Forum Topics What discount to NPV do mining projects typically sell for?

I'm trying to come up with some ballpark figures here to work with. 

Let's say we've got a mining explorer developing a project, lets say they have an asset with a NPV of 1 billion using a 10% DCF, without many uknowns or jurisdictional risks. What are they likely to be able to sell their project for? (Am I using the right DCF - from my reading it seems the figure is somewhere between 8-15%). 

Are they likely to sell it for something like 50%? 500 mil? 

I've been researching and just haven't been able to find much on this - obv. mining companies need to make a profit. 

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Bear77
3 years ago

Stuey, there are SO many variables that come into play, such as the commodity to be mined, if it loved or hated at the minute, access to infrastructure, liklihood of ultimate owner achieving necessary finance to build the thing, and how much someone is prepared to pay, just for starters.  If a good deposit lies alongside a larger company's existing mine, they might be prepared to pay over the odds for it, to add production to their existing mill.  Another consideration is why are the owners selling?  If the deposit is really good, most owners would develop it themselves for maximum returns, rather than sell it as a project to someone else and then go looking for another one.

It is really more of an art than a science - trying to give valuations to miners, developers and explorers.  And every situation is different, and has diffferent considerations.  There is really no "one size fits all" valuation methodology that I've ever come across.

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Thanks heaps again Bear! Definitely appreciate the information (I am listening, despite appearances :P ) 

Okay, so some of those factors include:

Ah that's interesting about the owners wanting to develop it - I've heard that it's often better for the explorers/developers to sell it as they often don't have experience in bringing a mine into operation. 


Thanks Peter - Much appreciated! May I ask what FX is? Also, may I ask why such a high DCF is used in Australia? Is it done like that to minimise a lot of the risks? (Ie., they still make money if things go wrong?) 
 

Okay, so in terms of evaluating deposits things to consider are:


- The strip, grade, and total amount of ore. 

- The type of ore and how hard it is to process. 

- Any contaminants. 

- Processing costs and what processing facilities are available/need to be built. 

- Jurisdictional risks. 

- Risks to whether state or councils will let the project proceed. 

- The shape of the deposit and whether it is amenable to open cut or types of underground mining. 

- The likely capex and aisc. 

- When the ore will be mined (a lot early, more later, etc.) 

- Potential for extension of the mine. 

- Whether the commodity is liked (Ie., coal at the moment vbad), or likely to be liked. 

- What the forecasted price, supply, and production is for various commodities. 

- Where the mine is, including altitude. 

- Infrastructure such as transport, housing/population, water access, etc.

- How many bidders there are/how much they are wanting to pay for it (bidding war obviously the best situation). 

- How many similar style deposits there are out there. 

 


(One deposit I'm trying to evaluate is the Hot Chilli one - it seems excellent, (apart from the current jurisdictional risk =/ and the management doesn't seem amazing either). 

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Bear77
3 years ago

FX is foreign exchange Stuey, so currency risk, which applies particularly when the company is HQ'd (headquartered) in one country and the minesite is in another, or when the input costs are going to be in one currency (such as US$) and the home country of the company is another country.  It also applies to commodities that are produced in Australia and sold in US$.  For example.

I would replace "aisc" with costs - in your list.  AISC is used in the gold mining industry but not much outside of gold.  Other metals use C1, C2 & C3 costs.  Net Direct Cash Cost (C1) represents the cash cost incurred at each processing stage, from mining through to recoverable metal delivered to market, less net by-product credits (if any). The M1 margin is defined as metal price received minus C1. Production Cost (C2) is the sum of net direct cash costs (C1) and depreciation, depletion and amortisation. The M2 margin is defined as metal price received minus C2. Fully Allocated Cost (C3) is the sum of the operating cost (C2), indirect costs and net interest charges. The M3 margin is defined as metal price received minus C3.  See here:  https://www.mpsinnovation.com.au/wp-content/uploads/CVL-Economics.pdf

And here:  https://www.fiig.com.au/research-and-education/fiig-research-news-item/2016/11/23/fortescue---explaining-the-various-cost-and-price-metrics

And here:  https://www.miningmonthly.com/markets/international-coal-news/1285533/mining-costs-demystified

