Эрдсийг эрдэнэст
Ирээдүйг өндөр хөгжилд
Mining The Resources
Minding the future

Why proper mineral valuation is a must to attract investment

The Mongolian Mining Journal /Aug.2020/

Saranchimeg Purevgerel followed up her degree in geology with an MBA in Mining, before doing an MSc in Mineral Economics at the Western Australian School of Mines. She specialises in Mineral Project Evaluation and has worked on various projects in mineral exploration, resource development and investment. Currently a director of MSA Global, she talks to Iderkhangai about the importance of following international norms in valuation of mineral resources.  

Does Mongolia have a mineral project evaluation procedure that is internationally accepted?
Not yet, but not because we lack the manpower or the skills. The reason these are not properly utilized is that our legal environment for undertaking such work for investment purposes is not adequately developed. Once this changes, our mining professionals will certainly be able to do all that is done in developed countries to support investment decisions and to be acceptable at the time of initial public offerings (IPOs). 

The basic purpose of mineral valuation is to determine the likely monetary worth of a deposit, to help investors decide on its merits as an investment opportunity. Codes are allotted to the various systems followed in different countries and an international valuation council known as IMVAL is responsible for coordinating these. The Australian code, adopted in 1995, is known as VALMIN, Canada has CIMVAL, South Africa SAMVAL, the USA SME and IIMA, and the Chinese CAMRA. Currently, Mongolia is in the process of developing its own code to be called MONVAL. 

Tell us more about how it works. 
IMVAL certification is a must for national codes and standards. It is based on accepted best practices which are regularly updated from time to time. Its requirements, guidelines and definitions are developed by professional organizations and institutions and it is accepted by stock markets and investment firms. Armed with such valuation, companies can access international markets across jurisdictions in search of foreign investment. The MONVAL code will also reflect Mongolia’s commitment to following best practices. 

This will then give us more power in multilateral negotiations, no? 
Yes. It will also open up international markets for mineral valuation services rendered by Mongolian professionals. Once IMVAL recognises MONVAL, the professional ethics of those who work according to the latter would be taken for granted, and they would not be suspected of either overestimation or underestimation, or of wilfully downplaying risks. Their report would be the basis of an IPO, or of other efforts to attract capital or enter into investment agreements. Such reports would also contain estimates of tax liabilities of all parties in a transaction, as well as determine the base for value-related taxes and quantify asset values in company balance sheets. 
A working group consisting of representatives of the Financial Regulatory Committee, the Stock Exchange, ministries and other related stakeholders has been working on the development of the MONVAL code since October 2019. 

Why has it taken us so long to do mineral project valuation in ways consistent with international standards? 
There are several reasons for this. First, we have had no accepted standards and methods for accurate and reliable mineral valuation. Second, we did not have enough qualified professionals in this area. Such people should not only know geology and mining, they must also have some understanding of securities and investment markets, and economic, financial and legal matters. Third, the legal environment for this kind of work is not well-developed, chiefly because of the lack of experience in attracting investment in exploration and mining projects. These days we see the social media being used to reach potential investors, which is a kind of distortion and is possible only because we do not have the proper legal framework for investment according to international standards. The case of Khan Resources, which went to international arbitration, showed up the differences in the valuation of the company’s project, and more recently, the declared valuation of the Salkhit silver deposit has been criticised as it was seen to have been done arbitrarily, without following any of the accepted international codes.

Some projects active in Mongolia are listed in stock exchanges in Australia and Canada. Are their mineral assets properly valuated?
Yes. Their valuation reports had to be prepared in accordance with listing rules. For example; the valuation report of the Kharmagtai copper project of Xanadu Mines was prepared using the Australian VALMIN code. 

What is the main difference between valuation of the mineral asset in a project and its feasibility study? And are mineral valuation and evaluation of a mineral project the same? 
It is quite common to confuse them. A feasibility study is a detailed technical and economic study of a mineral project, based on its ore reserve and the engineering design, while mineral valuation is determining the monetary worth of the mineral assets in a project, taking into account the risks and returns as per the terms of an investment agreement. A valuation report shows the market value of the deposit. 
The basic difference between the two similar sounding words is that valuation is an estimation of monetary worth, while an evaluation is an assessment, often in our context to decide the future of a project, from the physical, technical, legal, economic and other angles separately or together. This report can then lead the investor to make a scoping study, a prefeasibility study and ultimately a feasibility study. In 2018, I conducted an evaluation of the Gatsuurt gold project, including a valuation of the deposit. I based my work on the NI 43-101 technical report and used the VALMIN Code. 

