Traps in mining valuations

In applying financial modeling techniques in mining valuations (in particular, discounted cash flow (DCF) analysis) the following key factors need to be considered: 1. metal (or oil) prices, 2. operating costs, 3. the USD/AUD exchange rates, 4. production volumes, and 5. capital expenditure. There a...

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Bibliographic Details
Published inJASSA no. 1; p. 8
Main Author Lonergan, Wayne
Format Journal Article
LanguageEnglish
Published Sydney Finsia - Financial Services Institute of Australasia 01.04.2002
Subjects
Capital expenditures
Cash flow forecasting
Commodities
Discount rates
Discounted cash flow
Energy economics
Expected values
Financial reporting
Foreign exchange rates
Mining
Mining industry
Net present value
Prices
Probability
Risk management
Success
Valuation
Valuation methods
Australia
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Summary:In applying financial modeling techniques in mining valuations (in particular, discounted cash flow (DCF) analysis) the following key factors need to be considered: 1. metal (or oil) prices, 2. operating costs, 3. the USD/AUD exchange rates, 4. production volumes, and 5. capital expenditure. There are many risks associated with mining projects. The issue is how risk should be reflected in the valuation. Many DCF valuations are undertaken using a single estimate of the future cash flows. In assessing projects where cash flow forecasts are optimistic and/or highly uncertain, a reasonable assessment of the "expected" cash flow projections can be materially different from the "most likely" estimate, especially if the promoters, or others with a financial interest in the project or the value being derived, provide this. The valuation of a mining project is normally based upon the net present value of its future cash flows.