Income Valuation

INCOME APPROACH TO VALUE

The Income Approach is based on the principle of anticipation of benefits and includes all methods that are based on the income or cash flow generation potential of the Mineral Property.

According to the Fundamentals of Real Estate Appraisal, 8th Edition “As a general rule, the sales comparison approach is the most reliable with non-income producing property having a limited market or with special purpose properties, and the income approach is most reliable with income producing property” (Ventolo and Williams, 2001).

Another concept under the Income Approach includes Option Pricing and Real Options methods. These methods consider the risk/volatility in metals prices/forecasts and use numerical methods to project prices and/or value the returns for the holding of the assets. Assumptions are generally tied to market observations. Derivatives, such as the Black-Scholes-Merton model, is a well-known mathematical valuation model of a financial market containing derivative investment instruments that is based on options. Scholes and Merton were later awarded the Nobel Prize in 1997 for their model. High volatility commodities, such as silver, serve well for these types of models. Options methods for minerals are generally more suitable for properties without defined resources, and can be viewed as the cost of keeping an option active, until the decision to proceed or cancel the project can be considered after exploration and feasibility has been better studied.

Stochastic and probability/risk management type methods are also concepts under the Income Approach to Value. This may include Monte Carlo Analysis, Bayesian Analysis, Binomial Matrix and other methods. Stochastic/risk methods for minerals are generally more suitable for properties with some form of cash flow model or expense outlay, where the risks and variability can be addressed in the models.

Market Multiples and Valuation Metrics such as Price to Earnings, Price to Net Asset Value, Enterprise Value to EBITDA, and others.