Deloitte Valuations Workshop

November 5, 2014

Deloitte Corporate Finance

Fundamentals of Valuation Private and Confidential

© Deloitte LLP and affiliated entities.

Fundamentals of valuation This evening’s speakers

1 Deloitte Corporate Finance: Fundamentals of Valuation

Chelsea Jiang Analyst,

Corporate Finance

Vancouver

Direct: +1 604-601-3496

Email: [email protected]

Ian is a Vice President in our mid-market corporate finance practice in Vancouver. Focused on

mergers and acquisitions, and financing for growth, Ian has led several transactions which have

involved strategic private and public acquirers, as well as, private equity acquirers. Ian has experience

working in manufacturing, food and beverage, mining, real estate, forestry, and other business to

business operations.

Prior to joining the corporate finance practice, Ian gained experience working for a local private equity

company, assisting with the successful close of mid-market acquisitions. Ian is a Chartered Accountant

and a Chartered Business Valuator and he holds a Bachelor of Commerce Degree from the Sauder

School of Business. Ian serves as the Treasurer on the Board of the Dixon Transition Society and he

has been published by the Chartered Professional Accountants Association of BC for articles in M&A.

Ian Wanke Vice President

Corporate Finance

(604) 640-3355

[email protected]

Kayli Clark Senior Associate

Valuations

Vancouver

Direct: +1 604-640-4984

Email: [email protected]

Kayli is a Senior Associate in our business valuations practice in Vancouver. During her time at Deloitte

Kayli has specialized in mining valuations in connection with mergers and acquisitions, disputes,

income tax planning and corporate restructurings. In addition to mining, Kayli has experience working in

manufacturing, forestry, healthcare and consumer goods.

Prior to joining the Valuations team at Deloitte, Kayli worked for a biotechnology investment fund

specializing in early stage medical device companies. Kayli is currently pursuing both her CA and CBV

designations and she holds an Honours Business Administration Degree from the Ivey School of

Business.

Chelsea is an Analyst in the Corporate Finance Advisory group in Vancouver. During her time at

Deloitte Chelsea has focused on research in the metals and mining sector, supporting public company

mergers and acquisitions, project financing and advisory mandates.

Prior to joining the team at Deloitte, Chelsea worked for an Equity Research firm in their metals and

mining team. Chelsea currently holds a Bachelor of Business Administration from the Simon Fraser

University.


Fundamentals of valuation Agenda

Fundamentals of Valuation Workshop

Deloitte Corporate Finance Overview

Valuation concepts

Discounted cash flow

Market based approaches

Case Study: Premium food company valuation

Q & A



Deloitte Corporate Finance

Overview



Deloitte at a glance Corporate finance – part of a complete solution


Consumer

Business

Mining & Energy

Financial Services

Manufacturing

Public Sector

Engineering &

Construction

Technology,

Media & Telecom

Ind

us

try

Private Equity

Financial

Advisory Audit Tax Consulting

Financial Advisory

Public Corporate

Finance

Transaction

Services

Valuation

Services

Forensic &

Dispute Services

Reorganization

Services

• Fairness opinion

• Capital markets

and IPO advisory

• Board advisory

• Shareholder value

analysis, strategic

partnerships and

joint ventures

• Lender due

diligence

• Vendor due

diligence

• Acquisitions,

reverse takeovers

• Acquisition &

investments by

private equity

groups and

financial buyers

• Purchase price

allocation

• Goodwill

impairment

• Structured finance

• Business &

intangible asset

valuations

• Pricing analysis

• Fairness opinions

• Forensic

investigations

• Analytic &

forensic

technology

• Dispute

consulting

• Class action

services

• Expert witness

• Litigation support

• Anti-money

laundering

• Business

intelligence

• Anti-corruption

• Turnaround

• Loan portfolio

management

• Stressed and

distressed

advisory services

• Liquidation

• Insolvency

services

• Performance

Improvement

• Merger

Integration

Mid-Market

Corporate Finance

• Divestitures &

acquisitions

• Private equity

capital raise

• Debt advisory

• Management buy-

outs

• Options analysis


Deloitte Corporate Finance One of the largest practices in the world

Deloitte’s Global Footprint North America: Vancouver, Toronto, Montreal, New York, Los Angeles, Chicago Asia: Tokyo, Hong Kong, Seoul, Beijing, Mumbai

