Abstract
M.Com. (Business Management)
All valuations of mineral assets in South Africa are guided by the South African
Mineral Resources Committee (SAMREC) and South African Mineral Valuation
(SAMVAL) codes. They have also been adopted by the Johannesburg Securities
Exchange (JSE) in order to protect shareholders.
Different capital budgeting methods are used for mineral assets valuation in South
Africa. These are the net present value (NPV), internal rate of return (IRR), payback
period, cost, market and real options methods. It is not known which capital
budgeting method is most often used for mining property valuations, as South
African mining companies and associations are not required to share their capital
budgeting processes with the public. In addition, the SAMVAL code does not
recommend the use of the real options method and no reasons are provided.
The study was aimed at establishing the capital budgeting method most often used
for mining property valuations in South Africa, as well as the reasons why the real
options method is not recommended by the SAMVAL code. A judgement sample of
expert valuators was utilised in the study and interviews were carried out using open
ended questions.
The research revealed that NPV is the capital budgeting method most often used for
mining property valuations followed by the IRR method. Outside South Africa,
Bhappu & Guzman (1995) found that these preferences were reversed. Since the
IRR method represents a notional rather than an actual return on investment, South
African valuators were found to be more rational than their overseas counterparts in
the application of these discounted cash flow (DCF) methods.
The findings also revealed that the cost, market and payback methods were less
preferred to the NPV and IRR methods. The reasons given were all consistent with
the theory. The cost method was avoided because it uses historical cost data which
is not usually applicable, the market method was limited due to the lack of available
information on truly comparable projects and the payback method was shunned for undervaluing mining properties by ignoring cash flows that arrive after the payback period.
The respondents also indicated that the real options method is the least used. The method (which includes the value of embedded optionality) was regarded as complex and not widely understood and this was also thought to explain why it is not recommended by the SAMVAL code. This finding indicated that in South Africa the embedded optionality in mining projects may not be taken into account and as a result, opportunities for the exploitation of its mineral assets could be missed.