It is critical companies have realistic expectations and a proactive working relationship with asset valuers.
According to Jeames McKibben, principal consultant (project evaluation) at SRK Consulting, valuing mining assets is increasingly complex due to various issues such as commodity-price volatility, COVID-19 and emerging environmental, social and governance (ESG) trends.
McKibben has worked on mining-asset valuations and independent technical reports – to support project finance – for almost two decades.
“I expect to see further increases in asset values across the mining sector for a sustained period,” McKibben told Australian Resources & Investment. “But within that, there will be volatility in asset prices.
“Mining companies must be well prepared when having their assets independently assessed and valued.”
Commodity-price assumptions are a key driver of asset-price volatility. After rising in 2021 and 2022, commodity prices in aggregate have retreated this year, amid expectations of slowing global growth and recessionary fears.
Prices for lithium, cobalt and other critical minerals have fallen this year after soaring gains in the past two years. Metallurgical and thermal coal prices surpassed their previous highs in 2022, but are lower this year.
In contrast, the gold price has rallied in 2023. Proposed mergers in the gold sector have featured.
“Volatility has seen transaction counterparties adopting different positions with respect to commodity prices,” McKibben said. “It is evident that some companies are basing their expectations of commodity prices approximating prevailing spot prices, while others adopt a view based on long-term commodity-price forecasts.”
Uncertainties associated with COVID-19 compound the present valuation challenge.
“The pandemic was a turbulent time for valuing assets and its impact is ongoing,” McKibben said. “The period saw transaction volume and values fall, resulting in fewer meaningful transactions to guide current asset values.
“For example, how does today’s asset value compare to prices paid for similar assets during COVID-19 given challenged supply chains, labour constraints and productivity declines over that period?”
ESG considerations are an important aspect for valuation practitioners.
“While certain issues determine the practical constraints and value of mining assets, the priority and breadth of these aspects to the valuation exercise has progressively increased,” McKibben said.
“There has also been extensive repositioning with respect to the ESG credentials of each metal. Clean-energy metals have been in favour, as have traditional stores of value, such as gold.
“In contrast, fossil fuels have lost favour due to ESG factors, yet coal has been among the best-performing commodities over 12 months, in part due to geopolitical factors.”
Mining companies are increasingly factoring ESG trends into asset-value assumptions.
“Certain parts of the market have been slow to recognise this trend,” McKibben said. “But that is changing as companies gradually reposition in light of longer-term trends in clean energy and there is a greater focus on ESG aspects of due diligence and the associated implications for asset values.”
The recent emergence of artificial intelligence (AI) is another growing consideration in asset valuations.
While machine learning has enabled recent advances in exploration and mine production, it is yet to make an impact in mining asset valuation. This is likely to change in the near term due to the requirement for real-time, cost-effective and reliable data, as well as the need to support research, data compilation and analysis of increasingly complex models, and test a larger range of valuation assumptions.
“It’s early days, but the use of AI offers the potential to reduce costs, increasing the turnaround of valuations, and provide more detailed information regarding an asset’s value,” McKibben said.
“AI is likely to play a larger role in researching and preparation of mining asset valuations near term.”
