1. Watts, Griffis and McOuat Mineral Sector Valuations A Presentation on Practices in the Canadian Minerals Industry November, 2005 Al Workman, P.Geo., Vice-President Watts, Griffis and McOuat Limited

2. Watts, Griffis and McOuat Valuation Standards The Valuator must understand the standard of value that is required by the client: Investment Value - the value to the owner Forced Liquidation Value- the value if assets of a failed business are sold at auction Orderly Liquidation Value- net proceeds if assets of a business are sold over a period of time to maximize the proceeds received Fair Market Value or Market Value – proceeds from unforced sale between willing vendor and a willing buyer

3. Watts, Griffis and McOuat Valuation Standards Most valuations in the Minerals Sector involve the estimation of “Fair Market Value”. Fair Market Value is defined in accordance with Revenue Canada guidelines as “the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm’s length, and under no compulsion to act, expressed in terms of money or money’s worth”.

4. Watts, Griffis and McOuat Valuation Standards Some valuations in the Minerals Sector involve the estimation of “Market Value”. Market Value as defined by the British Columbia Mining Rights Compensation Regulations is defined as “the market value of an estate or interest in land is the amount that would have been paid to the holder of the expropriated mineral title if the title had been sold on the date of expropriation, in an open and unrestricted market between informed and prudent parties acting at arm’s length”.

5. Watts, Griffis and McOuat Valuation Standards The difference in these two definitions is important. Market Value is estimated as the likely outcome of a sale and it requires the valuator to estimate the value in accordance with probability. Fair Market Value is estimated as the highest outcome of a sale and it requires the valuator to estimate the value based on what the most willing buyer would pay.

6. Watts, Griffis and McOuat Valuation Approaches Three traditional approaches: Cost – what did it cost to acquire the property and how much has been invested in it Market – what would the market be willing to pay if the property were sold Income – what is the earning power of the property expressed as a Net Present Value

7. Watts, Griffis and McOuat Use of Valuation Approaches CIMVal covers examples of many valuation methods: Valuation Approach Valuation Method Method Ranking Comments Income Discounted Cash FlowPrimary Very widely used and generally accepted in Canada as the best method Income Monte Carlo Simulation Primary Less widely used but gaining in acceptance Income Option PricingPrimary Not commonly used and not well understood but gaining in acceptance Market Comparable Transactions Analysis PrimaryWidely used – based on substitution Market Option Agreement Terms Primary Widely used but option terms must be discounted over time Market Gross In-Situ Metal Value xNot acceptable

8. Watts, Griffis and McOuat Use of Valuation Approaches Summary of valuation methods continued………… Valuation Approach Valuation Method Method Ranking Comments Market Net Value of In-Situ Metal SecondaryVery widely used ‘rule of thumb’ Market Value per Unit AreaSecondary For large reconnaissance exploration properties without central focus. Market Market CapitalizationSecondary Can be used for single property companies – usually junior companies Cost Appraised ValuePrimaryWidely used but not uniformly accepted Cost Multiple of Exploration Costs PrimaryNot widely used or accepted in Canada Cost Geoscience FactorSecondaryNot widely used.

9. Watts, Griffis and McOuat Valuation Approaches Income Approach: Discounted Cash Flow Analysis - well suited for the valuation of mineral assets for which there are Mineral Resources and/or Mineral Reserves, and some form of economic analysis Monte Carlo Simulation Analysis – well suited for the valuation of mineral assets for which there is some indication of Mineral Resources and/or Mineral Reserves, but where costs and revenue streams are uncertain

10. Watts, Griffis and McOuat Valuation Approaches Market Approach: Joint Venture Terms Analysis - quite effective if there are examples available for the subject property Comparable Transaction Analysis - based on the principle of substitution, which says that the economic value of a property can be determined by the cost of acquiring an equally desirable substitute In-Situ Resource Analysis – market value of the mineral in the ground

11. Watts, Griffis and McOuat Application of Valuation Methods DISCOUNTED CASH FLOW (DCF) MODELLING CIMVal guidelines state that DCF modelling is an acceptable valuation method for valuing Measured and Indicated Mineral Resources, but it should be used with caution for Inferred Resources. It does not forbid the use of Inferred Resources. The Toronto Stock Exchange (TSE) will not accept the use of Inferred Resources. The use of Inferred Resources is prevalent within the industry in striking deals between companies, however there is little hard evidence of its use.

