VANCOUVER (miningweekly.com) – Project valuations based on elevated price assumptions in the absence of more reasonable scenarios to provide a more balanced view to the market are potentially damaging to the credibility of management teams, their consultants and the mining industry as a whole, London-based boutique investment dealer SP Angel said Thursday.

“We are seeing an increase in the use of what we feel are unreasonable assumptions for commodity prices. We do not wish to temper the enthusiasm of hard working and ambitious mining executives and their paid consultants, but we feel the industry would be better served through the public presentation of more conservative figures alongside their more aggressive assumptions,” analyst John Meyer said in the firm’s daily market commentary sent to clients.

He does not want to see the expectations of enthusiastic mining investors raised yet further for projects that may struggle to gain finance from more conservative lending organisations, and suggests that mining companies and their consultants consider the publication of a number of scenarios including more reasonable commodity price assumptions so that nonexpert investors who read news on stock exchange news wires are more appropriately informed. 

“After all, if you can run one scenario, then you can normally run another relatively easily. We suggest it may be more reasonable to run three price scenarios incorporating a bull case, a bear case, and a neutral case to better show the value of a project,” the analyst suggests.

SP Angel continues to propose its conservative, mid and optimistic price levels for a range of commodities.

For iron-ore, the ideal price level should be based around indications on what is financeable by the major lending banks. This could include base-case prices in a range of $45/t, $60/t and $75/t.

For tungsten, which is “bumping along” at a base case price, the analyst would recommend using $200/mtu (metric tonne unit), $250/mtu and $300/mtu.

In the case of copper, SP Angel might expect to see assumptions ranging from $5 000/t to around $8 000/t.

For gold, financing is generally based off spot prices plus or minus a premium relating to the forward curve at the time. Given the short-term variability of gold spot prices and the longer-term nature of feasibility studies, Meyer reckons studies could use something like $1 200/oz, $1 300/oz and $1 400/oz to give a balanced view of the value investors might expect.

CONSERVATIVE APPROACH
According to SP Angel, banks are currently using more conservative price assumptions.

“We believe the project finance banks are currently working off assumptions of approximately $45/t to $60/t for 62% iron material. We believe they may be similarly conservative when it comes to premiums for higher-grade material. If we see a project financed on the assumption of higher prices then we will update our view,” Meyer noted.

While tungsten pricing is more opaque, the analyst does not believe any tungsten projects are currently being weighed for financing. However, he suspects independent financier Oak Tree Financial, which is backing Ormonde Mining, is delaying the start of construction of the ‘world class’ Barruecopardo project, in Spain, pending higher prices and perhaps firmer offtake agreements.

Meyer points out that several proposed gold projects are working off a $1 300/oz gold price, not far off the spot price currently hovering around $1 247/oz, and banks are able to offset their risk in a very liquid forward market through the sale of hedging products. “Gold companies which had forward planned on the basis of much higher gold prices (at about $2 000/oz), like Petropavlovsk we think, have suffered immensely as they then struggled to restore profitability to mine plans, which included the mining of marginal if not uneconomic grades at much lower gold prices,” he warns.

Further, the analyst suspects that banks might be more aggressive in their financing of copper projects at $5 500/t to $6 000/t. These price assumptions are also supported by the liquid market in forward pricing, which adjust according to forward expectations relative to near term three-month pricing.

One major independent forecasting house recently presented $7 275/t as a long-term price assumption based on reserve depletion, falling head grades and the need for new mine supply to meet demand in the next decade. “While we would not disagree with this view it will be interesting to see if major banks will lend against this forecast,” Meyer pointed out.

“We are not trying to forecast where commodity prices will go, rather we are proposing that companies and their consultants use price assumptions that are in accordance with forecasts, which are realistic when it comes to bank financing for larger capital projects.

“The problem with the inflation of asset values to unreasonable levels and excessive borrowing, is that it eventually leads to catastrophic collapse as seen with the sub-prime mortgage crisis and other asset bubbles. We have first-hand experience of what happens when asset values are held high by unreasonable expectations in support of business where the available cash is spent by the very management who have supported their business on assets with overinflated valuations. 

“This is why, we and most banks take a more conservative approach when it comes to these things,” Meyer stated.