Mining conference workshop 11092012 assef

WWW.LCC.ASIACONFIDENTIAL DOCUMENT
Conference Workshop Book
Mining Investment & Finance
Optimising mining investment structures & returns
DATE ISSUED:
10th September 2012

What are the core competencies of the Firm ?
How are Shareholder Returns generated ?
Competencies in the Resources Space

| WWW.LCC.ASIA
Lincoln Crowne & Company | Strictly Confidential
Understanding Core Competencies
Resource companies are either ‘discoverers’ or ‘manufacturers’
1. Unique characteristics lose
value over time
Rich ore bodies on the whole suffer declining grades and increasing
costs as time moves forward. The management team need to be
continually looking for new discoveries and opportunities – which have
complimentary and overlapping timetables
Recognise the entrepreneurial
spirit of the young mining
company and keep doing
deals
2. Newly discovered ore
bodies can be sold or
licensed early
There is a trade off between advancement and ‘optionality’ in value of a
newly discovered ore body. Understanding the position of the discovery
against the backdrop of the market, and having an ability to move quickly
can pay dividends
Flexibility in timing and a
clinical understanding of
opportunity value (time) can
pay dividends
3. Mining is no different from
manufacturing or
technology
Technology revolves around ‘discovery’ and manufacturing around being
the ‘lowest cost producer’. Mining is no different, and larger companies
focus on cost base – and not resource
Align the junior company with
delivering projects that are
able to be leveraged into cost
advantage by larger / regional
players
4. ‘Alliances’ can make
significant cost sense
Resource companies on the whole cannot afford to build infrastructure.
Alliance agreements can assist in the development of a lowest cost
producer mindset
See : Acacia Coal (16m MC) and Bandanna (190m MC)
Look at what deals would
make sense to accelerate the
potential of a resource
5. Deal making skills can
enhance shareholder value
For the smaller player it is essential that the deal making skills of the
Company are advanced. In the process of advancing projects there is a
real ability in furthering shareholder value by such a pro active approach
Invest in people and skills
which enhance value. No to
lifestyle company

| WWW.LCC.ASIA
Resource Project Lifecycle
Does not factor in ‘wildcat hits’ which can occur across the Resource space
LO
W
HIGHBROADERINTEREST
EXPLORERS DEVELOPERS PRODUCERS
SINGLE
ASSETS &
SMALL
PORTFOLIOS
FEEDSTOCKS
FOR LARGER
PLAYERS &
INVESTMENTS MERGERS,
CROSS
BORDER
ACQUISITIONS
Develop an
asset(s)?
Accelerate
Portfolio
NO MANS LAND
© LCC 2012 Deal Drivers Framework

Examining:
Tactics in positive markets, capital structures, ‘constraints’
Sector Cyclicality

| WWW.LCC.ASIA
Shareholder Value & Commodity Attraction
Trade in the ‘bubble’, understand that bubbles do not last, balance sheets critical
★ Examine Coal Sector Sector moved through significant market attraction within the period of 2009 to 2010. Numerous small
IPOs took place which all returned significant post IPO performance
★ Bulk Commodity
Constraints Ignored
Anticipated high level of M & AActivity drove valuations in the sector – not fundamentals. This resulted in
significant ‘paper gains’ - but constraints were ignored
★ Capital Availability Capital markets commence to dry up. Reality of the requirement of capital becomes a focus. M & A
activity becomes patchy
★ Balance Sheet Companies take the profile of ‘traditional’ commodity companies – balance sheets in focus

| WWW.LCC.ASIA
Coal Sector Constituents Under Pressure
High cash costs associated with ‘bulk commodity’ starts to bite – balance sheet focus