Latin America: Sao Paulo, Santiago, Buenos Ares, Mexico City Australia: Brisbane, Sydney, Perth

Africa: Johannesburg

Europe: London, Paris, Madrid, Brussels, Oslo, Frankfurt, Berlin, Moscow, Munich, Rome, Warsaw

• Deloitte Corporate Finance

– In more than 150 countries, is the world’s largest

private professional services practice in terms of

headcount and fee income.

– Offers sophisticated investment banking advice to

companies participating in public and private

transactions globally.

– Boutique levels of service and industry knowledge

integrated with the market reach and technical

resources of a global advisory network.

– Last year, Deloitte advised on over 350 completed M&A transactions globally.

• Deloitte is consistently ranked as a leading

Global Mid-Market Advisor by Thomson Financial

5

69%

31%

Firm Revenue (2014)

Advisory Audit

Deloitte Corporate Finance: Fundamentals of Valuation


Deloitte Corporate Finance Complete corporate finance advisory services

• Strategy development

• Acquisitions or

divestitures

• Valuations

• Execution

• “Outsource” corporate

development

• Strategic assessment

and analysis

• Board, shareholder

services

• Fairness opinions

• Capital projects

• Safety assessment

• “Deloitte as one”

Mergers and Acquisitions Corporate Advisory

Capital Raising Other

• Capital raising

• Option analysis

• Private placements

• Strategic investors



Global mid-market advisory team A global advisory platform for private companies in BC


Ian Wanke

Vice President

David Lam

Partner, Mid-

Market Advisory

Ashton Scordo

Senior Analyst

Core Mid-Market Advisory Team in BC

Strong local team with a global network of 1,300 corporate finance

professionals across 30 countries

Global Mid-Market Corporate

Finance Team

Matt Meyer

Senior VP

Los Angeles

Rob Olsen

Partner

Toronto

Cahal Dowds

Vice Chairman

UK London

North America

Canada Mexico United States

- Chicago - Dallas - Detroit - Los Angeles - New York

South America

Argentina Brazil Chile

Austria Belgium Central Europe Denmark France Finland Germany Greece Ireland Italy

Luxembourg Netherlands Norway Portugal Spain Switzerland Russia Turkey United Kingdom

Europe

Africa

South Africa Nigeria

Middle East

United Arab Emirates

Saudi Arabia

Kuwait

Qatar

Asia Pacific

Australia China India Indonesia Japan Malaysia New Zealand Philippines Singapore South Korea Taiwan Thailand

Will Frame

Senior VP

Chicago

Ronald Chao

Partner

Beijing

Dallas Mcmurtrie

Partner, M&A Tax

Advisory

Simon Gisby

Partner, CF

New York

Avinash Gupta

Partner

India

Doug Beaton

Vice President &

Director

Matt Miller

Analyst

© Deloitte LLP and affiliated entities. 8

June 10, 2013 - Deloitte US has teamed up with McColl Partners LLC. Founded by former Bank of America CEO Hugh McColl in 2001, McColl Partners focuses on strategic advice and assistance to entrepreneurial clients in evaluating and executing mergers, acquisitions, divestitures, and private capital-raising assignments.

• Dedicated Financial Sponsors group to ensure unparalleled

understanding of private equity market dynamics

• Proven track record under Mr. Hugh L. McColl Jr., former Chairman

and Chief Executive Officer of Bank of America

• The Financial Sponsors Group maintains dialogue with over 300

financial sponsors in a wide variety of markets throughout the United

States and internationally.

• DCF has real-time information on which groups are interested in

recapitalization transactions.

• Regular dialogue with these financial sponsors provides meaningful

insight into the investment community’s interests in prospective

acquisitions. As a result of our close relationships, DCF has

developed a strong understanding of each sponsor’s investment

thesis and behavior during transaction processes.

