Valmin 2015, A Timely Update. [Coal Asia magazine Vol. 67]

Valmin 2015, A Timely Update

Introduction.

Australian explorers were in the forefront of Indonesia’s post war reopening of its mineral industry to the public. Many of today’s major mineral and coal mines were discovered and developed with Australian funds and experts. These success lead to opportunities and capabilities being developed, whereupon today’s Indonesian mining industry is lead by a strong professional and ethical Indonesian exploration and mining community. Indonesia is continuing along this international professional development path, with the JORC code (2004) of reporting providing a guideline for the Indonesian KCMI code of reporting.

We recently saw the updating of the JORC code from the 2004 to the 2012 version. Now we see its complimentary reporting Valmin code being updated from 2005 to the 2015 version, becoming binding on AusIMM and AIG members as of 1 July 2016. Valmin is principally an Australian code of reporting for mineral assets. The updated code will have an impact on the Indonesian mineral investment industry as domestic and international investors shall always seek to reduce their risk through reliance of such reporting codes, while geologists, miners and others will apply such codes to improve their professional reporting.

The Indonesian mineral & coal industry is in the midst of a series of mergers and acquisitions, wherein this article seeks to act as an introduction to the reporting code that assigns value to mineral and coal assets. The Valmin code can be freely obtained on line at http://www.valmin.org

What is VALMIN

“The VALMIN Code (2015) provides a set of fundamental principles (Competence, Materiality and Transparency), mandatory requirements and supporting recommendations accepted as representing good professional practice to assist in the preparation of relevant Public Reports on any Technical Assessment or Valuation of Mineral Assets. It is a companion to the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code). The VALMIN Code provides guidance on matters that may be subject to Australian regulations, other provisions of law and the published policies and guidance of the Australian Securities and Investments Commission (ASIC) and the Listing Rules of the Australian Securities Exchange (ASX) or of other relevant securities exchanges.”

The Valmin code is designed to be a reporting code placed between the JORC code for determining ore resources & reserves and the Australian Corporations Act that applies to all public companies. Thus the Valmin code may not be mandatory outside Australia, however it is deemed to be compliant upon individual AusIMM & AIG members for wherever their reports may become public. Public reports include, but are not limited to;

1. a) “A Technical Assessment Report involves the technical assessment of elements that may affect the economic benefit of a Mineral Asset.”
2. b) “A Valuation Report expresses an opinion as to Monetary value of a Mineral Asset but specifically excludes commentary on the value of any related corporate Securities.”
3. c) “An Independent Expert Report is a type of Public Report which may be required by the Corporations Act, the Listing Rules of the ASX or other security exchanges.”
4. d) corporate presentations and
5. e) news releases relating to such reports.

Updating of the VALMIN code;

The 2015 edition of Valmin is prepared by the AusIMM & AIG wherein members can be subject to disciplinary action by their respective associations. The earlier 2005 edition was prepared by a wider range of associations, which have a variety of enforcement mechanisms upon their members. The 2005 Valmin was mandatory for the petroleum industry, however the petroleum industry tends to follow set international standards that are not yet harmonized with the JORC reporting standards, thus the Valmin 2015 edition is referred to as a guideline for petroleum reporting. The Valmin codes assertive nature has been further emphasized from the 2005 obligation “The Valmin Code is recommended practice and should be adhered to when assessing and valuing Mineral…assets etc”, to the 2015 obligation “Public Reports must be reliable…”. In general, the 2015 Valmin report has been broadened, from the 2005 version of a long list of prescriptive report items, to a shorter generalized list that is designed to capture all relevant reports. For example the 2015 sections on commissioning a public report (article 6) and technical assessment (article 7) have changed from a detailed list (2005) to a simplified broader range of terms along with further guidance. However the Valmin code is simply a step towards compliance with the Corporations Act, (GR 111 etc) wherein there are very specific definitions, details and list to be complied with. For example the scope and purpose of a report must be written, along with further guidance in the appropriate Corporations Act. Similarly the emphases of clear, concise and effective reporting remains, however the 2015 version states more directly that “detailed technical information and data must be included…”. Along with a list of items a public report should contain.

The 2005 term of “expert” implied an ASIC related definition that were deemed to be not consistent with this Valmin reporting context, and thus the 2015 Valmin code now refers to a “specialist” for accept the reporting responsibility. To improve transparency, the cost of providing the Public report must now be disclosed, and the Practitioner must make a concerted effort to access and review previous Material Public Reports and confidential information.

