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Possible methods for valuing exploration properties
The method used to assess the market value of exploration properties will reflect various factors, including the development status of the property and the extent and reliability of available information.
The main distinction between resource properties at various stages of development is the amount of information and knowledge available about the geological and geotechnical characteristics of the property, and the degree of confidence that one has about the prospect of converting the property into a producing field.
Due to a lack of knowledge and information about the geological characteristics, the ATO understands that the DCF method is not commonly applied to early stage exploration properties (that is, 'blue sky' projects, or those that have not yet established a resource). This is because properties at these early stages of development have typically not been subjected to the analysis necessary in order to define project-specific DCF input parameters to a high level of confidence. However, the ATO understands that the DCF method is used for earlier stage exploration properties where the valuer has reasonable grounds for the forward looking information used in the method.
Where the DCF method is used to value exploration properties, the ATO considers it to be good practice that the valuer discloses the extent and nature of the adjustments made to the method to allow for the development stage risks attaching to these cash flows, including reflecting such risk in the discount rate adopted8.
One of the primary drivers of the value of an exploration property is its geological prospectivity. The prospectivity of an exploration property is assessed through the interpretation of a range of geological, geochemical and geophysical data by subject matter experts. Since the interpretation of such data has a subjective element to it, an assessment of the prospectivity of an exploration property can be highly subjective.
In addition, an assessment of the ultimate profitability and therefore value of a target resource, if it is discovered, is also subject to a high degree of uncertainty. Together, these two factors can lead to a wide range of values being assessed for an exploration property, and as such, represents a significant risk to the ATO in its administration of the extended PRRT.
A number of valuation approaches are utilised by valuers when assessing the value of exploration properties. These include:
- the joint venture terms method
- various methods that reflect historical exploration expenditure
- the geological risk method, and
- the benchmark method.
Given the subjectivity of valuations, the ATO considers it to be good practice that valuers cross-check their exploration valuations using a secondary valuation method. To the extent that materially different valuation outcomes are derived, the reasons for these differences should be clearly articulated and a justification of adopting one value over another should be provided.