Mining feasibility studies are prone to exaggerate project values without any rebuke from regulators by failing to take proper account of the cost of capital
Mining feasibility studies are prone to exaggerate project values without any rebuke from regulators by failing to take proper account of the cost of capital. Here is a clear-cut example to illustrate the point. On 18 February 2014, Pilbara Minerals published a study valuing the Tabba Tabba tantalum mine using a 10% discount rate. On 26 March 2014, the company raised capital via a package of convertible notes and options over shares specifically to fund a stake in the mine. The actual cost of capital was, according to my analysis, 46%, more than enough to make a material impact on any valuation. In gaining approval for the capital raising, the company never referred to the true cost of capital perhaps out of embarrassment or perhaps reflecting an unfortunately widespread failure in the sector to understand that equity comes at a cost.
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John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...
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