Webby Banda Senior Researcher (Extractives) CTPD
Mining valuation can simply be defined as the placement of a currency value on a mining asset. It tries to answer the question of “what is the value of the mine” or “what is the mine worth?” Consequently, mine valuation must encapsulate the value of surface and sub-surface infrastructure.
In the recent past, several jurisdictions have developed professional codes to standardize the field of mining asset valuation, these include, VALMIN code from Australia, CIMVAL code from Canada, and SAMVAL code from South Africa.
These codes classify the valuation approaches as income, market, and the cost approach. The application of any of these methods on a particular mining asset depends on the phase of the project, availability of information, and nature of the valuation. The objective is not to arrive at a particular value but to narrow down to a range of values. Therefore, multiple methods must be employed to achieve this.
There are several purposes for undertaking mineral asset valuation. These include:
(i) Trading purposes of these assets in the international market place;
(ii) Taxation purposes; and
(iii) Financing purposes.
It is important to note that if the reserve/resource statement is unsound or the exploration data does not reflect the potential of the property, the resulting valuation could be meaningless. In other words, this means an erroneous estimate of reserves or resources as an input parameter will translate into garbage out in terms of the estimated value of the mine. Therefore, a mineral asset valuation code should be applied in tandem with a mineral reserve reporting code.
Despite a 100 years of mining it is unfortunate that the country cannot boast of its own mineral asset valuation code and a mineral reserve reporting code. Crafting these codes will avert a situation where our mining assets continue being overpriced and underpriced to the detriment of the state. When our mines were privatized the citizenry felt and continue to feel at a loss because the assets were underpriced. Secondly, in the case of of the acquisition of Mopani Copper Mine by ZCCM-IH it is debatable as to why a cost approach to mine valuation was used. This approach merely looks at the historical, current and future cost of a mining asset. It fails to account for reserves, production profile and other fiscal terms of the project. The question that is to be answered is whether this approach to mine valuation is the best when valuing production properties like Mopani? The best-known method of valuing mineral production properties is the income approach particularly using a Discounted Cash Flow (DCF) analysis. This approach valuates the mineral reserves/resources and takes into considering the cost, production profile, and the fiscal regime in application over the life span of the mine.
The trend of undervaluing and overpricing of mining assets will continue in perpetuity if the country does not craft its own mineral asset valuation code. This does not involve reinventing the will because the Government can easily fine-tune and adopt one of the international codes and pass it into law. When this is done the country will have proper guidelines on mining asset valuation. This is a matter that the Centre for Trade Policy and Development (CTPD) has been advocating for over the recent years. The Centre also calls for Government to craft mechanisms that establish the authenticity of the deposited geological information by mining houses as this will translate in estimating the true worth of Zambia’s deposits in any future transaction.
