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Factors to Consider in Project Valuation
Leading / Thinking / Performing
Beijing, PRC
June 15, 2011
Alexander Lopatnikov
Factors to Consider in Project Valuation 2
Exposure to China and changing risk profile
Individual factors that influence project valuation
What can companies (not) do to improve valuations?
In This Presentation
Factors to Consider in Project Valuation 3
Exposure to China and changing
risk profile
Factors to Consider in Project Valuation 4
Exposure to China…
“The construction of Chinese infrastructure has
lifted the global intensity of steel use to levels
not seen since the post-War reconstruction of
Europe and Japan ended in the early 1970s.”
FT 0.0
5.0
10.0
15.0
20.0
2011 2016
GPD (PPP), US$ trillion (China - Red, USA – Blue)
Factors to Consider in Project Valuation 5
Market Value 2001 – 2011, US$ billion
Source: Thomson Reuters, Datastream, Vale
…Created Most Value in 2000s…
7.70%
18.90%
2002
China
Other Asia
ROW
33.10%
20.20%
2010
China
Other Asia
ROW
US$4.3bn
US$46.5bn
Vale’s Revenue
Factors to Consider in Project Valuation 6
…and Continues to Create It…
Factors to Consider in Project Valuation 7
…Too Much Money May Be a Problem
“…another major factor is the
financialization of commodity
markets. Its importance has
increased significantly since about
2004…
This phenomenon is a serious
concern, because the activities
of financial participants tend to
drive commodity prices away
from levels justified by market
fundamentals, with negative
effects both on producers and
consumers.”
UNCTAD, June 2011
Factors to Consider in Project Valuation 8
Individual factors that influence
project valuation
Factors to Consider in Project Valuation 9
Key Value Attributes
Resources /Reserves
Deposit characteristics
Mine Dilution and Mill Recovery
Metallurgical recovery
Metal credits and Contamination Charges
Mine and infrastructure costs
Costs to deliver to markets
Fuel, energy and labor costs
Environmental issues
Fiscal and political risks
Factors to Consider in Project Valuation 10
7%
8%
18% 18%
13%
10%
12%
7% 7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
< 60 60-65 65-70 70-80 80-90 90-100 100-130 130-150 >150
Fre
qu
en
cy,
Pri
ce %
Coal Price, US$/Tonne
Coal Price Distribution (FOB Europe) 2007-2010
Assuming current (end 2010)
production and transportation costs
thermal coal sales to the market
breakeven at US$100/tonne
Price Volatility
NPV > 0NPV < 0
Factors to Consider in Project Valuation 11
Real Dollars Costs
OverrunCost
Inflation
11%
14%
100% 125%
Feasiblity Study As-Built
Source: Jasper Bertisen & Graham A. Davis analysis of 63
worldwide mining and smelting projects completed between
1980 and 2001
Size of Project Number of ProjectsPercentage of
Feasibility Study estimate*
$0 - $50 Million 11 118%
$50 - $100 Million 4 102%
$100 - $1,000 Million 3 137% **Over $1,000 Million 3 110%
* - in real dollars
** - contains an outlier otherwise the difference is only 102%
Source: Pincock, Allen & Holt
Capital Costs
Cost inflation, currency and
commodity price volatility
complicate project valuation
Factors to Consider in Project Valuation 12
Non-Mining Costs
FOB Baltic Ports 110 $/t
FOB Vostochny 112 $/t
FOB Yuzhny 103 $/t
50 $/t
35 $/t
40 $/t
NB - 62 $/t
NB - 75 $/t
NB - 64 $/t
Factors to Consider in Project Valuation 13
What can companies (not)
do to improve valuations?
Factors to Consider in Project Valuation 14
Rising mining costs may trigger sector correction
(Reuters) - Consensus forecasts for miners' earnings are failing
to price in the full impact of rising costs, a gap that could trigger
a correction in the sector's shares after the summer results
season.
Uncertainty Is Still There
Factors to Consider in Project Valuation 15
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Incremental Value Over Tangible Assets Book Value
Gold
Iron Ore
Oil and Gas
Replacement
Cost
MRR Taxation and Return on Capital
0%
5%
10%
15%
20%
25%
Return on capital in mining
Factors to Consider in Project Valuation 16
Share Buybacks
BHP Billiton ~ $10 billion
Rio Tinto ~ $ 5 billion
Vale ~ $ 2 billion
Potash Corporation of Saskatchewan ~ $ 2 billion
Alternative Ways of Value Creation
Factors to Consider in Project Valuation 17
In Conclusion
Exposure to China remains both a major risk and source
of return
There are factors to consider other than commodity
prices
Investors need to avoid undertaking “subprime” mining
projects even assuming demand and prices will hold
Factors to Consider in Project Valuation 18
谢谢