Traditional and non traditional approaches to value
Valuation in the Resources Space

| WWW.LCC.ASIA
Valuation Approach to be Determined ?
No perfect model, need to present a ‘multi point’ approach
Comparable Analysis Look at trading companies that have a similar resource Not all resources are the
same. Can be mixing
oranges and apples
Single Transactions Look at in geography transactions and compare technical data Close as one can get, but
items such as size, quality,
infrastructure must be filtered
Joint Venture
Expenditure
Link value to potential payoffs from JV expenditure obligations Can be limited in ‘payoffs’
Factoring Formula Formula such as the Kilburn Geoscience Rating Method. This
starts with a base acquisition cost and then introducers
‘multipliers’ and weightings
Risk weights the opportunity,
but based on objective and
subjective elements
Earn In Calculations What the willing buyer acquires an interest in the permit Bad deals can limit equity
value
Control transactions Working backwards from control premia Comparables challenge
DCF / FCF Pure speculation in early stage projects, assumptions difficult to
‘defend’
Can be highly in accurate

| WWW.LCC.ASIA
Resource Project Lifecycle
Is there a negative co-relation of capital to development phase ?
LO
W
HIGHBROADERINTEREST
EXPLORERS DEVELOPERS PRODUCERS
SINGLE
ASSETS &
SMALL
PORTFOLIOS
FEEDSTOCKS
FOR LARGER
PLAYERS &
INVESTMENTS MERGERS,
CROSS
BORDER
ACQUISITIONS
Develop an
asset(s)?
Accelerate
Portfolio
NO MANS LAND
© LCC 2012 Deal Drivers Framework

| WWW.LCC.ASIA
Opportunity cost – Bandanna Energy
Intrinsic value removed, ‘bankruptcy’ valuation steps forward, capital raising difficult at best
Sector out of favour Once the sector is out of favour capital quickly dries up. Any asset based valuation pushed to one side
Balance Sheet exposure The spiral effect is then that the balance sheet of the company becomes fragile and weak, and there is
little prospect for any form of additional raising

| WWW.LCC.ASIA
Discussion points on Valuations
Is the Business Plan going to attract investors – or alienate them ?
Risk Mining is a risk game, but what is the typical return that an institutional shareholder / cornerstone investor
will be looking to receive ?
Portfolio theory Given that many junior resource companies have multiple assets within their portfolio do they enjoy a
strategic advantage or a hindrance ?
Core Competency What is the core competency of a junior resources company ? How can capital be used to maximum
efficiency ? What is the linkage to the balance sheet of the Company ?
Cost of Capital What is the cost of capital for a small to medium ‘explorer / developer’ in the resources sector ? What
analogy is this to the venture capital or private capital industry ? (current gold client)
Competition What effect does competition for capital have on cost of capital, probability of success in capital raising and
process for attracting capital (due diligence to project advancement) ?
Deal Structure What does potential deal structure do to the potential valuation of the project ?
‘Tiffany Box’ How selective are larger players being in the current market ? What does this mean for due diligence ?
What does this mean for timetable larger players will consider projects (spoilt for selection) ?

| WWW.LCC.ASIA
Cornerstone Investor Requirements
Review of Domestic –v- International Requirements
Valuation Venture capital approach to early stage Resources projects
creeping into the market – problems abound
Staggered Deals :
Copperchem
Payback Large cornerstones looking for swift payback 12 – 18 months High competition for such
projects
Directorships Cornerstones often want these Can mean a ‘conflict’ at
Board
Marketing
Agreements
Many are after these at commercial rates Can effect takeover premia
in the stock
Non Dilution Certain shareholders are looking for non-dilution provisions in
the Resources space – or top up options, etc.
Private equity focus
Offshores Absolute focus on ability to get project into production Watch out for ‘researchers’
Grades & Cash
Costs
Cornerstones undertaking extensive independent work to verify
potential
Timetables can be up to 12
months
Cookie Cutter If it is not a simple deal won’t engage Research alternate projects
to ascertain fit

| WWW.LCC.ASIA
Cost of Capital In Current Market Conditions
The larger the capital requirement, the larger the ‘cost of capital’
Equity Market Capital High levels of discount associated with raisings (up to 25% - 30%). Many deals are failing –
particularly those that are dependent on retail shareholders. Capital is not ‘sticky’ with almost
immediate turnover of capital in the markets. No one wants to be caught in the lobster trap
Pre IPO Capital Seed money is still available, but the IRR that is being commanded for such capital is an
expectation of 100% return over a 6 to 12 month period. Seed capital typically up to A$5m
Mezzanine / Private
Equity Capital
US Banks are pushing mezzanine capital into late stage developers and early stage producers.
Rates can be extremely high – up to 18% with a combination of coupon based paper and PIK
Debt Availability Project Financing is available, in particular for short timetable producers in the precious metals
space. Typically, however there is an equity leg condition precedent that is required to be
satisfied prior to the capital itself being available. Debt with a mandatory equity raising is also
doing the rounds ( Cortona Resources)
Cornerstone Trading companies are looking at bulk commodity opportunities. Typical framework of up to
A$30m for up to 50% of the project, with an off take agreement / marketing agreement. Care in
any marketing agreement needs to be taken – spot or at a discount ?
Hedging This is a two edged sword – is it a hedge or a high risk speculative position ? How does one
cater for a hedge that moves into a negative position ?

