New valuation code out in draft form

Canada has moved closer to adopting standards for mineral property valuation with the draft report of a committee of the Canadian Institute of Mining, Metallurgy and Petroleum.

The CIM’s Special Committee on Valuation of Mineral Properties released a set of standards and guidelines in February, currently in draft form, and is now soliciting public comments on them.

The proposed valuation system, called “CIMVal,” has its roots in the 1999 report of the Mining Standards Task Force. The task force, set up by the Ontario Securities Commission and the Toronto Stock Exchange following the 1997 Bre-X Minerals scandal, recommended that the Canadian mining industry adopt a valuation code similar to the Valmin Code used by Australian mineral valuers and public companies.

The same report recommended the development of explicit standards for mineral resource and reserve estimates, best-practice guidelines for mineral exploration and resource estimation, and the Qualified Person (QP) practice. The QP system has since been brought into force by the provincial securities commissions as National Instrument 43-101.

The CIM formed the Special Committee, under co-chairmen Keith Spence and William Roscoe in May 1999, and the committee delivered discussion papers for public comment in 2000 and 2001.

The draft document has, by design, two parts: a set of mandatory standards that valuation work must meet, and a set of guidelines to provide proposed methodologies that can be used in preparing a valuation.

The meat of the proposed system is that valuations should have five characteristics:

– The information used in the valuation must be both material and complete — fundamentally, meaning that no material information should be omitted from the process of valuing the property.

– The valuation must be transparent — the report setting out the valuation should show clearly how the valuator arrived at his figures.

– The valuator should be independent.

– The valuator should be competent.

– The valuation itself should be reasonable, and the value that comes out should be in the range that other valuations would arrive at.

The standards and guidelines are designed to dovetail with existing regulations under National Instrument 43-101, which mandates the QP rule and establishes the CIM’s resource and reserve definitions as standard disclosure categories for public companies. Many definitions of terms used in the Standards come directly from NI 43-101, and the standards for the use of technical reports refer to the Instrument for specifics.

The new standards would require a Qualified Valuator (QV) to sign off on the valuation report, taking responsibilities similar to those taken by the QP in technical reports. The QV would be entitled to rely on technical reports made by QPs. The QV would either have to make a site visit to the property being valued or rely on a QP’s site visit, though in some circumstances site visits would not be material to the valuation and then would not be obligatory.

QVs would normally be independent, though the standards envision cases where that would not be necessary.

Although the CIMVal system has departed in significant respects from Australia’s Valmin Code, a number of Valmin’s important features remain. One is the company’s obligation to provide an engagement letter or contract to the valuator, representing that it has provided all the material information the valuator may need.

Like Valmin, CIMVal does not force the valuator to use a particular method to value the property. The guidelines recognize the widespread acceptance of three broad approaches to valuation: income methods, such as discounted cash flow valuation and option-pricing models; market-value methods, such as valuing based on other comparable transactions; and cost appraisals, which take into account the amount that has been spent on a property. The standards require, in normal circumstances, both a market-value assessment and one or the other of the income or cost approaches, anticipating that for one property, the two valuation methods should come to a similar value.

Copies of the Draft CIMVal Standards and Guidelines are available from the Canadian Institute of Mining and Metallurgy, most conveniently from the CIM web site at www.cim.org/committees/valuation_Minerals.cfm.

Comments on the proposed standards and guidelines can be sent to Michael Bourassa, CIMVal Committee Secretary, at Aird & Berlis, Suite 1800, 181 Bay St., Toronto, Ont. M5J 3T9. E-mail: mbourassa@airdberlis.com