Presentation to Ministry of Lands and Resources (MOLAR) , Beijing China

November 30, 2005

Keith N. Spence, Co-ChairmanKeith N. Spence, Co-ChairmanCanadian Institute of Mining, Metallurgy and Canadian Institute of Mining, Metallurgy and

Petroleum Petroleum Special Committee on Valuation of Mineral Special Committee on Valuation of Mineral

PropertiesProperties(CIMVal)(CIMVal)

President and CEO, Alliance Pacific Resources President and CEO, Alliance Pacific Resources Inc Inc

CANADIAN (CIMVal) CANADIAN (CIMVal) STANDARDS AND STANDARDS AND

GUIDELINESGUIDELINESFOR VALUATION OF MINERAL FOR VALUATION OF MINERAL

PROPERTIESPROPERTIES

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Items to be DiscussedItems to be Discussed

Background on Keith N. Spence Valuation vs Evaluation International Scene What is Canadian CIMVal Scope and Limitations Definition of Value Valuation Principles Qualification of Valuators Valuation Reports Key Issues Valuation Approaches and Methods Some Problems with Valuations

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Background on Keith N. Background on Keith N. SpenceSpence Co-Chairman & Co-Developer of Canadian Valuation Standards

President and CEO of Alliance Pacific Resources, an exploration company with operations in Xinjiang, China

Geologist - Hons BSc, MBA; Both University of Western Ontario, London, Canada

Investment Banker for 14 years, specializing in Mining Finance, Project Finance and Corporate Finance.

Investment Banker at Royal Bank, Bank of Montreal, Bank of Nova Scotia and Export Development Bank

Financed or evaluated projects in Chile, Peru, Argentina, Bolivia, Mexico, USA, Africa, Australia, Thailand, Indonesia, China and Canada.

CIM Distinguished Lecturer CIM Fellow Award President, Mineral Economics Society Board of Directors, PDAC (Canada) International Advisory Board , CHINA MINING CONFERENCE

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Valuation vs. Evaluation of Valuation vs. Evaluation of a Mineral Propertya Mineral Property

Valuation - estimation of the value or worth of the mineral property in dollars or equivalent-

“Question – What is the value or worth of the Property ?”

Evaluation - economic assessment of the mineral property generally for an investment decision, for example, a feasibility study –

“Question – Is this project econonically viable ? Is it economic to develop this project?”

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The International SceneThe International Scene

Canadian CIMVal Standards & Guidelines- Developed and maintained bv Canadian Institute

of Mining, Metallurgy & Petroleum (CIM)- CIM also maintains the rules for Classification of

Reserves; eg Inferred Resources to Reserves- Required by Toronto Stock Exchange (TSX-V)

Australian VALMIN Code- Similar to CIMVal, supported by AusIMM

South African proposed SAMVal Code- Similar to CIMVal, supported by SAIMM

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The CIMVal DocumentThe CIMVal Document

The document consists of two parts:

Standards (mandatory)

Guidelines (highly recommended)

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Scope and LimitationsScope and Limitations

Reasons for valuation: mergers and acquisitions, non arm’s length transactions, IPO pricing, listing support, support of audited financial statements, support for property agreements, fairness opinions, determination of vendor considerations, litigation, expropriation, insurance claims

Valuations of mineral properties are required by regulatory bodies under certain circumstances. CIMVal Standards is recommended to be followed, for valuations of mineral properties required by regulatory bodies

Fairness Opinions based on valuation of mineral properties should also be governed by the CIMVal Standards

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Scope and Limitations Scope and Limitations Cont’dCont’d

Limited to valuation of mineral properties, but do not cover valuation of corporations that hold the mineral properties

Mineral property means surface/subsurface mining rights; including various types of claims, development or mining licenses, prospecting permits, mining leases

Cover valuation of metallic and non-metallic mineral properties, including industrial minerals, placers, aggregates, coal, oil sands and uranium

CIMVal Standards do not cover oil and gas properties (Separate Standards for Valuation)

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Definition of Value Definition of Value Fair Market Value (FMV) is the standard of value.

Key elements of FMV are as follows: Both seller and buyer are willing and not under compulsion to act The transaction is at arm’s length Both seller and buyer are informed or have reasonable knowledge of the

relevant facts Valuation should be based on a given point in time

Other types of value include; replacement value, salvage value, book value, depreciated value, net asset value, assessed value, insured value, etc. - But not recommended for CIMVal purposes.

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Valuation PrinciplesValuation Principles

       Materiality

- inclusion or omission of information that might result in different conclusion of

value

        Transparency

- information used (or excluded), the assumptions, methodology etc, must be set

out clearly, along with the rationale

        Independence

-the valuator must to be independent of the commissioning entity

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Valuation Principles Cont’dValuation Principles Cont’d

     Competence

-the valuator must be appropriately

qualified and experienced to conduct the

required valuation

        Reasonableness

-other appropriately qualified and experienced

valuators would value the property at approximately the same range

       

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Qualifications of Valuators Qualifications of Valuators

Concept of Qualified Valuator (QV) :

Professional individual with at least 5 years mineral property valuation experience

Experience relevant to the subject property Member of an approved self-regulatory

professional organization, such as Professional Engineers or Geoscientists, or CICBV

Commissioning entity must establish that the QV is qualified, competent and independent

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Qualifications of Valuators Qualifications of Valuators Cont’dCont’d

