How the valuation of tailings, wastes, water and other externalities can lower the risk premium and add to a property’s value
Technical reports, whether NI 43-101, JORC or SAMREC (1), are signposts telling investors the economic potential of a property. Their release can vault or sink a stock price depending on whether the results are positive or negative. Yet they often do not contain a full discussion of the possible value destroyers that lurk in the shadows of a prospective mine. Then the prospective investor must factor the unknown into their offer, sometimes unfairly discounting the value. A balanced discussion would lead to a better valuation. Tailings, waste and water are three such value destroyers that often get short shrift in technical reports. Investors know that, when poorly managed, these issues can lead to project delays, failures during operation and chronic impacts that erode profitability and return on investment.
At the upcoming PDAC conference in Toronto (March 4-7, 2018), Stantec will host a session that considers how best to evaluate and report the opportunities and costs associated with tailings, waste and water. The session will include presentations followed by a panel discussion. The panel will include:
- Ryan Bennett, Partner, Resource Capital Funds will address whether NPV (net present value) is still a good way to measure risk, and whether more work should be done to create a strong risk framework.
- Rosalind Cooper, Environmental Lawyer and Partner, Fasken Martineau will give the regulatory and legal perspective, showing that following the rules doesn’t mitigate everything.
- Hu Fleming, Head, Water Management, Anglo American will talk about water risk and security of supply.
- Monica Ospina, Founder, O-Trade will describe how water is a nexus for social risk.
- Dirk Van Zyl, mining professor at the University of British Columbia will discuss the long-term costs associated with physical hazards and risks including water, stability, and their effects on communities.
- Andrew Watson, VP Stantec will discuss the case for understanding the business aspects of tailings, waste and water and how these influence the value of projects and mines.
The session will serve potential investors and promoters interested in a candid discussion about taking proactive measures to address potential problems at a mine site. A proactive approach not only de-risks a project; demonstrating that the issues – like water and tailings – have been considered by the project team, adds value.
“The contention of this session is that the economics should include an accounting of the potential value destroyers and not just the value,” said Watson, who notes that investors and potential acquirers are much more likely to walk away from projects if they see glaring omissions in technical reports. Examples might be a gold prospect in Latin America whose report doesn’t mention anything about social license and artisanal miners, or a report on a potential mine in a particularly arid region that doesn’t adequately discuss the water supply.
Watson remarked that addressing these risks in the report shows investors that the mining company has thought through potential problems and has solutions that will further de-risk the property –making it more valuable. “A smart investor is going to assign a value to the risk associated with their purchase,” said Watson. “The more a promoter can do to address those risks, or make the evaluation of those risks easier, the more likely an investor is to lower their risk premium and pay more.”
An example of such de-risking is the proactive water strategy taken by a large multinational mining company. They are commissioning regional planning studies in conjunction with relevant government and industry stakeholders – like farmers or ranchers – so the extent of the water resource is well understood. The mining company and others like it know that failing to consider their neighbors can lead to troubling conflicts especially since the government has the power to shut down the mine or revoke permits if the water needs of local populations have not been adequately addressed. “Mining companies realize that unless everybody gets their fair share, they may end up with none!” Watson said: “We have to show that the project has strong fundamentals and is a go before folks will invest in it.”
The PDAC panel will present diverse insights and experiences so that promoters, investors and lenders can look at projects from a broader and more informed prospective. “Our hope is that the discussion will inspire a more rounded presentation of projects where these risks are addressed in a balanced way so that investors pay a fair price,” said Watson.
The Valuation of Water, Waste and Other External Costs session will be held during PDAC on Wednesday, March 7 from 9 am to 11:30 am in room 717 of the Metro Toronto Convention Centre. The session chairs, Andrew Watson and Resa Furey, both of Stantec, will be on hand for questions.
(1) National Instrument 43-101 Standards of Disclosure for Mineral Projects, JORC (Joint Ore Reserves Committee) or SAMREC (South African Mineral Resource Committee)