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Mining Valuation

Summary

Don’t know your NPV from your CAT793? Strip ratios/ ROM/ CHPP/ Ash content/ crucible swelling index/ Cast and doze/ SXEW/ Ball mill- no idea what they mean? You will after this course, where we make you do the work:  we will be looking at listed company X that has a coal mine and you will create, “from scratch”, a financial model for the coal mine.  We will start from the dirt and end up at the dollar i.e. we start with exploration results, and then add typical costs (exploration/ extraction/ processing/ labour/ capex/ port and rail, etc), plus revenue assumptions, to arrive at the mine’s cashflow.  We don’t stand up the front and lecture in this course-rather you do the work!  You will leave the course knowing how to start with a blank Excel sheet, add the data, and assess the feasibility of a coal project, and have learnt the model structure/architecture for assessing mining projects in general.

There are many courses on offer teaching the finance/valuation side of mining- why choose ours?

Your trainer, Emma McPherson, (Master of Commerce, Sydney University) has worked for mining companies, and continues to be asked by mining co’s to consult on financial modelling assignments, from feasibility studies (BFS to DFS) to project finance models, thus remaining involved in the mining sector.  Over 2011-2012 she delivered no training, rather worked full-time for two mining co’s completing financial modelling on  >AUS$4 billion of coal and gold assets.  This required auditing old models, building new models, updating with new technical data and due diligence, daily interaction with mine managers, chemical engineers, geologists, and mine-site visits – which makes our course curriculum richer than others : we teach the qualitative as well as the quantitative.   Another reason is our course is at the cheaper end of such mining courses offered globally.

Part A: Mining 101

This course is about more than numbers thus we cover:

  • Some basic terminology across coal that will be used in building the models
  • Is the mining boom over?  Some say yes, others (enjoying a  rebound in iron ore prices) would say no, a still-healthy growth rate of 7% in China would say no, and the  BREE (Australian Bureau of Resource & Energy Economics), would say possibly (based on their May 2013 release of committed projects).  We will discuss various views.
  • As we will be focusing on coal we briefly review another class: rare earths- What are they and why they could be the “next big thing’? Hint – they are not actually so rare- rather China (which has the highest supply) has just cut the supply of them.  They are used in many everyday items : mobile phones, LCD screens, hybrid cars, as they have excellent magnetic and photo-voltaic qualities.

Part B: Best Practice Financial Modelling & Introduction to Valuation.

  • Excel: we will show you some great Excel short-cuts, and inbuilt Excel functions (which seem difficult but are actually very easy to construct) – both which will vastly improve your speed around the worksheet.
  • You will be able to complete your valuations quicker and more accurately, and in general handle large amounts of dater easier,  if you follow the tenets of best practice financial modelling.  We will be constructing basic models in this course, but mining models can be complex i.e. 50 year mine life- required quarterly (thus 200 columns), 23 different mines, 5 different minerals, 10 different currencies and associated hedging programms.  Hence we review the fundamentals of a robust model, and ways to avoid common errors.
  • Valuation 101: How to value a business: DCF or multiples? What do they mean, and which is appropriate to different types of businesses. Terminal value: what is it and how to calculate it? When do we need a terminal value and when don’t we?  Which growth factor to use?  What is the Gordon Growth model?  Are cashflows received start of year, mid-year, or end of year, and how to adjust for this? (cashflow timing can have a substantial effect on the NPV).

Part C: Building the Coal Mine Model

  • Planning/ logic flow/ model set-up / Cover and Log sheets / Model Maps/ creation of error checks as we go along (the more we have, the less chance of error).
  • Dates : Set them up once in inputs sheet-and all other pages headers should flow from these. Avoid common mistakes such as having different periods within the same sheet.
  • Inputs-coal quality and quantity: We look at the inputs we have from the technical due diligence / geo. reports, i.e. seam geology and coal quality
  • Inputs: Capital expenditure (Capex):  Equipment : Requirements will depend on the mine plan (size of pits, location of various coal seams,  and speed at which they will be mined)
  • Inputs: Capex: Infrastructure: Onsite accommodation for staff, CHPP (coal handling processing plant), additional power required (input lines as well as generators), additional roads to be built, construction of coal loading facility onto train.
  • Inputs – Operating costs  up to the “mine-gate” (Opex) : costs of production : from pre-feasibility costs to extraction, to processing (CHPP)
  • Inputs-Opex after the mine-gate : We will review typical costs ,rail (above and below) and port costs.
  • Inputs- Opex: Other: sales costs, admin costs and royalties
  • Revenue-Quality: Classifying the output: based on its qualities, some which are listed below. Will the output be PHCC (Premium Hard Coking Coal),  SHCC (Standard Hard Coking Coal) , SCC (Semi-Hard Coking Coal), SSCC (Semi-Soft Coking Coal), LVPCI (Low Volatile Pulverised Coal Injection),  Thermal coal – or somewhere in between these classifications/a hybrid output?  Also will the seam geology produce a wide range of coal qualities, and thus various “discounts” that must be applied to the standard/benchmark price for the product.table
  • Revenue-Price: Once you have classified the output how do you price it ? If you have an operating mine, with a sales contract you have your price, however if you are doing a feasibility study for a proposed mine you need to obtain price forecasts – we look at various sources.
  • Debt Inputs and calculations: The project may have zero debt now but it’s useful to add in the rows/ calculations, for potential future use.
  • Outputs (Quarterly): Construction versus Operations phases / Creating the calculations to arrive at cashflow / Working Capital/ Basic profitability outputs: EBITDA, Depreciation, EBIT, Pre-tax Earnings, NPAT.
  • Outputs (Annual): the same data shown annually- and how to do this in just a few keystrokes (Issues to look out for: balances versus flows, % outputs, tax schedule)
  • Using the mine cashflows, calculate the valuation via DCF.
  • Audit: In addition to the numerous error checks you will have created by this stage, we must also do a final check : we look at various audit tools available, both in Excel, and commercially available software. You will  then create a “short-cut”/ shadow model, which is a good way to check the main model is correct.
  • Scenario analysis :We look at various sensitivities: thermal product instead of SHCC / coal prices crash /  capex and opex costs increase.
  • Presentation: Which of Excel’s tools are best for your presentation / summary purposes:  Charts? Floating charts? Pivot Tables? Data Tables? Normal tables?   We encourage students to tell us how they need to use Excel in their daily work/life, so we can send you back to work, 10 times more productive!   Are you always having to show the difference (and the reasons why), between either two points in time, or two points in a  measurement (i.e. costs from last Financial Year to this FY, or the change in  NPV in the base case versus  that in a sensitised case) ? If so “floating charts” (also called “bridge -as they show the bridge (or the steps) from A to B) could be your best tool. …Or are you always having to re-categorise costs  i.e. slice your costs,  in different ways (by mine / by country / by cost category / etc)? If so pivot tables could be your best tool.  We also show how to create impressive charts and tables in just one keystroke.