| WWW.LCC.ASIA
Backdoor Listing and Recapitalisations
Promoters seek to make the ‘economic rents’
Shell Valuation Always contentious. Promoters attempt to extract ‘premium’
due to convenience – but backdoor loophole all but removed
Should be same costing as
for front door
Capital Structures Typically complicated. Options, warrants, performance
payments all make it difficult to create true value for the
Company
Institutional investors tend
not to engage where
complication exists
Directorships Often a compromise between parties – and not typically the
best talent that can be sourced
Smaller Boards for smaller
companies – keep costs low
Trading Tend to be favoured companies for day traders given there is
typically significant issued capital
Cornerstone shareholders
typically also consider
looking at the Project level
Capital Raisings Tend to have a more complex time of the capital raising
process. Warrants (including broker warrants) tend to be the
normal part of the process
Low market caps mean
rights issues of prospectus
styled issues still required
Balance Sheet Typically tend to be weak following any deal Little incentive to invest
ASX complication Change of Direction or Change of Size issues mean that
shareholder approval is required – potential for expert reports
Process ensures
transparency

Observations from the ‘buy side’
Deal Filters – Choosing the Correct
Project ?

| WWW.LCC.ASIA
Understanding Project Position / Selection
An objective comparables analysis is of critical importance in assessing any opportunity

| WWW.LCC.ASIA
Elements for Consideration in Resources
An objective assessment of projects is required to develop a robust business plan
Infrastructure & Port
Access
Ability to access Power, Water and Transport. For Bulks need rail / port access – which
means may require finance bonds well ahead of production for Port allocation
Depth & Quantity Open Cut the preference, given underground operations CAPEX and timetable
complications
Environmental &
Community
Community engagement critical if near any population (see CSG), environmental issues
can complicate and delay – including cash for environmental bonds when in production
People Excellent talent can deliver a positive bias to value, but talent comes at a cost and must be
introduced at the correct time. Move to IPCC technologies to drive down OPEX (Iuka
example)
CAPEX to ROI Investors seek quick paybacks given illiquidity and choice for investment
Competition for Resource Gold and Precious metals easy to ‘trade’, bulks and exotics not as easy to create markets
for
Royalties and
Government Policy
Mining Rent Resources Tax effect. Mine closures & project shelving (BHP at Olympic
Dam, BMA at Gregory). International choice of investment venues
Timetable Current market not ‘patient’ – capital being directed to projects that can move to cash flow
positive within 12 to 18 months

Observations from the ‘buy side’
Observation on Feasibility Errors

| WWW.LCC.ASIA
Errors in Resource Project Feasibility
Errors come in all shapes and sizes – conservative approach –v- aggressive
Abundance of capital Australian companies tend to calculate things on the basis that capital WILL be available.
Investors are looking for ‘privateer’ styled management teams who are less focused on the
perfect development as opposed to getting a project established and into production
Commodity pricing Feasibility is often run at unrealistically high assumptions. For example in Gold, many
projects are currently being promoted on the basis of a sustainable Gold Price at US
$1,550 p oz where banks (for example) are using assumptions around US$1,100.
Rapid fluctuations in commodity or FX rates are often not reflected in project briefings
Contractor Cost Contractor cost over life of mine are typically underpriced. Example : Oil & gas explorer
with Drilling requirement but no contractor – quote to contract difference
Contingency Rarely is there sufficient contingency for establishment of a project, and this in turn leads
to points where certain projects can fail or run materially over budget
Timetable Timetables for approvals and availability of even basics such as drill rigs can be vastly
underestimated. Delays lead to high holding costs and unpredictable outcomes – which
disengage investors

| WWW.LCC.ASIA
How Aggressive Are Project Assumptions ?
3 Month Price Action
3 Year Price Action
Would you invest ? Assumption of gold at US $1550

