gas industries. Much to my surprise, I found little written on ‘How to Value Mining Company Shares’. Having written the texts on Business Valuation used by many Canadian professionals, I decided to write an ‘Electronic Book’ dealing with what I think ought to be considered when valuing Mining Companies. I have recently updated that E-Book for purposes of this Blog have sub-divided it into 17 Blog Posts, of which this is the 1st. All 17 will be filed under the Category ‘Valuation of Mining Companies’ on this Blog. We hope you find this Post Series useful.

Index of Blog Posts in this ‘Mining Company Valuation Series’ and Release Dates

Introduction

From an investment perspective arguably few business ventures are as risky as those pursuing natural resource opportunities, particularly mining exploration companies and producers. Aside from financing and ‘finding’ risk in the case of pure exploration companies, and usual financing risk in the case of producers, this is because natural resource industries and the companies that participate in them are subject to product price cyclicality, ongoing changes in operating and capital cost structures, and stock market vagaries and volatility in circumstances where:

1. In the case of Small Cap Mining Companies (be they explorers or producers) there typically is a dependence on company management that is not present to the same degree in large companies.

2. At the explorer and especially producer level they are capital intensive and utilities dependent, with attendant cost structure variations related in particular to:

• direct and indirect energy costs; and,

• changes in environmental costs both during the period of resource exploitation and at the time of mine closure and environmental remediation.

3. They are dependent on the available infrastructure external to them for power, transportation, water, and so on.

4. At the exploration stage and the mine and processing infrastructure development stage they are dependent on a continued flow of external financing and a Board and Management team to effectively spend monies raised in the furtherance of their project(s).

5. At all times their share prices and ability to raise new financing on reasonable terms (or in some market conditions raise new financing at all) are subject to stock market vagaries and volatility in times of both normal and abnormal trading patterns.

6. At all times important to assess how much net cash on hand (i.e. cash and equivalents less interest bearing debt) a company has when compared with its exploration and mine development capital spending programs. It is important to analyze this carefully in at least the following contexts:

• Where the company does have net cash on hand, in what money market or other instruments is it invested, and at what risk are those investments?

• Does the company have enough net cash on hand to fund those programs without raising additional capital?

• In prevailing lending and capital markets does the company have an ability to curtail exploration or capital spending, ‘mothball’ its projects, and wait out a ‘down-cycle’?

• What is the likelihood of a requirement of near-term and longer term prospective dilutive primary share offerings on reasonable terms?

• In prevailing lending and capital market conditions will it be necessary for the company to raise new financing on what fairly might be considered as ‘unreasonable’ terms, or in extreme circumstances, will the company be able to raise new financing at all.

7. They have no control over the pricing of their mineral outputs that are driven on world prices that historically have been cyclical.

8. At both the exploration and producer levels they are subject to the political and economic risks of the country(ies) in which they principally operate, and to substantive government regulation.

9. Whereas risk may change through the various stages of mine development from initial seeding funding through exploration to either sale of reserves (typically to a ‘major producer’) or production, risk at virtually all times remains higher than the risk investors accept in more conventional investments that consistently generate positive free cash flow. In the 17th Post in this Post Series rates of return on investment criteria of multi-national and large public companies are compared with the rates of return I believe investors in higher risk mining ventures ought to require.

I believe it follows that in order to invest in mining ventures an investor needs to have a clear understanding of the internal and external risks specific to such investments – and to make such investments with an appropriate idea of the returns they need to realize from them in order to justify putting capital at risk.

Ian R. Campbell has for over 35 years been one of Canada’s best-recognized Business Valuation Experts – see biography on this Blog.

This Series of Posts is reproduced and supplemented in E-Books titled ‘The Valuation of Mining Companies’ and ‘Valuation Methodologies’. Those E-Books can be found under the E-Learning tab in the Main Navigation Bar of www.StockResearchPortal.com. They are reviewed and amended as market conditions change and our experience dictates. Accordingly, we recommend readers of this Blog Series periodically visit www.StockResearchPortal.com and review those E-Books.

For a comprehensive discussion of Share and Business Valuation see ‘The Valuation of Business Interests’, Ian R. Campbell and Howard E. Johnson, The Canadian Institute of Chartered Accountants, 2001, available through the websites of either Campbell Valuation Partners Limited www.cvpl.com, or The Canadian Institute of Chartered Accountants www.cica.ca.

The views expressed in this Post are those of the author. The value of shares of a given company is time and fact specific. The valuation theories, principles, methodologies, observations, comments and data inputs discussed in this Post are of a general nature, and are provided for information and general guidance only. They should not be taken to include all ‘value or price relevant factors’. Nothing in this Post is intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

© 2008, Stock Research DD Inc., all rights reserved.

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