12. Watts, Griffis and McOuat Application of Valuation Methods EXAMPLE OF THE USE OF INFERRED RESOURCES During 1996, Barrick Gold acquired Arequipa Resources just after the discovery of the Pierina gold deposit in Peru. At the time, only 20 diamond drill holes had been completed. Barrick paid US $756 M to purchase the deposit. Barrick recognized the geological model, and based on the model, inferred that the deposit contained at least 6 Moz of gold. Barrick was willing to pay $150 per potential contained ounce for the “inferred” resource. Further exploration showed that the deposit contained over 7 Moz of gold.

13. Watts, Griffis and McOuat Application of Valuation Methods DISCOUNTED CASH FLOW (DCF) MODELLING WGM believes that the position of the TSE is based on: a misguided interpretation of National Instrument 43-101 rules; fear of the misuse of Inferred Resources; and, a desire to avoid the over-capitalization of companies

14. Watts, Griffis and McOuat Application of Valuation Methods DISCOUNTED CASH FLOW (DCF) MODELLING DCF modelling requires: clearly defined resources and/or reserves; good idea of appropriate mining and processing techniques, equipment requirements, G & A costs, capital and operating costs, metallurgical recoveries, by-product credits…etc current and future commodity prices taxes, royalties and mine closure costs a production schedule;

15. Watts, Griffis and McOuat Application of Valuation Methods DCF EXAMPLE

16. Watts, Griffis and McOuat Application of Valuation Methods DCF EXAMPLE

17. Watts, Griffis and McOuat Application of Valuation Methods MONTE CARLO SIMULATION Use Monte Carlo simulation to develop realistic discounted cash flow valuations to reflect the uncertainty contained within a project. Use MCS to build confidence in a project knowing where the main risk parameters are located. Simulate and examine the affect of risk elements within a project by varying in-put parameters and visualizing the result.

18. Watts, Griffis and McOuat Application of Valuation Methods MONTE CARLO SIMULATION Use when DCF in-put parameters can not be defined, but can be estimated within a range. TSE rules do not cover probabilistic modelling and so the use of Inferred Resources is not prevented. MCS should be carried out by an experienced mineral economist in consultation with either (1) a Mining Engineer or (2) a current and comprehensive mine production database. Careful consideration must be given to in-put ranges and the skewness of the range.

19. Watts, Griffis and McOuat Application of Valuation Methods MCS APPLICATION Early exploration property has 50 drill holes and Inferred Resource of 12.6 mt grading ~9 g Au/t. Additional drilling indicates strong possibility of doubling and up-grading the estimated resource. Based on other similar mines in the area, we can estimate, +/- 10-25%, the following: metallurgical recoveries; total capital and production costs; taxes, royalties and mine closure costs

20. Watts, Griffis and McOuat Application of Valuation Methods MCS APPLICATION Symmetrical or Skewed Inputs????? The confidence of the data may allow issues of the average grade to be a simple matter of assessing the need to cut high grade values: Average gold grade with no cutting = 9.4 g/t Average gold grade with assays cut at the 98 th percentile (50 g/t) = 9.1 g/t. Average gold grade with assays cut at the 95th percentile (30 g/t) = 8.8 g/t.