• Extensive experience providing mergers and acquisitions advice

exclusively tailored to middle market clients

• Customized sell side process to meet clients’ specific goals

Deloitte’s financial sponsors group Enhancing our private equity coverage through the acquisition of McColl

A Powerful Combination – Deloitte US + McColl Partners Overview

Deloitte Corporate Finance: Fundamentals of Valuation

Southeast

58 professionals

• Atlanta

• Charlotte

West

15 professionals

• Los Angeles

Mid-America

9 professionals

• Dallas

• Houston

Central

20 professionals

• Chicago

• Detroit

Northeast

15 professionals

• New York

Talent

Number of Partners/Principals/Directors: 25

Number of advisors: 120+

© Deloitte LLP and affiliated entities. 9 Deloitte Corporate Finance: Fundamentals of Valuation

Illustrative transaction experience Deloitte success stories

has acquired

The undersigned acted as advisor to

Makin Metals Ltd.

has acquired

The undersigned acted as advisor to

Northern Mat & Bridge Ltd. The undersigned acted as advisor

to Eminata Group

Has acquired

The undersigned acted as advisor

to 4Refuel

Has acquired an interest in

The undersigned acted as exclusive

advisor to CBV Collection Services Ltd.

has acquired Has acquired

INLAND PACIFIC DISTRIBUTORS LTD.

The undersigned acted as financial

advisors to the shareholders of

Inland Pacific Distributors Ltd. The undersigned acted as advisor

To Norsat

Has acquired


advisor to Tom Harris Cellular

acquired selected business locations from

The undersigned acted as

financial advisor to CPX

Has sold 50% of its interest in

invested in


advisor to Kicking Horse Coffee.

September 2012

(a Swander Pace Capital, Jefferson Capital &

United Natural Foods Inc. partnership.)


financial advisor to Earth’s Own and

Meadowfresh

Agrifoods International

&

has acquired

Earth’s Own and Meadowfresh

has acquired

The undersigned acted as

advisor to Lesley Stowe Fine

Foods Ltd.


Illustrative transaction experience Deloitte success stories

CIBT Corporation

Has acquired Has acquired an interest in Has acquired Has acquired


to Eminata Group


to West Coast Engineering


to Sprott-Shaw

Has invested in


to Sequel

Has acquired


to Fitness World


to Vancity

a subsidiary of

Has acquired Has acquired Has acquired Has acquired

The undersigned acted as due diligence

advisor Yellow Point

Has acquired


to Pizza 73


to Datawave

Has acquired


to Soyaworld


to SASD

The undersigned acted as advisor to PJ

White Hardwoods Ltd.

http://www.alliance-sd.com/index.php


R.S.T. Instruments Ltd.

Location: Maple Ridge, BC

Line of business: Manufacturer of geotechnical equipment

Ownership: Private; 3 Entrepreneurs

Assignment: Majority sale of equity


Overview:

• RST’s products provide critical data and geotechnical measurement information for: civil

infrastructure projects, mine site construction and monitoring, oil and gas and pipeline

developments, as well as, environmental and utility projects. RST has customer around

the globe.

Process:

• Educated management on various opportunities available: minority sale, majority sale,

100% sale.

• Prepped the business for sale, completed a vendor due diligence assignment, and

reached out to a list of 128 prospective purchasers developed by Deloitte.

Outcome:

• Maximized value by maintaining competitive tension and encouraging increased bids to

gain exclusivity privileges.

• ~ 70% equity sale to HKW was completed on July 31, 2014 allowing the vendors to

realize the majority of their share capital appreciation.

• Ensured that all three shareholders were permitted to retain equity ownership going

forward, even if they choose to retire at a later date, consistent with their objectives.

“We are glad to have Deloitte on our side. Their level of execution, experience and access to global investors ensured that we had all the right

players at the table. We have now secured a partnership for our company that will accelerate further growth and opportunities for us. From

transaction readiness, to marketing, to negotiations, the Deloitte team guided us every step of the way to achieve the best possible results. Thank

you Deloitte and a job well done to David and Ian.”

Rob Taylor, President & CEO of R.S.T. Instruments Ltd.

has invested in

The undersigned acted as exclusive financial

advisor to R.S.T. Instruments Ltd.

Hammond Kennedy, Whitney &

Company, Inc.