The updated 2015 Valmin code has a significantly different structure to the 2005 version, and unlike the update of the JORC code, can not readily be compared section by section. The different approaches are most evident in the final part of the code where the 2005 final headings are revenue (95-96), finance,(97-100) share market and economic conditions(101-102), risk (103). The 2015 code on revenue (7.6) is then followed by a new chapter 8 on Valuation, chapter 9 on Financial Modeling, chapter 10 on Risks and Opportunities, chapter 11 on Other and chapter 12 on Declarations.

Issues.

A webinar was held on the 13 April 2016 with a number of Indonesian based AusIMM members attending along with observers from the KCMI committee. Discussion included concerns that in both Indonesia and Australia that tenement verification is becoming more complex. It is reasonably straight forward to examine the tenement document and refer to the transparent web based C&C status. However determining forestry clearance, environmental compliance and a range of provincial and district compliance issues is often beyond the geologist / miners scope, whereupon a legal due diligence may be called upon.

Most geologist & miners agree that a reserve estimate is developed through modeling the optimum economic mine plan, wherein determining a commodity price is the least reliable factor in the equation. Even the commodity traders that have developed insight into the world of demand and supply have difficulty in predicting price trends beyond a few years, yet most life of mine models are seeking to predict price trends for 20 years. This is where the date of the report becomes a critical factor, whereupon the specialist can only refer to the economic scenarios upon the given date. Essentially a Valmin report has an expiration date of when there is a major shift in the commodity price, costs or significant impact from legislation etc.

The Valmin code requires a specialist to have at least 5 years of recent relevant experience, and a securities expert to have a further 5 years of valuation experience. There was some discussion wherein attaining the additional 5 years valuation experience can only be done through working under an existing valuation expert, and there seems to be gatekeepers to this career path. There clearly needs to be a university course (mineral economics etc) to allow entry of young professionals to this area of expertise, and for such Valmin rules to be adjusted.

The shrinking exploration and mining industry, along with increased work permit complications for foreign specialists has seen a number of international geological consulting firms back out of having a strong presence in Indonesia. The mining companies and a number of investment companies are sometimes looking for readily available consultants however very few have suitable accreditation to undertake valuation reports. KCMI is seeking to develop its own version of Valmin.

Unfortunately there are always some big players in every market who seem to look to exploit weakness in the system. It is common practice for project owners to shop around to find the most suitable consultant, with some owners taking into consideration which consultants are likely to provide a suitable encouraging report. A negative example may be a coal concession owner may that needs to demonstrate 20 million ton reserve in order to qualify to bid for a mine mouth power project. This type of situation has prompted PLN to change the technical criteria to ensure greater reliability of such reserve reports. The new Valmin code requires “

A draft copy of a Public Report should be given to the Commissioning Entity so that it can advise the Practitioner of any Material omissions, comment on the factual accuracy, and assumptions made and advise on any included information that is confidential.” However such a draft may not include the final conclusions, to ensure independence of the author. This will be a difficult business practice for some project owners who feel they have a business right to withhold payment unless the report meets their high value expectations.

The criteria for a Specialist is similar to that of the JORC code; “As a general guide, a person being called upon to act as a Specialist should be clearly satisfied in their own mind that they could face their peers and demonstrate competence in the evaluation of the Mineral Asset under consideration”. Unfortunately some less stringent reporting compliance is made all the more easy for some geological and mining professionals who are more ready to replace “independent confirmable data” with “in my specialist opinion it is OK”. A typical example is seen on the Singapore stock exchange where one companies report professed to be compliant with JORC reporting standards, but the reporting geologist did not undertake a site inspection for the recent drilling. It is understood that sometimes professional who voice concerns about a project report have been subject to intimidation, or fear intimidation, that may include threats to have their foreign work permits revoked, or the threat of inspections in the middle of the night. We have seen the formal complaint process at work in the IDX, whereupon there is typically an initial request for the companies to “please explain” and ultimately followed with limited administrative sanctions or delisting. A formal professional complaint to the AusIMM or AIG is a well respected confidential process; however it is also a lengthy process. For modest Valmin or JORC reporting code infractions the professional author / expert of the public report is required to correct the report, but for more serious breaches there are stiff legal penalties and expulsion from the association.  Both in Australia or Indonesia it is possible for the investing public to lose many millions of dollars, a sum impossible for the professional expert to bear, wherein the investor remains at a loss. A recent court case in Canada (with a different legal base for reporting minerals) has seen one international consulting company liable for a multi-million dollar fine. This has had a kick back impact on the broader consulting industry whereupon the insurance premiums for all international mineral consulting firms have since skyrocketed and created another layer of corporate due diligence that is ultimately passed on through higher rates.

