Valuing Mineral Extraction Companies

Course Content:

Economic background to mineral extraction companies

Ø The markets for oil and gas, metals and other minerals: how big are they, what drives them, and how do they work?

Ø Commodity markets, and trading instruments: physical volumes, forward contracts, futures contracts and swaps

Ø Interpretation of forward price curves: what do backwardation and contango tell us?

Ø The differences between oil and minerals: OPEC, distribution of reserves, substitutability and re-cycling

Participants interpret a forward price curve

What makes mineral extraction companies different?

Ø Economic versus geological constraints to reserves: how recovery factors are dependent on prices and costs

Ø Definition of commercial, contingent and potential reserves: bankable projects, out-of-the-money assets, and exploration upside

Ø Probability distributions: proven, probable and possible oil reserves, and measured versus inferred mineral reserves

Ø How to interpret oil and gas, and mineral company, reserve reports, and the main accounting differences between countries and between oil and mining companies

Ø How to measure reserve replacement: volume and cost effectiveness

Ø Accounting for exploration and measurement of exploration and development costs, and assessment of corporate performance

Participants analyse the reserve statements for an oil and gas company, and a mining company, and analyse corporate performance

Valuing mineral reserves

Ø Tax regimes: royalty and tax versus oil Production Sharing Contracts (PSCs)

Ø Building Discounted Cash Flow (DCF) models of individual assets, and corporate valuation based on liquidation models

Ø Going concern models of mineral extractions companies and the problem of appropriate terminal values

Ø Valuing technical reserves and exploration opportunities: real options theory and probability trees

Ø Enterprise value to equity value: getting from a value of the assets to the value of the equity

Participants complete a model of an oil PSC and interpret its contribution to consolidated accounts and to a company valuation, and discuss a model of a mining company

Comparable companies analysis applied to mineral extraction

Ø Relative versus absolute value: when and why to apply multiples analysis

Ø Valuation measures for mineral extraction companies: why the emphasis on cash flow over profit? Why net of tax cash flow rather than Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)?

Ø Which metric? Value related to reserves, production life, cash flow per unit produced, exploration upside

Ø Application of multiples for new issues, stock selection and mergers and acquisitions: when and how to apply which measure, and methods of interpretation

Participants complete and interpret a comparable companies analysis for a cohort of mineral extraction companies