Discussion - Should Discounted Cash Flow Projections For The Determination Of Fair Market Value Be Based Solely On Proven And Probable Reserves? - Technical Papers, Mining Engineering, April 2001, Vol.53, No. 4, pp. 51-56 – Lawrence, Ross O.

Discussion by Stephen Semeniuk Discussion As a valuator and SME member, I view Ross D. Lawrence's position as based on unproven and faulty assumptions made with regard to the pragmatic evidence presented in his paper. Moreover, his call for the inclusion of all mineral resources in discounted cash flow valuations is redundant, if not irrelevant, as there are procedures that already take all classes of mineralization into consideration for valuation purposes. In my experience as a valuator, I find that Canadian securities regulators are more than accommodating in allowing any valuations of mineral properties to be based on cash flow calculations. In other business areas, the same regulators usually reject discounted cash flow valuations of projects or businesses with no operating history. Instead, the regulators prefer valuations to be based on other transactions tested in the marketplace. Valuations based on actual market transactions are less subjective than discounted cash flow calculations and/or the capitalization of arbitrary, untested or undemonstrated earnings projections. In the mining and minerals sector, such projections may be made by persons not qualified to make such projections. In support of this statement, I direct readers to the article "Valuation of mineral properties which do not contain exploitable reserves" by Lionel C. Kilburn, which appeared in the August 1990 issue of the CIM Bulletin. To quote from the article: "Value of a mineral property depends basically upon metal prices, recoverable grades, mining and metallurgical practices, commodity supply and demand, and political-economic conditions, all of which vary with time. Five fields of expertise influence the value of a mineral property: •geological engineering, •commodity markets, •financial markets, •stock markets and •mineral property markets. The skills of geologists and engineers properly apply to the first field of expertise. Knowledge and consideration of the other four fields is important, but such advice is more properly sought from marketing experts, economists and stockbrokers." Securities regulators have created no hardship for valuators by excluding unsubstantiated resources in discounted cash flow valuations. In the field of engineering, best design practices apply. A margin of safety is built into the design criteria for any new equipment or structure that will exceed normally expected load levels and stresses, even though such considerations imply higher front end costs. In accounting, the comparable operating principle is conservatism. It explains why, for balancesheet presentation purposes, inventory is stated at cost or market, whichever is the lowest value. Similarly, when the engineering or geoscience-based valuator plays in the field of finance, the rules of accounting and applied economics apply. Regulators in their skepticism of income-based valuations are in tune with similar views already expressed in mining literature. To quote H. Van Tingley, in Mining Magazine, July 1996: "... the DCF method has inherent dangers when applied to undeveloped resources. Firstly, it presents an often-undeserved aura of accuracy. A DCF value is no more accurate than the least accurate of the assumptions incorporated into the calculation - and assumptions