| WWW.LCC.ASIA
Errors in Resource Project Feasibility (con)
Lack of flexibility in financial modeling a common observation
Cut Off Grades Unrealistically low cut off grades which are not globally competitive. These question the
economic viability of the projects when cost base is considered
Mine Life Short mine life projects that have an ‘expectation’ that the mine life will be extended.
CAPEX associated with extension can outweigh the potential financial benefit
Change in Process Items such as Electricity and Fuel Costs are not factored in in a flexible fashion. These
then result in movements with cost base that are not able to be recovered (contractor shift
in price)
Scale Lack of scale makes an operation exposed to additional losses – fragile business models
Weather Never factored in
FIFO costs Cost of workforce through both mobility and accommodation are typically low. Cost of
recruitment and retention of talent in smaller operations is also typically low
Environmental Reports, maintenance, bonding and reclamation are often low. Government Bonds are
only estimates and do not result in 100% cover (if an acquisition)

| WWW.LCC.ASIA
Building a Market Presence – Chasing Capital
Wide ranging roadshows often yield little value for early stage Resource companies
Broker Activity It is patchy at best. Most brokers are being quite ‘activist’ with
investee companies that are not delivering – this is a developing
trend amongst Australian fund managers, and dealing with activist
investors can be a complicated and highly distracting activity
Ideal to have multiple
brokers
Research Without independent broker research there is a lower possibility of
achieving a capital raising. There is a ‘loop’ which is brokers
expect some form of corporate activity to justify the investment in a
research commitment
Understand the importance
of independent research
Individual Senior
Brokers
Small companies often have evangelists. These are senior
brokers in a Firm that takes the time to understand the potential of
the business model
Company needs to invest in
cultivating senior broker
contacts – including site
visits
Seeking out
experts
There is some skepticism about reports, competent person
statements and project potential. Objective calibration to leaders
in a sector required
Research and objective
focus on skills of
professionals recommended

Examining:
Formation, Structures, Valuations, Dissolution, Exits
Joint Venture Relationships
Readings :
Joint Venture Laws in Australia
When do Joint Ventures Create Value ?

| WWW.LCC.ASIA
Discussion points on Joint Ventures
Smaller players need to take care in ensuring a JV covers a wide range of scenarios
Ownership What difference does the ownership structure make ? Should one be a passenger in any deal ?
Signalling How can a Joint Venture be used effectively from a shareholder value perspective ? Are such signals
permanent ?
Valuation How does valuation interact with ownership ? Do small differences in structure make any difference to
potential value of a minority shareholder ?
Capital Calls & ‘Loans’ How should capital calls be handled ? What if a larger player fails to take up a capital call ? Effect on
Project and the ability to raise capital
Dissolution Do pre-emptive rights clauses work ? What are the challenges that are faced in dealing with these sorts of
mechanisms ? What are the alternatives that are available – and what are the risks within those structures
and how can they be further mitigated (examine shotguns)
Duties & Reporting Importance of duties. Why is ongoing reporting a requirement ?
Contract v Fiduciary How do fiduciary duties interact with Joint Ventures ? How are these mitigated ? What does that
mitigation in fact mean ?
Disputes on JVs What happens if a JVA is incomplete in terms of time ? Glide path clauses.
Heads of Agreement Breaking a few myths
This Agreement shall continue after the expiry of the Term for so long thereafter as shall be necessary in order to properly complete the winding up of the activities to be conducted pursuant to the JVA