Valuation.

The concept of a Mineral Asset is similar to that used in Indonesia, wherein the minerals within the ground belong to the State but the rights for exploitation and sale are included in the definition of a Mineral Asset. The Valmin code valuation is limited to the Mineral Asset and does not include the valuation of the company.

There are two main methods of valuation;

• “Technical Value is an assessment of a Mineral Asset’s future net economic benefit at the Valuation Date under a set of assumptions deemed most appropriate by a Practitioner, excluding any premium or discount to account for market considerations.”
• “Market Value is the estimated amount (or the cash equivalent of some other consideration) for which the Mineral Asset should exchange on the date of Valuation between a willing buyer and a willing seller in an arm’s length transaction after appropriate marketing where the parties had each acted knowledgeably, prudently and without compulsion.”

“The selection of the Valuation Approach and underlying Valuation Method used is the responsibility of a Practitioner and must not be influenced by the Commissioning Entity or other parties”. “A Valuation Report should make use of at least two Valuation Approaches and the Practitioner should comment on how the results compare and on the reasons for selecting the Value adopted.”

Three widely accepted Valuation Approaches are:

(a) “Market-based, which is based primarily on the notion of substitution. In this Valuation Approach the Mineral Asset being valued is compared with the transaction value of similar Mineral Assets under similar time and circumstance on an open market.”

1. b) “Income-based, which is based on the notion of cash flow generation. In this Valuation Approach the anticipated benefits of the potential income or cash flow of a Mineral Asset are analyzed.”
2. c) “Cost-based, which is based on the notion of cost contribution to Value. In this Valuation Approach the costs incurred on the Mineral Asset are the basis of analysis.”

A general guide to the applicability of each Valuation Approach is outlined in Table 1

 

Valuation Approach	Exploration Projects	Pre-development Projects	Development Projects	Production Projects
Market	Yes	Yes	Yes	Yes
Income	No	Sometimes	Yes	Yes
Cost	Yes	Sometimes	No	No *

 

We can see that the Valmin code rejects the cost method for production, however the Indonesian government has indicated a preference to use the cost method when acquiring shares in some COW companies. For the COW companies this is not simply just about negotiating the cheapest option for the Indonesian government, as many of the COW companies are listed on the Australian or other international stock exchanges, wherein they have a legal and professional commitment to follow the Valmin code.

All Ore Reserves and Mineral Resources must be considered in a Technical Assessment or Valuation. “A range of values (high/most likely/low) must be determined and stated in a Public Report to reflect any uncertainties in the data and the interaction of the various assumptions made; however, the range should not be so wide as to render the conclusion of the Public Report meaningless.” A Public Report should also include a sensitivity analysis showing the effects of changing the most significant assumptions.

Valmin is for whom.

We can see from the definition of Material “requires that a Public Report contains all the relevant information that investors and their professional advisors would reasonably require, and reasonably expect to find in the report, for the purpose of making a reasoned and balanced judgment regarding the Technical Assessment or Mineral Asset Valuation being reported.” Wherein the definition of “Reasonableness implies that an assessment which is impartial, rational, realistic and logical in its treatment of the inputs to a Valuation or Technical Assessment has been used, to the extent that another Practitioner with the same information would make a similar Technical Assessment or Valuation”. The Valmin code goes on to refer to more detail in the Corporations Act.

The Valmin code is often required for project owners that may be seeking to assess their portfolio of assets. Applying the same Valmin code to different projects may more readily enable several projects to be compared. Valmin also provides a firm guideline for the professions who make such reports.

Note that an earlier EY report (Oct 2015) highlighted that some brown-fields projects were too highly priced, and suggested that selective green-fields exploration may provide better investment potential. Although the EY report did not define the valuation / pricing method, it seems that if the Valmin code may not have been applied in all cases. There are still many projects in Indonesia where the owners are holding out for a high price and are not interested in reasonableness.

Conclusion

Each country needs to develop its own code for the valuation of mineral assets, wherein KCMI has started this process. Indonesia may incorporate aspects from the Valmin code, but may also look more closely towards other national and international codes.

The revised Valmin code represents an industry wide professional advancement at a time when acquisitions are a focal point of the industry.