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A geological risk approach to valuing early-stage exploration projects

The valuation of exploration projects that do not contain defined resources is complex, as consideration must be made of both technical and market factors. Technical factors include the level of geological understanding of the project area, the targeted mineralisation style, and the distribution and magnitude of mineralisation indicators defined by previous exploration (e.g. geochemistry or geophysics). Market factors may include recent comparable transactions, geography, infrastructure costs and commodity prices.

SRK’s valuation approach considers both technical and market factors. Analysis of the technical aspects of the project form the core of the valuation method as the probability of the realisation of mineralisation potential has to be understood before the project can be sold or developed. The technical understanding is then tempered against market factors.

SRK has developed a probability (risk) based approach to exploration valuation – the Geological Risk Method (“GRM”; Lord et al., 2001; Morley, 2007). This relies on identifying likely target value (TV) outcomes from successful development of a resource of particular target size (TS), and discounting this figure by the cost and probability of success through the five stages of the exploration and development cycle, to arrive at an expected value (EV). The TS is based on the geological understanding of the area, and uses data from previous exploration and nearby operations.

The geological risk of each project is quantified by assessing geological features indicative of four key success factors for deposit formation (source, pathway, fluid and trap). Market parameters are considered in the GRM through comparable market transactions for deposits and exploration plays with similar commodities and target sizes, and the expected exploration and infrastructure costs to define a resource at the specified TS. The market data is used in the GRM as a dollar value per tonne of metal as determined by the market at a given time – equivalent to the yardstick method of valuation – and as cost discounts for exploring and developing the project from one stage to the next. The final EV is then benchmarked against traditional valuation approaches.

The GRM represents a science- and market transaction-based valuation approach, which is easily auditable, and accounts for the collective technical knowledge of the project being valued, in concert with market conditions preceding and at the time of the valuation.

Louis Bucci:
Deb Lord:

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