Good luck with Hot Chili - all I know is their projects are in Chile, so South America.  And it's copper/gold.  And it's a BIG resource.  Whether it's economical and feasible is another story, and also whether HCH's management can get it up and running, or sell it at a good price.  It's primarily copper.  They are expressing their Cortadera Resource in terms of CuEq or copper equivalent metal, meaning that copper is the main commodity produced and the others (gold, silver and molybdenum) are considered byproducts of the copper production for the purposes of their JORC-compliant Resource of 451 million tonnes of ore at 0.46% CuEq for 1.7Mt Cu (copper), 1.9 million ounces of Au (gold), 9.9 million ounces of Ag (silver) and 27 thousand tonnes of Mo (molybdenum).  The most important price when considering this particular project is therefore the copper price, and, more importantly, the copper price outlook at the time they (or the ultimate owners of the project) would be bringing this project into production, should it get that far.  Remember, this is no BHP.  This is a tiny $110 million company.  I think their market cap and their 10-year chart can tell you a fair bit about what the market thinks of their prospects of getting this thing into production or selling it for a good price.  They were trading at 66 cps (cents per share) on 1/1/2013, at 6.4 cps on 1/1/2016 - so a 90% drop in 3 years, then 3 years later, on 1/1/19 they were trading at 1 cps.  They are now at 3.6 cps in May 2021, which is around the middle of their 12-month range ($0.014 - $0.058).  They've also now got over 3 billion FPO (fully paid ordinary) shares on issue, which does not include options.  How many more shares are they going to issue to raise more capital between now and making some money, assuming they ever make any money?  I predict that they will soon do a share consolidation, and that may well coincide with another capital raising.  Their cash burn was over $13m in the March quarter and they ended the quarter with $9.5 million in the bank.  Not a good position to be in.  I wouldn't touch them.

Also, regarding the discount rate used - Peter was saying that it is higher here in Australia than what you were suggesting, and it goes much higher still when the project is overseas.  That is to compensate for the risk, because there is so much risk with explorers and developers.  The vast majority never make any money, instead they die trying.  Those that do get through to production often go through so many capital raisings that early investors are diluted virtually out of existence.  With over 3 billion shares on issue, I'd suggest that HCH have already had their fair share of capital raisings including placements - and remember that placements are on an invitation-only basis, and we (ordinary retail shareholders) are not invited, so get diluted.  And I would imagine that based on their low cash levels at 31-Mar-2021, there's another one coming sooner rather than later.  And a share consolidation, so the share price won't look so bad, but everyone will own less shares.  Hot Chili could be one of the few that make it through to production, but the odds aren't in your favour.  If you're looking for a shorter-term trade rather than a longer-term investment they might be OK for that, particularly if they have positive announcements or other positive catalysts coming up that should prod their SP in the right direction.  However, I'd probably wait for them to get the next capital raising out of the way first.  If you see a good announcement followed by a share price move up, the CR will almost certainly follow quick on the heels of that, and will result in a lower SP afterwards.  Most of the CR's for these smaller companies will be placements, because they're the cheapest way to raise capital, so they do not help ordinary retail investors in any way other than to keep the company solvent.

On a positive note, copper is a good commodity to be in with a global recovery on the way.  Once emerging economies such as India get over their COVID crisis, we can expect much greater spending on infrastructure and copper has plenty of tailwinds in terms of electric vehicles, battery storage for all sorts of things including grid power, and the shift to renewable energy.  A single wind farm can contain between 4 million and 15 million pounds of copper. A photovoltaic solar power plant contains approximately 5.5 tons of copper per megawatt of power generation. A single 660-kW turbine is estimated to contain some 800 pounds of copper.  I'm bullish on copper.  However, not everyone with a big copper deposit is going to make it into production, and I'd rather go with the ones that are already producing and are doing greenfields expansion at the same time - like OZL and SFR.

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Bear77
3 years ago

One more point I forgot to mention Stuey.  You mentioned about discount rates - are they higher so that people still make money if things go wrong?  With people buying shares in such companies it's more that these companies are hit and miss, you generally are going to make a lot, or lose a lot, and with most of them it will be the latter simply because the ones that succeed are few and far between.  As a shareholder, you would demand a high margin of safety, or discount, simply due to the fact that you're probably going to lose money.  If you invested in 10 such companies and got them all at really good discounts to the NPVs of their projects and 1 or 2 of them multi-bagged and you lost all of your money or most of it on the other 8 or 9, then you might still come out in front - if the winners win by enough.  The downside is always 100%, whereas the upside can be many multiples of 100%.  The thing to remember though is that the losers in this sector far outweigh the winners, as in there are more companies that never make a dollar than those who multi-bag, despite most of them having a really good story at some point in their journey - a story that made them look or sound like a compelling opportunity at the time.

In terms of what other companies would pay for projects and the discount rate they would demand on the NPV of a project if they were to buy it, it is again about compensation for risk, including all of the main risks that Peter mentioned, and others, including many of those in your own list Stuey.  You just don't pay full price for undeveloped or partially developed projects in the mining industry unless you are really super-confident that the value of the project is going to rise significantly between when you buy it and when it enters the production stage.  Buying mines that are already producing is different, because there are less risks.  There are still commodity price risks and plenty of other risks, but not nearly so many risks as there are with projects that are years away from producing anything that can be sold for income.  It's just a very risky sector where plenty of things can and do go wrong, and the more things that could go wrong, the less you will want to pay for a project.  In the case of companies buying projects off other companies, then yes, it is about still being able to make money if things go wrong, as you suggest.

