India needs a mineral asset valuation code – Now! – 1

Mr Pratyush Sinha has an enviable job. He has to put a value on 42 operating coal mines which are looking for new owners. Not only that, the procedure adopted by his team is likely to be used as a standard in auction/ acquisition/ sale of coal assets in future. To top it off, all this has to be done by 10th Nov. To err on the wrong decide, would give rise to sleepless night for the bureaucrats and govt in future. None of the committee members have experience in mineral asset valuation. As per the terms of the committee, they can can seek outsider expertise  from empanelled consultants of public sector banks/insurance companies. These consultants have also never handled mineral asset valuation as mineral assets within the country were not allowed to be transferred or financed on the basis of their intrinsic resource value.

The recently issued coal ordinance provides guidance on compensation to prior allottee of the coal block for the cost of land and infrastructure but is silent on mineral asset valuation.

India does not have a mineral valuation code which can be used as a standard by certified competent valuation professionals with technical expertise in understanding the challenges of extracting the mineral reserve from hundreds of feet below ground and bring it to the market.  Absence of a standard norm for mine valuation will give rise to fraudulent activities  as happened during Bre-X scandal in which million of ounces (gold) tuned to naught and investors were duped . Subsequently, Canadian stock exchange (TSE) strengthened its mineral estimation standards through promulgation Ni 43-101 for minerals resource estimation and a financial valuation code (CIMVAL). Australia has its own JORC and VALMIN code for investor guidance while South Africa has SMREC and SAMVAL codes.

The reasons for inefficient mineral valuations are due to

1. Absence of mineral property valuation standards: This removes the subjectivity in interpretation of techno-economic parameters.

2. Lack of data on market transactions : Its very difficult to find two properties with similar geological characteristics.

3. Secrecy of valuation information: Private and state agencies are often reluctant to release detailed auditable information to public.

4. Lack of homogeneous mineral asset: mineral assets all differ in their stage of development, quality, quantity & ease of extraction. These add to the complexity of valuation.

5. Lack of liquidity in local market: The lack of a central market place which can  handle mineral assets and property transactions gives rise to highly local markets with valuation which do not reflect or take into account future discovery.

6. Limited Freedom: The ease of entry-exit into a transaction affected by legal, financial, taxation, national and international constrains.

All international mineral valuation codes are far from perfect. While valuation of greenfield assets have varied widely, those related to advanced development projects have fared relatively better. However, all these codes have helped in providing a degree of transparency and comfort to the buyer, seller and valuation expert so that they are not hounded out of office after a couple of years. ( although, we have some instances of that too :-) )

Guess, as a retired , Ex CVC head, Mr Sinha is the best man for the job.

In next installment, we will deal with an analysis of some of the extractive industry valuation codes in existence today.