| WWW.LCC.ASIA
Valuation & Joint Ventures – Inputs
Poorly addressed clauses can have a negative bias on value
Ownership What difference does the ownership structure make ? Should one be a passenger in any deal ?
Typical Factors
Considered
Size, Public / Private, Size Holding, Operational relevance (passenger –v- operator) , Dissolution
Mechanisms, Rights in Shareholder Agreement (decisions), Liquidity, Marketability, Dividends
Size Larger the project the higher the level of interest and the
leverage for shareholder returns
Public / Private Typically there is a discount associated with a private
company as opposed to a public
Holding Closer to the 50% mark the minority arguably the lower
the discount to be applied. Tactically can use structured
deals to protect
Operational
Relevance
Significant issue. If operationally involved (even in part)
then can move away from minority shareholder
argument
Dissolution
Mechanisms
Open mechanisms lead to lower discounts as able to be
marketed. Structured or majority controlled processes
may result in ‘land locked’ assets
Decision Making Is the minority involved ? Decision making can lead to
argument for lower discount (see example)
Liquidity What market is there for the asset ? Size and quality of
both asset and holding critical
Marketability Links to Dissolution Mechanisms
Dividends How will these be able to be valued ? Is there value in a
preferred dividend ?
Payments More payments the higher the ‘option value’ associated
with the shareholding
Marketing
Agreements
Care needs to be taken in tying up marketing
agreements early. Marketing agreement can ‘cap’ both
value and liquidity
Progress Has the JV been advanced or is it a scenario of a larger
player ‘shelving’ the asset once the JV agreement is in
place ?

| WWW.LCC.ASIA
Positive ‘Signaling’ Potential from JVs
But how relevant is the JV for the Target’s shareholders following announcement ?
Why no follow on in share price ?
Examine announcements

Potential payoffs of early stage projects
Use of Real Options in the Resources
Space

| WWW.LCC.ASIA
Introduction to Potential Application of Option Theory
• Discounted cash flow (DCF) methods were, and still are, a central plank in most MBA and business education
programmes. Executives, managers and analysts are taught project appraisal methods and the superiority of net
present value (NPV) and internal rate of return (IRR) measures compared to return on investment and payback
• However, DCF method neglects the value of the flexibility of managers to react to any change such as new
information as it arrives
• Flexibility give management the option to change the investment / decision. This option will be exercised if it is
in the interest of the firm or organization to vary decision making – which can be as a result of market conditions
or commodity prices
• Real Option Valuation and other quantitative methods could be very useful when estimating an uncertain project
such as mining or resource exploration

| WWW.LCC.ASIA
Alternative Valuation Methods – Touching on Options
• Closed form, Black-Scholes based Real Option Valuation solutions
• Binomial Lattices
• Monte Carlo Method
• Finite difference methods for option pricing
• Delay Option
• Abandon Option
• Expansion/Shrink Option
• Conversion Option (debt to equity)

| WWW.LCC.ASIA
A Practical Case by Using NPV and ROV Model
• Company X has the opportunity to withdraw from a 10 years licence on Project N.
• Expected to yield 50 Million barrels
• Current Oil Price from field N: $11/barrel
• Present Value of development cost: $ 600 Million
• The commodity bull market is over and Company X is considering to quit from Project N in 5 years.
(Abandon Option applies)

| WWW.LCC.ASIA
A Practical Case by Using NPV and ROV Model
• LCC ROV Model, based on several key assumptions
of uncertainty.
• We exam two major sources of uncertainty affecting
the value of project: the quantity and price of oil.
• We also take into consideration of possible dividend
pay-out.
• This leads us to estimate Option Value at $ 100
Million.
• Given an estimated Residual Value of $ 600 Million
after 5 year, this leads us to a value of Options to
Abandon (Sell) at $ 137 Million

| WWW.LCC.ASIA
Other Methods Used – Binomial and Lattice Options
• Monte Carlo. This kind of method are increasingly,
and especially, applied to high dimensional
problems. Useful for projecting potential IRR and
returns – providing an output that is a probability
of the output of that project
• Binomial lattices. This can be useful in more
advanced projects – or those moving into
production (as can factor in dividend payments)

Examining structures that have been applied
Discussion on Benefits and Restrictions
Structured Deals

| WWW.LCC.ASIA
Creating Shareholder Value By M & A ?
Value creation is driven by advancing projects – not the acquisition of something ‘cheap’
Acquisition Premium
Market Value
Price PaidBidder Value Received
Value Created For
Bidder
Value Of Performance
Improvement
Stand Alone Value
Acquisition Base Case framework★ Bidder’s future performance as MergerCo will be
driven by a series of factors which result from the
acquisition. Near geography resources can deliver
‘scale’ (nuisance acquisitions)
★ Critical are : The capital structure of Bidder
following acquisition, the approach to boosting
performance via advancing operations & potential
for advanced balance sheet management
★ Bidder’s strategy for any acquisition has been
represented to investors as one seeking material
opportunities
A properly structured transaction will likely deliver 3
critical benefits :
1. Index weighting
2. Operational efficiencies
3. Simpler path to production

