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DISCOUNT RATES IN MINERAL COMPANY AND MINERAL PROPERTY VALUATION (Copyright © 2011 by Mineral Valuation & Capital, Inc.) John Lizak Mineral Valuation &

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Presentation on theme: "DISCOUNT RATES IN MINERAL COMPANY AND MINERAL PROPERTY VALUATION (Copyright © 2011 by Mineral Valuation & Capital, Inc.) John Lizak Mineral Valuation &"— Presentation transcript:

1 DISCOUNT RATES IN MINERAL COMPANY AND MINERAL PROPERTY VALUATION (Copyright © 2011 by Mineral Valuation & Capital, Inc.) John Lizak Mineral Valuation & Capital, Inc. December 6, 2011 Northeast Office Mailing Address 1805 Evans St. – Suite 1 Northampton, PA 18067 Phone Fax Direct

2 The Discount Rate Should Be Based Upon
Weighted Average Cost of Capital (WACC) Transactional Data © Mineral Valuation & Capital, Inc. 2011

3 WEIGHTED AVERAGE COST OF CAPITAL (WACC)   “The discount rate that should be used to derive the present value of a company’s future cash flows. It is the average required rate of return of all the company’s financing, equity, debt, and preferred stock, weighted in proportion to the company’s total invested capital”. (SBBI) WACC = (E/V x Ce) + (D/V x Cd) x (1 – Tc) Where: Ce = cost of equity Cd = cost of debt E = market value of the firm’s equity D = market value of the firm’s debt V = E + D E/V= percentage of financing that is equity D/V= percentage of financing that is debt Tc = corporate tax rate © Mineral Valuation & Capital, Inc. 2011

4 © Mineral Valuation & Capital, Inc. 2011
WACC Applications   * Business Valuation (total mineral company and mineral leases) * Regulatory Proceedings * Project Selection * Shareholder Value © Mineral Valuation & Capital, Inc. 2011

5 © Mineral Valuation & Capital, Inc. 2011
WACC WIDELY ACCEPTED BY: * General Business & Resource Extraction Community * Regulatory Agencies * Many Federal, State, and Local Taxing Authorities * Courts * Mineral Appraisers * M&A Intermediaries * Investment Bankers © Mineral Valuation & Capital, Inc. 2011

6 © Mineral Valuation & Capital, Inc. 2011
DATA SOURCES Market Approach to Valuation Uses data from Comparable Guideline Companies Data from guideline publicly traded companies Transaction data from public & private companies © Mineral Valuation & Capital, Inc. 2011

7 COST OF DEBT (Cd) DERIVATION
WACC = (E/V x Ce)+ (D/V x Cd) x (1 – Tc) Ce = cost of equity Cd = cost of debt E = market value of the firm’s equity D = market value of the firm’s debt V = E + D E/V= percentage of financing that is equity D/V= percentage of financing that is debt Tc = corporate ta Cd = The average yield to maturity on corporate debt with similar maturity and quality. © Mineral Valuation & Capital, Inc. 2011

8 COST OF EQUITY (Ce) DERIVATION
Capital Asset Pricing Model (CAPM) Ce = Rf + ß(Rm – Rf) Where: Ce = cost of equity or expected/required return Rf = risk free rate of return Rm = expected market return (Rm – Rf) = Equity Risk Premium, or the amount by which investors expect the future return on equities to exceed that of the risk free rate ß = beta, the volatility of the company or comparable guideline companies relative to the market as a whole © Mineral Valuation & Capital, Inc. 2011

9 © Mineral Valuation & Capital, Inc. 2011
Total Company WACC for Resource Extraction Industry Segments, After Tax INDUSTRY SEGMENT 2007 2008 2009 Building Materials, Cement, Aggregates Companies 10.6 8.8 11.1 Coal Companies 15.0 12.5 14.2 Precious Metals Companies 11.8 11.6 12.2 Oil Producing Companies 10.4 9.7 11.4 © Mineral Valuation & Capital, Inc. 2011

10 © Mineral Valuation & Capital, Inc. 2011
TRANSACTIONAL DISCOUNT RATES TOTAL COMPANY After Tax & Before Tax ( ) © Mineral Valuation & Capital, Inc. 2011

11 © Mineral Valuation & Capital, Inc. 2011
INDUSTRY RISK PREMIUM (IRP) (from SBBI)     “The amount by which investors expect the future return of the industry to exceed that of the market as a whole”. (SBBI)   *An IRP of 0 implies that the industry has the same order of risk as the S&P 500, or the market. *An IRP greater that 0 implies that the industry is riskier than the market.   *An IRP less than 0 implies that the industry is less risky than the market.   © Mineral Valuation & Capital, Inc. 2011

12 INDUSTRY RISK PREMIUM (IRP)
INDUSTRY SEGMENT INDUSTRY RISK PREMIUM (from SBBI) 2007 2009 Coal Companies 7.0 3.8 Mining & Quarrying (Non-fuel, non-metal) 4.0 1.6 Oil & Gas Exploration Companies -0.4 Gold & Silver Companies -1.0 -1.5 © Mineral Valuation & Capital, Inc. (MVC) 2011

13 Industry Risk Premium* © Mineral Valuation & Capital, Inc. 2011
MVC© ROYALTY LEASE VERSUS TOTAL COMPANY DISCOUNT RATE ADJUSTMENT Conceptual Example INDUSTRY SEGMENT Industry Risk Premium* OIL & GAS Royalty Trading Companies -4.0 Exploration Companies -1.0 Difference -3.0 * SBBI-IA Methodology © Mineral Valuation & Capital, Inc. 2011


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