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Thanks heaps again, much appreciated - will try to write a more detailed reply later. 

Hmmm, so in this area, even if there is a fairly conservative pfs, dfs, or bfs that suggests a strong NPV with good margins there are still plenty of ways things commonly go wrong? (other than obvious risks like jurisdictional, commodity price, and just bad construction/management) (Would like 50%ish go wrong? Or you are suggesting maybe 80%? Though obv. this would change depending whether the pfs, dfs, or bfs, and through to a producing mine? 


Yeah, I'm also very bullish on copper due to the reasons you've suggested (Or at least bullish on it not reverting more than 20% or so). (If you have a favourite American or Australian copper producer that isn't overpriced I'd be interested - probs need to take a look at other stuff you've wrote)

 

I've had a look at the pfs for the HCH project and was struggling to work out how it would lose money if the copper price held anywhere near it's current price (except for the high jurisdictional risk, copper price, or if they were going to develop it themselves). It had pretty conservative values used on it's copper price, though not a conservative enough dcr (15%). There are some significant concerns with management, but from what I can gather their plan is to sell the asset. I'll try and write something more detailed up on it at some point. 

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Bear77
3 years ago

Stuey, I'm not suggesting what the discount rate should be, because I'm not closely following this company, so I have no idea what discount rate would be suitable.  All I'm saying is that you can't just look at the value of a mine and processing plant as though it has been built, commissioned, ramped up to nameplate capacity and is actually producing when they are SO far away from that point.  They are VERY early stage, and there is just a lot of work to be done to get through to production and it will involve years not months, and a lot can go wrong through that process, whether that is for HCH or for a different company that buys the project off HCH.  And any company buying this project should also be well aware of the range of risks that could negatively affect this project, and that will be factored into the price they are prepared to pay, but I won't try to estimate what that price might be.  That would take a level of research that I'm simply not prepared to do - as I don't have the days/weeks to do it, even if I wanted to, which I don't.  And even then, I could never access the level of data and detail that a serious buyer would have access to, so I would have to make a LOT of assumptions, and many of those would likely be wrong.  It's not an easy thing to do, at all.  The commodity mix is good, particularly the copper, gold and silver.  The location is not particularly good.  Especially for an ASX-listed and Australian based company.  I do not have a strong view on Chile in particular, but I tend to avoid South America, Africa, Indonesia, Malaysia, Thailand, the Philippines, and a few other places, as I have mentioned over in the "Gold as an Investment" forum thread.  Perhaps somebody who likes to invest in South American miners could help out with a view - because I am biased against them.

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Thanks again Bear, much appreciated. 



"And even then, I could never access the level of data and detail that a serious buyer would have access to, so I would have to make a LOT of assumptions, and many of those would likely be wrong."


Yeah this is fascinating. That information wouldn't be available to the vast majority of institutional/retail investors either though? Do you have any idea how much additional information would institutional investors potentially have access to over retail? 



I think your suspicion of Latin America is generally deserved. Chile has from what I've read been historically very good for mining, but there is some unrest there currently and with it some real significant risk (they're trying to put through a really dumb bill targetting miners atm). 



I'm surprised you don't like Malaysia - I had assumed it was moderately stable there? (Though I think Lynas is getting kicked out of there). 

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Bear77
3 years ago

Insto's have greater resources and better networks than most retail investors however what I was referring to was that serious buyers get access to what they call "data rooms" or virtual data rooms, where a company that is open to acquisition makes pretty much everything available to a potential acquirer and they get to do some serious due dilligence (DD).  The level of access is so high that there have been occasions where a bidder will walk away from their own bid after trawling through that data, i.e. withdraw their offer.  That is usually accompanied by a serious share price pull back as people wonder what it was that spooked them.  We usually do not find out, because the parties are bound by non-disclosure (or "secrecy") agreements due to sharing info that is considered "commercial in-confidence".  This is not information that a company is required to share with the general market - it is more in the realm of trade secrets or corporate strategy.  Think: KFC's 11 secret herbs and spices.  We all know about them, but we don't know what they are, or what ALL of them are, definitely, without any doubt.  If a company was to take KFC over they would probably want to know that info, and they would not be able to share it.  Probably not the best example because I doubt whether KFC would give that information out unless a binding deal had already been signed and executed, but hopefully you get the general idea. 

