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Is regulation robbing exploration properties of their worth?

by Virginia Heffernan on February 25, 2013 community

[Click to enlarge] Inflation can distort the value of historical exploration work completed on a property.


A typical open pit at WGM's Zimbabwe project. Even though the property had produced several thousand ounces of gold, it was almost impossible to attach a value to the claims under current regulations.

You can’t get chickens if you don’t allow the eggs to develop. Joe Hinzer, president of geological consulting firm Watts, Griffiths and McOuat (WGM), uses this analogy to illustrate how many early-stage exploration projects are being stifled by current mineral valuation regulations before they have a shot at becoming mines.

After the Bre-X scandal in 1997, regulators slapped restrictions on how value could be applied to mineral properties in order to protect investors from fraudulent or misleading claims about a project’s worth. But in a recent talk hosted by the Toronto Geological Discussion Group(TGDG), Hinzer said the restrictions may have gone too far.

To secure a TSX listing, for example, companies must refrain from applying “future value” to a property (future value being what a company proposes to spend on exploration). Nor is applying a value to historical resources permitted, unless they can be reconciled with National Instrument 43-101 standards, which require an expensive premature investment in drilling.

The challenges are compounded by the currently large discrepancy between the value of an ounce of gold produced ($1,600-1,700) and the value of an ounce in the ground (usually less than US$100 per oz. and widely variable depending on the jurisdiction) a discrepancy which reflects investor unease over the risks associated with exploration and mining.

That leaves comparable transactions or the appraised value of work completed in the past as the means of attaching fair market value to an exploration property. But in many jurisdictions, including certain African countries, comparable transactions with accurate records may be few to none. Also, both the comparable transaction and appraised value methods can be severely distorted by currency fluctuations and differences in labour costs.

Hinzer used an example of a project WGM worked on in Zimbabwe that had recorded gold production of about 50,000 ounces and obvious value. But since the project had unreconciled historical resources and rampant inflation had halted exploration in Zimbabwe for years (a bottle of beer now costs about $350,000, for example), WGM was at a loss as to how to put any value on the project.

The company was eventually able to identify a couple of transactions based on JORC-compliant resources, but the outcome was far from ideal. “While this made for thin gruel, it was sufficient to pass muster with the bureaucrats at TSX-V,” according to a case study on the subject presented at the SME conference in Seattle by Hinzer’s colleague, Ross Lawrence, who heads up WGM’s mineral valuation practice. “Thus a good short-term solution was achieved. However, the issue of historic resources remains.”

As a solution, Lawrence proposes that the TSX allow historical resources that do not yet comply with 43-101 standards to be assigned some value under certain conditions, such as if they are well documented and/ or reported by a major company.

“It would be a way to bring some of the value back to properties that is being lost in this regulatory system,” Hinzer told the TGDG.