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VALUATION TRENDS IN PRECIOUS METALS & EMERGING MINERS. APRIL 30, 2013 www.cowensecurities.com | Member: FINRA/SIPC. Adam P. Graf, CFA, Managing Director 646.562.1344 Adam.Graf@cowensecurities.com Misha Levental, Associate 646.562.1410 Misha.Levental@cowensecurities.com.

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VALUATION TRENDS IN PRECIOUS METALS & EMERGING MINERS

APRIL 30, 2013

www.cowensecurities.com|Member: FINRA/SIPC

Adam P. Graf, CFA, Managing Director

646.562.1344

Adam.Graf@cowensecurities.com

Misha Levental, Associate

646.562.1410

Misha.Levental@cowensecurities.com

slide2

Valuation – Who’s Looking?

  • Mining Company / Private Equity
    • Concerned with returns and ability to weather the cycle
    • Use conservative price assumptions, downside potential is key concern.
    • Finance with cash or debt
  • Equity Investors
    • Looking to determine value today and value change with commodity price
  • Debt Investors / Banks
    • Most concerned with downside potential and ability to service debt (interest and repayment)
    • May require hedging to insure debt service, thus eliminating upside potential that likely are the concern of equity investors.

adam.graf@cowensecurities.com

determining value and leverage
By separating value and leverage, investors have a more complete method for choosing stocks that offer one, the other, or both. Additionally, investors can evaluate the cost of each.

Value – The difference (or discount) between the market price and the ultimate intrinsic value of an asset at current commodity prices.

Leverage – The change in intrinsic value directly associated with the price movement of an underlying commodity.

NAV Methodology – Discounted cash flow method used to determine the intrinsic value of a company from the valuation of its assets at current commodity prices. By constructing commodity price matrices, leverage to underlying commodities can quickly be determined and compared. NAV can accommodate all significant variables and thus offers a more complete analysis than simple ratios (e.g. ounces of gold per share).

Determining Value and Leverage

adam.graf@cowensecurities.com

leverage to commodity price
Leverage to Commodity Price

adam.graf@cowensecurities.com

the value proposition
The Value Proposition

“Major” and “Mid-Tier” miners trade at a higher P/NAV than single asset plays (“Juniors”) or development plays (“Emerging Miners”)

“Seniors” or “Majors”, &

“Mid-Tier” producers

“Junior”

producers

Explorers &

Emerging Miners

adam.graf@cowensecurities.com

the nav argument company vs asset level analysis
The NAV Argument: Company vs. Asset Level Analysis
  • The finite resource and uniqueness of every ore body favors an asset-by-asset approach.
  • Mining companies and regulatory requirement often (but not always) provide the transparency needed.
  • The consolidated company approach loses data
  • The NAV is a collection of the value of each asset combined with the corporate balance sheet to indicate value to equity holders.

adam.graf@cowensecurities.com

market based m a based valuation system
Market Based/M&A Based Valuation System
  • FRG provides a convenient case study.
  • Applying a simple multiple set to project in various states of development, FRG followed “fair-market value” from 2008-2010.
  • In late 2010, FRG was acquired by NEM for near “fundamental value”.

adam.graf@cowensecurities.com

market based m a based valuation system1
Market Based/M&A Based Valuation System
  • As equities underperform the commodities, the implied discount rate rises.
  • A rising discount rate reduces NAVs, especially for long-lived projects.

adam.graf@cowensecurities.com

forward looking trends in valuation
Forward Looking Trends In Valuation

Source: Mike Samis, Ernst & Young

adam.graf@cowensecurities.com

valuation trends
Dynamic NAV methodology, with market based inputs allows for asset and equity valuation in the context of the current market.

Only by using this method can value be separated from leverage, allow both to be quantified and ranked.

By determining fundamental (or intrinsic) value for each asset, can fair-market value be projected over time using a schedule of catalysts.

Advanced computing power allows for the use of increasingly sophisticated dynamic NAV models – which replace the need to use arbitrary conservative inputs (non-market derived) for prices or discount rates to evaluate risk.

Valuation Trends

adam.graf@cowensecurities.com

current investment trends
Risk-Off in Gold Equities – Producers vs. Pre-Producers

Investors shunning any hint of risk.

Major Risks Concerning Investors & Acquirers

Political Risk

Permitting Risk

Financing/Dilution Risk

Execution Risk

Large Producers have been punished for making acquisitions or aggressively executing project pipelines, then falling pray to these risks.

Current Investment Trends

adam.graf@cowensecurities.com