R.S.T. Instruments Ltd.


Valuation concepts



What is the purpose of a valuation exercise?


Value a purchase

Calculate a liquidation value

Price an Initial Public Offering

Value a sale

Perform scenario analysis

Evaluate managerial performance or decisions

Valuation concepts Use of valuation


Re-arranged

Equity Value

= Enterprise value - FMV of debt + Redundant assets

Valuation concepts Elements of value

Fundamental valuation equation

Enterprise Value

= FMV of equity + FMV of debt– Redundant assets

Enterprise Value

= Discounted free cash flows +

Terminal value

FMV of Equity

= Common shares + Preferred

shares +Minority interest

What is the difference between Equity Value and Enterprise Value?


?

Mortgage

(aka Debt)

What is the Enterprise Value of the house?


?

Down

Payment

(aka

Equity)

Mortgage + Down Payment

Valuation concepts Capital structure


How do you measure value? Valuation approaches and methods

Market

Approach

Guideline

public

companies

M&A

transactions

Asset

Approach

Liquidation Modified net

assets Capitalization

Income

Approach

Discounted

cash flows

Valuation methodology descriptions

Asset approach

The current value of a company’s net

assets as the prime determinant of value.

This approach is used when:

1. A business is not viable as a going

concern and it maximizes value under

liquidation; or

2. A company is properly valued as a

going concern but where the going

concern value is closely related to the

value of its underlying assets

Income approach

Value is ascribed based on the company’s

ability to generate future discretionary cash

flow and earn a reasonable return on

investment after consideration of risks

related thereto.

The DCF method is a form of the income

approach whereby projected cash flows,

attributable to an asset, are converted to

the present value through discounting.

Market approach

Involves determining the fair market value

of a company based on activity ratios

derived from the analysis of guideline

public company trading prices and market

transactions that can be applied to the

company in question.

Both merger and acquisition activity and

stock market activity are considered in

deriving various value measures to apply.


Discounted cash flow



Ascribes value to a company based on its ability to generate future discretionary cash flow and earn a reasonable return on

investment after consideration of risks related thereto

Limitations

Risk of realization, limited historical information (e.g., start-ups), forecasting Income

What is it?

• When comparable companies / precedent transactions

are not available

• When the cash flows are expected to change

significantly (i.e. Unprecedented growth)

• When there are multiple business streams with different

levels of risk

• For start-ups when the company does not have a history

of earnings

• When IRR is a key factor in the investment making

decision

When is it used?

1. Cash is King

- “If it don’t jingle it don’t count”

2. Time value of money

- Opportunity cost

- Reflection of risk

3. Net present value

- Only undertake transactions with positive NPV

Major cornerstones

Discounted cash flow Overview


Discounted cash flow Step 1 – Determine free cash flow


C$000 2014F 2015F 2016F 2017F 2018F 2019F

EBIT 100 119 141 169 209 274

Add:

Depreciation 20 25 32 38 40 25

EBITDA 120 144 173 207 249 299

Less:

Tax (24) (29) (35) (41) (50) (60)

Capital expenditures (50) (50) (50) (50) (50) (50)

Change in WC (1) (1) (1) (2) (2) (2)

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994

Enterprise value 1,435

Can start a DCF with net income, NOPAT, EBT, EBIAT, etc.




C$000 2014F 2015F 2016F 2017F 2018F 2019F

EBIT 100 119 141 169 209 274

Add:


EBITDA 120 144 173 207 249 299

Less:

Tax (24) (29) (35) (41) (50) (60)


Change in WC (1) (1) (1) (2) (2) (2)

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994


Add back non-cash expenses and deduct non-cash gains. Remember – Cash is King




C$000 2014F 2015F 2016F 2017F 2018F 2019F

EBIT 100 119 141 169 209 274

Add:


EBITDA 120 144 173 207 249 299

Less:

Tax (24) (29) (35) (41) (50) (60)


Change in WC (1) (1) (1) (2) (2) (2)

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994


DCF is used to estimate how much the company is worth which includes impact of taxation




C$000 2014F 2015F 2016F 2017F 2018F 2019F

EBIT 100 119 141 169 209 274

Add:


EBITDA 120 144 173 207 249 299

Less:

Tax (24) (29) (35) (41) (50) (60)


Change in WC (1) (1) (1) (2) (2) (2)

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994


Capital expenditure is a cash outflow required to support continued growth and working capital is the

cash required for day to day operations




C$000 2014F 2015F 2016F 2017F 2018F 2019F

EBIT 100 119 141 169 209 274

Add:


EBITDA 120 144 173 207 249 299

Less:

Tax (24) (29) (35) (41) (50) (60)


Change in WC (1) (1) (1) (2) (2) (2)

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994


Free unlevered cash flow available to all capital providers


Free cash flow to firm WACC = cost of equity (x%) + cost of debt (y%)

• Discount rate is compensation required (opportunity cost) for the stakeholders (FCFF) or

equity holders (FCFE)

• It accounts for the time value of money and adjusts the riskiness of the forecasted cash

flows

• Target weights for capital structure are the best choice

– Trends in the firm’s financing

– Trends in the industry

– Explicit statements from management


Discounted cash flow Discount rate


Discounted cash flow Cost of equity – CAPM

Ke = rf + β (rm – rf)


Market Risk Premium (rm – rf)

• Geometric average excess return of the

market index over rf

• TSE 300 or S&P 500

• Long term average preferred

Beta (β) – Company specific risk

• Regression analysis

• Pre-calculated data sources

• Comparable companies

Risk Free Rate (rf)

• Long term sovereign bonds

Capital Asset Pricing Model



Ke = rf + β (rm – rf)


Market Risk Premium (rm – rf)

• Market return = 12.0%

• Therefore, market risk premium = 7.0%

Beta (β) – Company specific risk

• Assume Beta = 1.2

Risk Free Rate (rf)

• Risk free rate = 5.0%




Ke = 5.0% + 1.2 (12.0% – 5.0%) = 13.4%




Discounted cash flow Cost of debt

Kd = 𝒌𝒅 * (1 – t)


Cost of debt

• Cost of debt is adjusted for the tax rate

Sources:

• Credit spread or yield of liquid

company bonds traded in the market

• Yield on recent bond issues

• Credit spread of similar companies

over government bonds


Discounted cash flow Cost of debt

Kd = 7.0%* (1 – 20.0%) = 5.6%


Cost of debt

• Cost of debt is adjusted for the tax rate

Assumptions:

• Kd = 7.0%

• Tax rate = 20.0%


Discounted cash flow Weighted average cost of capital

Ke = 5.0% + 1.2 (12.0% – 5.0%) = 13.4%



Kd = 7.0%∗ (1 – 20.0%) = 5.6%

Cost of Debt

WACC = 13.4%(50.0%) + 5.6%(50.0%) = 9.5%

Weighted average cost of capital


Discounted cash flow Step 2 – Determine discounted cash flow and terminal value


Discount factor = 1/(1+0.095)^mid-period

0.5 1.5 2.5 3.5 4.5 5.5C$000 2014F 2015F 2016F 2017F 2018F 2019F

EBIT 100 119 141 169 209 274

Add:


EBITDA 120 144 173 207 249 299

Less:

Tax (24) (29) (35) (41) (50) (60)


Change in WC (1) (1) (1) (2) (2) (2)

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994



Discounted cash flow Terminal value

Terminal Value Considerations

• When the company reaches a

representative mature steady growth

phase

• Factors to consider:

• Cyclicality

• Representative year

• Depreciation and CapEx

Terminal Value Approaches

• P/CF multiples

• Dividend discount models

• Capitalized cash flows


-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Utilities Tobacco Sporting Goods High Tech