21. Watts, Griffis and McOuat Application of Valuation Methods MCS APPLICATION Symmetrical or Skewed Inputs????? The effect of cutting shows no serious nugget affect caused by coarse gold and so we might reasonably select a normally distributed range of values for gold in-put between 8.8 and 9.4 g/t. Probability

22. Watts, Griffis and McOuat Application of Valuation Methods MCS APPLICATION Symmetrical or Skewed Inputs????? Uncertainties regarding the amount of refractory gold and its effect on overall recoveries may dictate a more cautious approach. Recovery of refractory gold may be 60% versus 95% for non-refractory gold. Probability

23. Watts, Griffis and McOuat Application of Valuation Methods MCS EXAMPLE ITEMLowHigh Frequency Distribution Average Grade 8.59.5 Tonnes 12 MT 13.2 Mt Gold Recovery 60100 Mining Costs 2055 Processing Costs 4060

24. Watts, Griffis and McOuat Application of Valuation Methods MCS EXAMPLE It is very important that the Monte Carlo simulation be repeated enough times to produce reliable out- put = recommend 1,000 iterations

25. Watts, Griffis and McOuat Application of Valuation Methods MCS EXAMPLE – OPERATING COSTS

26. Watts, Griffis and McOuat Application of Valuation Methods MCS EXAMPLE – CAPITAL COSTS

27. Watts, Griffis and McOuat Application of Valuation Methods MCS EXAMPLE – COMMODITY PRICE

28. Watts, Griffis and McOuat Application of Valuation Methods MCS EXAMPLE – NET PRESENT VALUE

29. Watts, Griffis and McOuat MCS EXAMPLE – OTHER VARIABLES Political risk Environmental risk Social risk Other variables that could be analysed and used as multipliers of net present value could include: Application of Valuation Methods

30. Watts, Griffis and McOuat JOINT VENTURE TERMS ANALYSIS If I invest $1M into a property worth $5M, the property may become worth $6 M. – this is not a JV The Valuator must always separate the value of the Joint Venture from the value of the underlying property – they are not the same. Application of Valuation Methods If I invest $1M into a JV where the underlying property is worth $5M, the value of the JV may be worth $6M, but the value of the property to me must be determined by my earned position in the JV.

31. Watts, Griffis and McOuat JOINT VENTURE TERMS ANALYSIS Application of Valuation Methods A useful formula is: $V p = $E x (100 - I%) / I% Where $V p is equal to value of 100% of the entire property $E is the cash being contributed to the JV by in-coming Party (the investor) I% is the interest to be earned in the JV by the investor

32. Watts, Griffis and McOuat JOINT VENTURE TERMS ANALYSIS Application of Valuation Methods The underlying principle is that an investor putting money into a property will earn his interest immediately, and the property may see an increase in value using, for example, the appraised value method. An investor putting his money into a JV is increasing the value of the JV, but not necessarily increasing the value of the underlying property, and the investors interest remains in the JV.

33. Watts, Griffis and McOuat Other Valuation Methods Other valuation methods exist, but many of these are not accepted as primary valuation techniques. However, they can be useful as a test of reasonableness. These include: Value per unit of area for an raw exploration property – use with caution to ensure areas are approximately comparable. Decision tree (probabilistic) analysis – not commonly used.

34. Watts, Griffis and McOuat Conclusions Valuing a mineral property is a time sensitive practice. What seems logical today may not seem reasonable 6 months from today. The Qualified Valuator must keep good notes to ensure that the chain of rational decisions that led him / her to his conclusions can be understood and duplicated in the future. Cross-referencing of valuation techniques is an important means to ensure that the valuation is reasonable. If the valuator does not see congruence in his individual conclusions, he should re-examine the data and his conclusions each step of the way.

35. Watts, Griffis and McOuat Conclusions Method Comparable Transactions Net Value In-Situ Metal Monte Carlo Simulation Appraised Value Fair Market Value 246 $ Millions 2.65.8 2.23.6 2.74.3 2.53.6 4.4

36. Watts, Griffis and McOuat Suggested Reading CIMVal Standards and Guidelines for the Valuation of Mineral Properties (Canada). VALMIN – supported by the AusIMM (Australia). SAMVAL – South African Institute of Mining and Metallurgy – draws on CIMVal and VALMIN.