Sometimes I suspect that some companies posing as potential acquirers were never seriously intending to buy, they were just fishing for information, but there would be occasions where something that the target company thought was benign enough did cause the potential acquirer to balk and run away.  Anyway, that's the level of information I was referring to - i.e. the company opens it's books and records to a potential acquirer and they get to go through everything.  That's the sort of access that often takes place before a takeover actually goes through, and it's what allows a potential acquirer to make a reasonably raitional assessment of the risk/reward trade off, and use that info to inform a price they are prepared to pay.  It's not a level of access that people like you or me can ever hope to get anywhere near, so we instead have to make estimates and assumptions about a lot of stuff.  And that means that our eventual conclusions - including valuations - could be wildly inaccurate.  That's all I was saying.

In terms of Malaysia - there have been a couple of Australian companies that I know have been royally screwed over in Malaysia.  It pays to set up the company with some local Malaysian ownership and some connections within the government as well - such as board members who are current or previous Government Ministers, but even then if the project looks good enough, you could still find yourself getting kicked out of the country on some technicality and the locals taking over the project.  Lynas were victims of Chinese-backed local protesters whose aim was to slow down and frustrate Lynas at every point and every turn.  China basically control the rare earth market and Lynas were shaping up to be a serious player outside China which would have seen the US, Japan and others clambering all over each other to sign offtake agreements with Lynas for whatever they could produce, so they were no longer reliant on the Chinese for rare earths - which are vital components in a huge range of electronic gear, catalytic converters (in cars) and all sorts of things.  China obviously wanted to inhibit that potential competition so the local Malaysian protestors had unlimited funding from the Chinese to launch dozens of law suits, many of them doomed to fail, or completely frivolous, just to slow down and frustrate Lynas.  There was also pressure brought to bear on the Malaysian Government which resulted in them changing the rules that allowed Lynas to operate in Malaysia, including HUGE bonds that Lynas were required to pay in advance to ensure that the site rehabilitation costs - for whenever Lynas' Malaysian rare earth oxide processing plant finished production - would be entirely paid for - in advance.  I was a Lynas (LYC)  shareholder for part of that time, and it was very obvious what was going on, and very frustrating. 

Lynas have now decided to build a processing plant here in Australia - which makes far more sense - as Western Australia is where they mine the rare earths (Mount Weld I think it's called) and while it will cost more to operate such a plant here, it will not be the subject of so much interference and goal-post-moving.  The processing plant does the "cracking" and separating of the individual rare earths - the most expensive and involved part of the process chain from in-the-ground to end-product.  "Rare Earths" are not rare at all, they are everywhere; the trick is finding the right mix of rare earths that make it worthwhile to process the ore and separate the individual elements, which is the really expensive bit.  Lynas have an excellent resource, and it's going to be a strategic asset for somebody at some point to takeover.  Wesfarmers (WES) have already had a go at taking over LYC, but it didn't go through.  The sooner Lynas are fully out of Malaysia the better.  I'm not sure you can completely rely on what we call "Rule of Law" in countries like Malaysia.  The have laws alright, but they interpret them as they see fit, and they're not interested in what the rest of the world thinks about their internal decision-making.  Thailand is the same.  Look at what happened to KCN - Kingsgate Consolidated - and their Chatree mine - which doesn't seem to be theirs any more.  Africa - look at what recently happened to Resolute Mining (RSG) with the Ghanaian Honourable Minister of Lands and Natural Resources terminating the Mining Lease for the Bibiani Gold Mine right after RSG had agreed to sell it to the Chinese (Chifeng Jilong Gold Mining Co) for US$105 million (RSG got $5m, and may have to pay that back, but they've definitely lost that other $100m).

China is another country that is super-high-risk.  Even Jack Ma's Alibaba had their Ant Group IPO (spin-out from Alibaba) shut down by authorities after Jack gave a speech in which he was seen to be criticising the central government or at least questioning one or two of their decisions.  Some have said that speech was the most expensive speech in history - as it resulted in the shutting down of a planned $37 billion IPO that was set to shatter records with Ant Group (formerly Ant Financial Group) having an estimated valuation of close to $US300 billion.  Alibaba's share price has come off a fair way of course as a result of that IPO being blocked at the last minute by Chinese authorities.

Many countries appear stable until something goes pear-shaped.  There are only a small handful of places in the world where you can always rely on the rule of law and where laws and government decisions are fully transparent and can be appealled.  Australia and Canada are probably the safest for mining.  The USA and New Zealand are both safe enough.  You're scratching a bit after that, in my opinion.  However, some places are worse than others, in terms of track records of mining companies getting screwed over.

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Ahh yep that makes sense about the data rooms. 


Useful to know about Malaysia and Lynas thanks - I wasn't aware of that, but makes total sense. They CCP really doesn't play fairly or by the rules, except where it suits them.


Do you know much about ASM and how that may impact Lynas? 


100% on board with China, I think people are crazy to put any serious money there nowadays unless they have a quick exit plan. Personally I've also avoided China due to the  ethical issues. (Tencent seemed like a nobrainer a while ago, but do we actually want to invest in WeChat, which is used to control the Chinese people?)

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