Forecast Period Cash Flow vs. Terminal Value

Value of forecast period cash flow Terminal Value


Discounted cash flow Terminal value – capitalized cash flow


1. Take the final year of cash flow and multiply by (1+ growth rate)

Free cash flow: 186 * (1+0.03) = 111

2. Divide the free cash flow by the (discount rate - growth rate)

Capitalized cash flow: 111/ (0.095-0.03) = 1,713

3. Discount the terminal value to present using the discount factor in the final year

Terminal value: 1,713*0.58 = 994

Terminal value calculation

0.5 1.5 2.5 3.5 4.5 5.5C$000 2014F 2015F 2016F 2017F 2018F 2019F

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994



Discounted cash flow Step 2 – Determine discounted cash flow and terminal value


Equity value: Enterprise value less net debt plus redundant assets

0.5 1.5 2.5 3.5 4.5 5.5C$000 2014F 2015F 2016F 2017F 2018F 2019F

EBIT 100 119 141 169 209 274

Add:


EBITDA 120 144 173 207 249 299

Less:

Tax (24) (29) (35) (41) (50) (60)


Change in WC (1) (1) (1) (2) (2) (2)

FCFF 45 64 87 114 147 186

Discount factor 0.91 0.83 0.76 0.70 0.64 0.58

PV FCFF 41 53 66 79 93 108

Sum of FCFF 441

Terminal value 994



Discounted cash flow Forecasting assumptions


• 5 year geometric average

• AR, Inventory, AP turnover

• Historical margins

• Forecast and targets

• Corporate strategy

• Often most accurate public info

• May not be specific enough

• Product / customer life cycle

• Assessment of market potential

Growth

Rates

Tax

Rates

Margins

Terminal

Value

• Revenue

• Working Capital

• Expenses

• Tax break incentives

• Long term rate

• Gross margin

• EBITDA margin

• Timing

• Terminal growth rate

Common Assumptions Sources

Historical

Averages

Management

Analyst

Reports

Management

To forecast cash flows, what assumptions do you need to make?


Discounted cash flow Summary


Forecast future cash

flows after cash

taxes

Estimate future

working capital and

capital expenditure

Select the correct

discount rate

Discount the cash

flows and terminal

value

Assess reasonableness of results

• Cash is King

• Assess the timing of the investment

• Sensitivity analysis

Compare results

• Comparable companies analysis

• Precedent transactions analysis


Market based approaches



Market based approaches Overview


Common methods

Limitations

• Difficult to identify pure-play comparable companies or transactions

• Market inefficiencies

• Approach is often used as a ‘quick’ methodology, and can be misapplied

• Precedent transaction multiples • Comparable company analysis

Comparable Company Analysis Precedent Transaction Multiples

• Public market valuation

• Market’s shortcut to DCF

• Does not reflect M&A control premium

• Sale transactions

• Focused on change of control situations

• Includes a control premium


Comparable company analysis Theory and methodology


Disadvantages

• Include control premium and synergy assumptions, which are not public knowledge

and are often transaction-specific

• Precedent transaction valuations are easily influenced by temporary market

conditions

Advantages • Precedent transactions are typically an easy analysis to perform

• Market determined value – precedent has been established

Criteria for a “good

comparable”

Methodology

• Consists of a comparison of several companies’ operating and trading statistics

• Price that the market is willing to pay for a dollar of cash flows or assets for companies

that have similar growth prospects or risk profiles

• Operate in a similar industry and geographic region

• Have a similar size of operations and type of products

• Have similar growth opportunities and risk profile


Multiple Attributes Examples

• Well known and widely used, easy to understand

• Forward looking (forecasted earnings)