Does our inability to valuate or evaluate -- or both -- mineral projects in accordance with international standards contribute to our failure in protecting the interest of investors? 
Protecting the interests of investors is not the sole or principal purpose of a mineral project valuation exercise. That is to help the investor make a budgeting decision, including deciding on an IPO. 
We have made some progress in this regard. The present listing rules of the Mongolian Stock Exchange for mining companies were approved in 2018 but these should now be revised to include compliance with the MONVAL code. Once that is done, an accredited organization would provide training on use of the code.

Does the requirement of stock exchanges in many countries that mining companies should issue public reports apply to Mongolia-related companies listed in them? 
All stock exchanges do not have the same listing rules. However, exchanges as well as investment funds and institutions in Australia, Canada and South Africa require that exploration results relating to mineral resources and mineral reserves are reported in accordance with JORC, NI 43-101, SAMREC, or Petroleum Resource Management System (PRMS). Similarly, for mineral valuation, compliance with the VALMIN, CIMVAL or SAMVAL code is necessary. There would be no exception for Mongolian projects wishing to raise funds. 

How reliable and accurate are valuations of the Tavan Tolgoi deposit? 
There has been no word that the deposit has been valued following any international code. However, if its IPO is held at the Hong Kong Stock Exchange, the rules there are clear that technical reports and project appraisals must be prepared by independent experts and following accepted codes. 

Moving on to feasibility studies for our mineral deposits, it is important to improve their standard. Do you favour a stronger role for the Mineral Resources Professional Council in ensuring that these are prepared under international standards?
Mining projects are approved by the Mineral Resources Professional Council using local rules. However, stock exchanges and financial institutions have their own requirements, which might include compliance with international standards. Owners of a project would find it both time consuming and costly if they have to comply with both Mongolian legal requirements and international standards. Estimates may very well change over the time it takes to do things this way. In most countries, Governments and regulators do not approve feasibility studies, treating it as a primarily technical document designed to facilitate financing for a project. Whatever practice is followed, it mitigates risks for investors to get the feasibility study done by an independent company with competent persons. Codes are formulated to make sure of transparency and technical accuracy. 

We have traditionally followed Russian standards when preparing feasibility studies. Do   you think these are good enough or should we adopt other standards?
This is too big an issue to cover now. Briefly, no study made according to Russian standards has ever been ruled out or rejected. But these are not internationally recognised and when preparing any technical study others might be more relevant in relation to purpose, content, format, requirements and definitions.

If a Russian mining company seeks listing on the London Stock Exchange, will it have to do a feasibility study under internationally accepted codes? 
Yes. Even Russian companies must comply with the LSE Listing Rules.  

What is the situation in China? 
The Chinese Association of Mineral Resources Appraisers has observer status in the Mineral Valuation Committee. Teams from the Mineral Resources and Reserves Valuation Centre of the Ministry of Natural Resources in Beijing have visited South Africa to gain knowledge of the SAMREC and SAMVAL codes. 

Its monetary worth is a criterion for listing a mineral deposit as strategic, but how many of those on our list have been properly valued? 
As of today, there is no official information on this, but valuation in accordance with international standards is essential when trying to attract investment. 

Given that there is almost no foreign investment in mining, was the government right to stop issuing exploration licences for one year?
We need to continue improving our legal environment even when economic growth and investment slow down. First, we have to have better rules and regulations so that it becomes easier to raise funds at the local stock market. This will then lead to increased competitiveness and opportunities for foreign investment.  

To end this interview, what does the new Parliament need to do to attract investment? 
First of all, we have to update existing laws and regulations and also improve them in other ways. The Government and the legislature need to work together. Apart from attracting outside investment, there is need to improve the legal environment of the domestic stock exchange so that its working meets international standards.