Background to this Series of Posts

This is the 11th in a Series of 17 Posts that will be published on this Blog each Tuesday and Thursday from September 16 to November 11. All 17 Posts will be filed under the Blog Category ‘Valuation of Mining Companies’. For previously issued Posts in this Series click here. We hope you find this Post Series useful.

Valuation Methodologies - Introduction

This Post and Post #13 - #16 canvass the valuation methodologies adopted by stock market investors, stock market analysts, corporate acquirers, merger and acquisition intermediaries, and business valuation experts when they value shares in mining companies. In these Posts the following terms have the following meanings, where each is ‘point in time specific’:

1. Enterprise Value: The total value of a business including both its interest bearing debt and equity components.

2. Equity Value: The total value of the shareholders’ equity of a business, where shareholders’ equity is stated at its fair market value, not at its ‘book’ or ‘carrying’ value.

3. En Bloc Value: The value of all outstanding shares (or other ownership interests) of a business viewed as a whole.

4. Per Share Value: That portion of the ‘en bloc’ value appropriately attributed to each class of outstanding share capital divided by the number of shares of that share class that are outstanding at a particular point in time.

Valuation Methodologies are segregated by underlying basis of value as follows:

1. Asset Based Methodologies – Post #12.

2. Earnings and Cash Flow Methodologies – Part 1 – Post #13.

3. Earnings and Cash Flow Methodologies – Part 2 – Post #14.

4. Comparables Based Methodologies – Post #15.

5. Other Methodologies – Post #16.

Tables summarizing each valuation methodology are included. Each table sets out:

1. Whether a particular methodology develops ‘enterprise value’ or ‘equity value’.

2. Whether a particular methodology is principally used to develop ‘en bloc’ share value or per share value

3. The comparative reliability of each methodology.

4. Whether a particular methodology generally is adopted by Securities Analysts.

5. Whether a particular methodology generally is adopted by Corporate Acquirers.

Following each table, each valuation methodology is described, and the strengths and weaknesses of each are discussed.

Valuation Methodologies - Overview

Different business valuation methodologies should not be equally weighted, or for that matter considered relevant, for any given valuation purpose. The primary reasons are:

• value conclusions reached by Investors, Investment Advisors and Securities Analysts based only on information in the Public Domain necessarily must be more subjective than value conclusions based on both information in the Public Domain and Insider Information;

• at any given point in time quoted share prices, analyst or investor views as to what an appropriate price for a particular traded security might be, or a takeover price per share for a given public company may all be different;

• the market price of a normal sized trading lot of publicly traded securities may be quite different than a takeover price. This is because takeover prices typically reflect post-acquisition synergies anticipated by the purchaser; and,

• some valuation methodologies are not useful or applicable when determining the value of some businesses. For example, cash flow or earnings based valuation methodologies may not be relevant to the valuation of a mining exploration company that has no production assets or revenues, neither operating cash flow nor earnings, and no near term prospects of operating cash flow nor earnings.

That said, where a business generates cash flow and earnings, an en bloc share value (i.e. the aggregate value of all outstanding preference and common shares viewed as a whole) generally is developed pursuant to a Discounted Cash Flow (‘DCF’) methodology. Assuming full information access the DCF methodology is the most theoretically sound of all share and business valuation methodologies. This is because it necessitates careful review of near-term forecasted after-tax discretionary cash flows, which typically results in more informed analysis and valuation judgments than otherwise would be the case.

Public Market Participants typically do not have adequate information available to them to complete the same ‘fully informed’ DCF analysis that Corporate Acquirers are able to. Accordingly, Investors, Investment Advisors and Securities Analysts may adopt other valuation methodologies that either are not adopted by Corporate Acquirers, or not weighed heavily by Corporate Acquirers.

For previously issued Posts in this Series click here.

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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