• Hard to compare companies with low or negative earnings,

or multiple-sector corporations

• Distorted by capital structure

• Selection of proper comparables is key

Large caps

Blue chip stocks

Older, steady earnings companies

• Focuses on cash flow – most closely aligned with

shareholder’s interests

• Eliminates most accounting / financing distortions

• Can be used with negative earnings

• Short-term focus

• Subjectivity in choosing proper comparables

• Eliminates capital structure distortion

• Widely accepted methodology, especially in takeovers

• More cash flow oriented than earnings oriented

• More complex to calculate

• Higher needs for consistency between numerator and

denominator

Comparable company analysis Multiple overview


Enterprise

Value /

EBITDA

Price /

Earnings

Price /

Cash Flow


Multiple Attributes Examples

• NAV describes the company's current asset and liability

position

• Easy to calculate a target price

• Fair value of assets on a fully liquidated basis

Mining companies

Large asset bases

• Proven and probable (2P) refers to geologic reserves – 50%

chance of recovery

• Not cash-flow based

Mining companies

Oil & Gas companies

• Doesn’t account for cost structure

• Can be used to compare start ups with negative cash flow

Technology companies

Restaurants

Comparable company analysis Multiple overview


Enterprise

Value /

Revenue

Enterprise

Value /

Reserves

Price /

Net Asset

Value


Comparable company analysis Illustrative example


Public Companies Ticker Flagship Asset

Coal Type Stage Market Cap EV

Total

Resources

EV / Total

Resources NAV*

P / NAV

Location (C$M) (C$M) (Mt) (C$/t) (C$M)

Junior & Mid-Tier Producers

Rhino Resource Partners LP NYSE:RNO Appalachia Metallurgical Production 117 192 356 0.54 n/a n/a

SouthGobi Resources Limited TSX:SGQ Mongolia Thermal and met Production 109 211 912 0.23 585 0.19x

Cockatoo Coal Limited ASX:COK Australia Thermal Production 63 104 1,892 0.06 n/a n/a

Xinergy Ltd. TSX:XRG US Thermal Production 20 249 72 3.45 n/a n/a

Pacific Coal Resources Ltd. TSXV:PAK Colombia Thermal Production 17 46 88 0.52 n/a n/a

Atlantic Coal plc AIM:ATC US Metallurgical Production 12 25 2 14.27 n/a n/a

Buffalo Coal Corp. TSX:BUF South Africa Thermal and met Production 8 28 83 0.34 57 0.13x

Average 2.77 0.16x

Average excl. high & low 1.02 n/a

Developers

Atrum Coal NL ASX:ATU Canada Metallurgical Feasibility 218 208 1,567 0.13 n/a n/a

Rey Resources Limited ASX:REY Australia Thermal DFS completed 56 53 457 0.12 n/a n/a

Resource Generation Limited ASX:RES South Africa Thermal and met Development 72 39 3,031 0.01 n/a n/a

Fortune Minerals Ltd. TSX:FT Canada Metallurgical Development 36 35 472 0.07 88 0.41x

Coalspur Mines Limited ASX:CPL Canada Thermal Development 15 86 756 0.11 1,593 0.01x

Jameson Resources Limited ASX:JAL Canada Thermal and met PFS completed 25 22 99 0.23 96 0.26x

Stanmore Coal Limited ASX:SMR Belview Thermal and met Development 19 1 920 0.00 n/a n/a

Goldsource Mines Inc. TSXV:GXS Canada Thermal PEA completed 14 13 150 0.09 n/a n/a

Prophecy Coal Corporation TSX:PCY Mongolia Thermal Production 19 20 3,754 0.01 n/a n/a

Morien Resources Corp. TSXV:MOX Canada Thermal and met PFS completed 11 10 120 0.08 n/a n/a

Colonial Coal International Corp. TSXV:CAD 7 5 397 0.01 143 0.05x

Cardero Resource Corp. TSX:CDU Canada Metallurgical PFS completed 6 11 525 0.02 37 0.17x

EastCoal Inc. TSXV:ECX.H Ukraine Thermal Development 6 6 96 0.07 n/a n/a

Compliance Energy Corp. TSXV:CEC Canada Thermal and met PFS completed 2 1 131 0.01 n/a n/a

Average 0.07 0.18x

Average excl. high & low 0.06 0.16x


Precedent transactions Theory and methodology


Disadvantages

• Include control premium and synergy assumptions, which are not public knowledge

and are often transaction-specific

• Precedent transaction valuations are easily influenced by temporary market conditions

Advantages • Precedent transactions are typically an easy analysis to perform

• Market determined value – precedent has been established

Methodology

• Looking at historical prices for completed M&A transactions involving similar companies

to get a range of valuation multiples

• Basis for a precedent transaction analysis is that a rational investor should place a

similar value on similar assets

• Why do precedent multiples tend to be higher than comparable company multiples?

Criteria for a “good

transaction”

• Operate in a similar industry

• Consist of a similar transaction size and within a reasonable time frame

• Similar transaction type (i.e. share or asset transaction)

Documents

Deloitte Valuations Workshop