QV is responsible for the overall valuation and the valuation report

QV may be assisted by Qualified Persons (QP), as defined in Canadian Securities Regulations

All technical input to the valuation is subject to data verification by a QP

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Valuation ReportsValuation Reports

A QV is ultimately responsible for: preparation of the Valuation Report and its

conclusions adhering to the principles of materiality,

transparency and reasonableness including technical input

An approved technical report can be appended to the valuation report

All mineral reserve and mineral resource estimates must be disclosed and discussed in the valuation report

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Valuation Reports Cont’dValuation Reports Cont’d

List factors, critical issues, key risks and assumptions

Discuss all valuations within the last 24 months

Certificates of Qualifications for QV and QP(s)

Statement that the valuation complies with the Standards and Guidelines in their entirety

Site visit should be undertaken or explain why not

Effective date of the valuation

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Valuation StandardsValuation Standards- Key Issues- Key Issues

CIMVal Standards mandatory The Standards are considered to be mandatory but the

guidelines are highly recommended, and allow for professional judgement

How much valuation experience should a QV have? The Standards state five years’ valuation experience

Is a business entity allowed to sign the Valuation Report or just an individual QV?

The CIMVal Standards allow a business entity as well as an individual to sign the report but a QV must sign a Certificate of Qualifications

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Choice of Valuation Choice of Valuation Approaches and MethodsApproaches and Methods

QV has responsibility for choice of valuation approaches and methods with explanation

All three generally accepted valuation approaches must be considered and more than one should be used (at least two must be used)

Valuation must be reported as a range of values to reflect subjectivity and uncertainty of the valuation process

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Valuation Approaches Valuation Approaches

Three generally accepted approaches: Income approach - based on principle of

anticipation of benefits, usually DCF Market approach – based on principle of

substitution (also called Sales Comparison or Comparable Transactions)

Cost approach – based on principle of contribution to value

Valuation approach depends on the stage of exploration or development of the property

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Valuation Approaches and Valuation Approaches and Stages of Mineral Stages of Mineral

PropertiesPropertiesVALUATION APPROACH

EXPLORATION PROPERTIES

MINERALRESOURCE

PROPERTIES

DEVELOPMENTPROPERTIES

PRODUCTIONPROPERTIES

Income No In some cases Yes Yes

Market Yes Yes Yes Yes

Cost Yes In some cases No No

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Primary Valuation Primary Valuation MethodsMethods

Income Approach Discounted Cash Flow Method - very widely used Real Options Method – not widely used but gaining

rapidly in acceptance (some experts suggest it’s an Approach on its own)

Market Approach Comparable Transactions Method – widely used Option Agreement Terms – widely used

Cost Approach Appraised Value Method – widely used but not

accepted by all regulators Geoscience Factor Method (developed by Kilburn) –

not widely used – too subjective

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Secondary Valuation Secondary Valuation MethodsMethods

Market Approach Value per unit of metal – widely used rule of

thumb. Used to normalize or cross - check comparables

Market Comparables – Market capitalization of company holding the mineral property – Each property must be examined individually. Similar Properties ; similar Value.

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Mineral Resources and Mineral Resources and ReservesReserves

Mineral Resource - a mineral deposit for which quantity (tonnes) and quality (grade) can be estimated. But not demonstrated to be economic.

Measured - highest confidence category Indicated Inferred - lowest confidence category

Mineral Reserve - that part of the mineral resource that can be extracted economically.

Proven - higher confidence category Probable - lower confidence category

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Use of Mineral Resources Use of Mineral Resources in Income Approachin Income Approach

Generally Acceptable Practices Use of all proven and probable mineral reserves Use of measured and indicated mineral resources in

the following circumstances: Mineral resources are current and confirmed by a QP Mineral reserves are mined ahead of resources in DCF QP estimates or confirms technical parameters in DCF QP states that the mineral resources in the DCF are likely to

be economically viable Recognize higher risk of using mineral resources by

adjusting appropriately (eg: probability factors)

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Use of Mineral Resources Use of Mineral Resources in Income Approach Cont’din Income Approach Cont’d

Use of inferred mineral resources: With great care, but Not if they are the dominant resource category Inferred resources should not be used to make the property

economically viable Any use must be justified in the valuation report and treated

appropriately for the substantially higher risk and uncertainty Reserves and other resource categories are mined ahead of

inferred resources in the DCF model

Use of potential or hypothetical “resources” is not acceptable

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Some Problems with Some Problems with ValuationsValuations

Use of unacceptable or dubious methodsMisapplication of acceptable methodsNo explanation or justification for methods

usedLack of transparencyStatement of CIMVal compliance when

actually not compliant

Thank you !!

Presentation to Ministry of Lands and Resources (MOLAR) , Beijing, China

November 30, 2005

Keith N. Spence, Co-ChairmanKeith N. Spence, Co-ChairmanCanadian Institute of Mining, Metallurgy and Canadian Institute of Mining, Metallurgy and

Petroleum Petroleum Special Committee on Valuation of Mineral Special Committee on Valuation of Mineral

PropertiesProperties(CIMVal)(CIMVal)

President and CEO, Alliance Pacific Resources President and CEO, Alliance Pacific Resources Inc Inc

CANADIAN CIMVal CANADIAN CIMVal STANDARDS AND STANDARDS AND

GUIDELINESGUIDELINESFOR VALUATION OF MINERAL FOR VALUATION OF MINERAL

PROPERTIESPROPERTIES