By Bennie Mundando
THE Centre for Trade Policy and Development (CTPD) has questionded why a cost approach was used to valuate Mopani Copper Mines during its acquisition by the Zambia Consolidated Copper Mines-Investment Holdings (ZCCM-IH).
Last month, Government acquired 100 percent stake in Mopani Copper Mines after buying off Glencore’s 73.1 shares through the Zambia Consolidated Copper Mines-Investment Holdings (ZCCM-IH).
Before this transaction, Glencore had 73.1 percent, First Quantum Minerals (FQM) had 16.9 percent, and ZCCM-IH had 10 percent.
But CTPD Senior Researcher (Extractives) Webby Banda has questioned the decision to valuate the assets of the mine using a cost approach which did not take into account for reserves, production profile, and other fiscal terms of the project.
Mr. Banda said the best-known method of valuing mineral production properties is the income approach particularly using a Discounted Cash Flow (DCF) analysis.
“In the case of the acquisition of Mopani Copper Mine by ZCCM-IH it is debatable as to why a cost approach to mine valuation was used. This approach merely looks at the historical, current and future cost of a mining asset. It fails to account for reserves, production profile and other fiscal terms of the project. The question that is to be answered is whether this approach to mine valuation is the best when valuing production properties like Mopani?
“The best-known method of valuing mineral production properties is the income approach particularly using a Discounted Cash Flow (DCF) analysis. This approach valuates the mineral reserves/resources and takes into considering the cost, production profile, and the fiscal regime in application over the life span of the mine,” Mr. Banda said.
He said in the recent past, several jurisdictions had developed professional codes to standardize the field of mining asset valuation, these include, VALMIN code from Australia, CIMVAL code from Canada, and SAMVAL code from South Africa.
He said these codes classify the valuation approaches as income, market, and the cost approach and that the application of any of these methods on a particular mining asset depended on the phase of the project, availability of information, and nature of the valuation.
He said the objective was not to arrive at a particular value but to narrow down to a range of values.
“Despite a 100 years of mining it is unfortunate that the country cannot boast of its own mineral asset valuation code and a mineral reserve reporting code. Crafting these codes will avert a situation where our mining assets continue being overpriced and underpriced to the detriment of the state.
When our mines were privatized the citizenry felt and continue to feel at a loss because the assets were underpriced,” he said.
He said the trend of undervaluing and overpricing of mining assets will continue in perpetuity if the country did not craft its own mineral asset valuation code.
“This does not involve reinventing the will because the Government can easily fine-tune and adopt one of the international codes and pass it into law. When this is done the country will have proper guidelines on mining asset valuation. This is a matter that the Centre for Trade Policy and Development (CTPD) has been advocating for over the recent years.
“The Centre also calls for Government to craft mechanisms that establish the authenticity of the deposited geological information by mining houses as this will translate in estimating the true worth of Zambia’s deposits in any future transaction,” he said.