Examining:
Relevance, Potential, Tactical Application, Takeout Valuations
Royalty Arrangements
Readings :
Iluka Mining Area C – Macquarie Report

| WWW.LCC.ASIA
Discussion Points on Royalty Arrangements
Tactical advantage of royalty arrangements should be considered in any deal
Relevance Why have them ? Relevance for companies that are ‘in a hurry’ ?
Bounties and other
Milestones
Advantages. Risk / reward, alignment of parties, extracting maximum value
Application Early stage ? Development stage ? Mining stage ? What is the volatility of the arrangement ?
Protecting the Royalty Requirements to pay. Disputes. ‘Definitions’ in shareholder agreements
Dissolution How to position for a take out ?
Duties & Reporting Importance of reporting & audit obligation. Calculation in case of disputes
Contract v Fiduciary No fiduciary – contractual. Effect on dispute mechanisms.
Example : Poorly worded definition resulted in claim that royalty calculations in error.

Index
Appendix
Section 3: Target Companies

| WWW.LCC.ASIA
Information that has been prepared in this Work Book has been done so by Lincoln Crowne & Company (‘LCC’) in
good faith based on information sourced from a variety of information points including public data, company published
information and third party data sources such as Capital IQ, Bloomberg, IRESS, FACTSET, MDS News, Thomson
Reuters and various other news and media outlets.
Whilst it is believed that the information is accurate at the date of publication, no responsibility will be accepted in any
way from any party seeking to rely upon this information for any business or investment decision. The information
has been provided by way of background research only, and given its content is subject to continual change in
fluctuating markets.
In any engagement LCC acts as an independent contractor and not in any other capacity, including as an agent or a
fiduciary. LCC does not provide any tax advice. Any tax statement herein regarding any US federal tax is not
intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties. Any
such statement herein was written to support the marketing or promotion of the transaction(s) or matter(s) to which
the statement relates. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an
independent tax advisor.
Important Information
LCC’s approach to all engagements is
based on both technical and economic
fundamentals – and how these
fundamentals translate into positive
shareholder value.

| WWW.LCC.ASIA
ACADEMIA
LCC and Bond University has established a relationship
around the importance of success, academic integrity and
outstanding performance. To this end, LCC has sponsored
various faculty awards in both the Business and Law
Schools.
SPORT
LCC has sponsored 12 and 16ft skiffs in Sydney, over
numerous sailing seasons and championships.
In 2012, in partnership with Variety the Children’s Charity,
Nicholas Assef proudly supported the Variety Port Jackson
12ft Skiff Championships. This event marked the launch of a
series of projects committed to raising support for Alopecia
Areata, which is a medical condition of which there is no
known cure.
lincolncrownesailing.com.au
LCC’s Community Focus
LCC Strives to make a positive difference…
PHILANTHROPY
The Lincoln Crowne Foundation is an extension of the Firm’s
corporate social responsibility arm that director, Nicholas
Assef initiated.
The foundation’s main purpose is to support and extend
partnership development to grass roots charities in the Asia
Pacific region, understanding the need to invest in the future
of children in neighbouring communities.
lincolnecrownefoundation.org
GOVERNANCE
We are governed by our commitment as a signatory to the
UN Global Compact.
The UN Global Compact is a strategic policy initiative for
businesses that are committed to aligning their operations
and strategies to ten universally accepted principles in the
areas of human rights, labour, environment and
anti-corruption.
unglobalcompact.org

AUSTRALIAN OFFICE
Level 18, Aurora Place
88 Phillip Street
Sydney NSW 2000
Australia
Correspondence
GPO Box 4154
Sydney NSW 2001
T: +612 9262 2121
F: +612 8088 1239
AFSL 278054
ACN 105 807 645
PROJECT TEAM
Nicholas Assef
naa@lcc.asia
T: +612 8288 8688
Contact

Mining conference workshop 11092012 assef

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Semelhante a Mining conference workshop 11092012 assef

Semelhante a Mining conference workshop 11092012 assef (20)

Mais de Nick Assef

Mais de Nick Assef (9)

Último

Último (20)

Mining conference workshop 11092012 assef