VALUATION METHODS FOR MINERAL PROJECTS

Confidence A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account. Value DISCOVERY DESK TOP STUDY PROJECT COMMISSIONING FEASIBILITY STUDY STUDY PRE-FEASIBILITY STUDY MINERAL EXPLORATIONPROJECT CONSTRUCTION MINE PRODUCTION PROSPECT EVALUATION Resources Reserves

Confidence A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account Value MINERAL EXPLORATIONPROJECT CONSTRUCTION MINE PRODUCTION PROSPECT EVALUATION Resources Reserves DISCOVERY DESKTOPSTUDY PROJECTCOMMISSIONING FEASIBILITYSTUDY PRE-FEASIBILITYsTUDY STANDARD METHODS Prospectivity Enhancement Multiplier (“PEM”) Comparative Value Method Royalties/Farm-in Agreements

STANDARD METHODS 1. Prospectivity Enhancement Multiplier (“PEM”) Based on the principle of “Past Expenditure”; A premium (or discount) multiplier is applied to the total cost of exploration to date, depending on whether the exploration has enhanced the prospectivity of the ground or not; Multiplier typically ranges from 0.5 – 3.0; Historical expenditures must be declared as audited; Issue – Subjective choice of multiplier value.

2. Comparative Value Method Value is based upon recent ‘arms length’ transactions of a similar nature; Based on a monetary value per unit of resource in the ground or per unit area of defined mineralisation; Issue – Often insufficient similar publicly quoted transactions to make a meaningful comparison. STANDARD METHODS

3. Royalties or Farm–in Agreements The initial committed expenditure establishes a base value for the property; The staged expenditure is discounted to determined the value a buyer is placing on the vendor’s interest; The funding partner predetermines the ratchet effect of exploration success (PEM). This is a legal document and thus the value is firmly entrenched; The level of discounting is an opinion based on the probability that the buyer will actually commit the funds; Issue – Aspects of the method are subjective. STANDARD METHODS

Confidence A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account Value PROJECT COMMISSIONING FEASIBILITY STUDY STUDY PRE-FEASIBILITY STUDY DISCOVERY STANDARD METHODS & EXPECTED VALUE METHOD MINERAL EXPLORATIONPROJECT CONSTRUCTION MINE PRODUCTION PROSPECT EVALUATION ResourcesReserves DESK TOP STUDY

EXPECTED VALUE METHOD Statistically defines the probability of successful outcome of expenditure; and Based upon geological knowledge, cost and time. Issue – Highly subjective.

Confidence A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account Value MINERAL EXPLORATIONPROJECT CONSTRUCTION MINE PRODUCTION PROSPECT EVALUATION Resources Reserves DISCOVERY DESK TOP STUDY PROJECT COMMISSIONING DCF & STANDARD METHODS STUDY STUDY PRE-FEASIBILITY STUDY FEASIBILITY

DISCOUNTED CASHFLOW METHOD (“DCF”) Where possible a cashflow model should be generated; This method takes into account the uniqueness of each resource; Value is calculated from future cashflows generated from the mining of the mineral resource; Cashflow assumptions are based on the likely costs of construction, production and sales for a mine of a similar nature; Discount rate is applied to the cashflows according to the risk profile; Issues - The accuracy of the input assumptions; and - The selection of a suitable discount rate which is a highly contentious issue; Question – Should inferred resources be included?

Confidence A function of the amount of knowledge on a mineral resource/property and the degree of probability of it being brought to account Value MINERAL EXPLORATIONPROJECT CONSTRUCTION MINE PRODUCTION PROSPECT EVALUATION Resources Reserves DISCOVERY DESK TOP STUDY PRE-FEASIBILITY STUDY PROJECT COMMISSIONING FEASIBILITY STUDY STUDY DCF & OPTION PRICING

OPTION PRICING MODEL Typically used for Wits gold properties; Method is applied when the current viability of exploiting the resource is negative by using the DCF; Reflection of the potential for the resource to be developed into a viable mine at some time in the future when the commodity price is favourable; The owner of the resource has the option to list the project on a stock exchange and realise the value the market would place on it; Use the option pricing theory to calculate the commodity price at which the full risk adjusted NPV of the mine is greater than 0.

THE BOTTOMLINE “Where possible, use a number of different valuation methods to increase the voracity of your results” Venmyn