Other people's money

The provincial government wants to know how much the coal resources in the Dominion Coal Block are worth. The government has been negotiating to open up those federally-owned lands to mining since at least 2003 - despite concerns the development of those resources could pollute the waters in and around America's Glacier National Park, as well ruin valuable wilderness habitats. And now, the Campbell admnistration has tendered a $50,000 contract "to determine the market value" of the block's coal deposits, including conceptual mining plans for the region. The government has asked that work "to commence as soon as possible and be completed within 2 months" of the contract being awarded. The following is a complete copy of the statement of work for that contract.

Statement of Work

Market Valuation of the Coal Resources
in the Dominion Coal Blocks

1. Requirement:

An economic valuation is required to determine the market value of the coal resources in the Dominion Coal Blocks. The market value is defined as the expected price a buyer would pay for the right to mine the coal resource at the time the valuation is completed, assuming that the same laws and risks of development applicable to other coal properties in British Columbia (BC) apply to the Dominion Coal Blocks.

The Dominion Coal Blocks (Federal Real Property identifier # 67166) are comprised of two parcels of land and the underlying coal resources, Parcel 73 and Parcel 82, located in the Elk and Flathead Valleys of Southeast BC. The proposed procedures in this Statement of Work for estimating the market value for the coal resources within the Dominion Coal Blocks are somewhat different for each block.

The outputs required from this valuation are a report and an Excel spreadsheet, in both printed and electronic form. The report should include, but is not limited to, a discussion, analysis, and summary of the variables identified in this Statement of Work as relevant to a market value determination and how they inform the market value. The spreadsheet should show how the market values for the coal resources within each of Parcel 73 and 82 were calculated based on the variables discussed in the report. The spreadsheet should be prepared such that the input variables are easily identifiable and can be readily manipulated by the client in order to update the market value output, as input variables change over time.

To aid in the valuation, a map is included as Attachment 1 locating the Dominion Coal Blocks based on BC Terrain Resource Information Management (TRIM) topographic base.

A geological assessment of the coal resources of the Dominion Coal Blocks (the geological report) will be made available on a confidential basis to the successful candidate. The geological report provides coal resource estimates and a breakdown of how these estimates were calculated. The geological report was prepared in accordance with Attachment 2, Statement of Work: Geological and Coal Resource Assessment of the Dominion Coal Blocks, Crowsnest Coalfield, British Columbia. The geological report is the source of coal resource data for Parcels 73 and 82 to be used by the consultant for the valuation.

Purpose:

To provide an economic evaluation of the value of the coal resource in the Dominion Coal Blocks.

Tasks:

I. Valuation of Parcel 73: 2023.5 Hectares (7.8 sections)

Parcel 73 has a mainly surface mineable coal resource.

The valuation is envisaged to include the following steps with respect to the coal resources within Parcel 73.

1. For coal considered surface mineable, construct a tonnage versus strip ratio table that also describes in general terms the coal quality in each category. Much of this information is provided in the geological report.

2. Develop conceptual mine plans outlining general mine infrastructure to enable the estimation of at least the following two scenarios for future mining costs to be used in the valuation:

(a) if Parcel 73 were developed on its own; and
(b) if it were developed in conjunction with the adjacent Marten-Wheeler coal property.

Use the conceptual mine plans to generate a table of mining costs per clean tonne of coal for each year over the projected lives of the projects.

3. Identify on a topographical map, the estimated footprint the conceptual mine(s) will occupy as a result of the mine operations, including any pits, spoils, and/or mining infrastructure.

4. Estimate annual transportation and handling costs from mine site to ocean terminal Free On Board (FOB) in Canadian Dollars and US Dollars, and provide the exchange rate forecast utilized.

The two critical price points are:

(a) as a clean tonne leaves the mine site (FOB mine site); and
(b) as a clean tonne is loaded onto boat at Roberts Bank (FOB ocean port).

5. Discuss expected trends in future coal markets in terms of supply, demand, prices and type of coking coal required. Relate this to the quality of coal that will be mined from the Parcel. Ascertain likely markets for the coal and estimate ocean transportation and other costs in US Dollars to deliver coal to these markets. Assess the international competitiveness and economic viability of the conceptual mines on the Parcel. State any necessary assumptions and provide a brief discussion relating to the forecast confidence.

6. Produce a summary table for each conceptual mine plan that includes all the assumptions necessary to derive life-of-mine:

(a) mining costs, including costs to participate in environmental/operation approval processes and costs of reclamation,
(b) rail and port costs,
(c) FOB port selling price.

From these data, estimate total mine profit after tax on a per clean coal tonne basis based on costs and selling price over the life of the project. Assume any of the hypothetical mines proposed would operate within the BC regulatory regime, and undergo a regulatory and construction process comparable to mines of similar scope and geography. State any other necessary assumptions.

7. Based on the summation of the table in step 6, determine the market value of the coal resource in the Parcel to a prospective mining operation, if the property is sold with no further resource information provided. This is the amount that the mining company would be willing to pay at the time this valuation is completed, assuming they can mine and sell the coal resource, taking into account the risk that they assume by buying the coal interest based on the data available and assumptions made as to the profit that might be made mining and selling the coal in the future. Please provide the discount rate used to calculate the net present value of this profit stream and discuss the reasons for choosing that discount rate for this property. Please discuss any other assumptions made in the valuation.

Include a discussion of the accuracy of the value obtained from this valuation. What are possible sources of variance associated with the valuation approach taken and how is this related to the assumptions?

8. Provide advice and recommendations with regard to alternative methodologies to the discounted cash flow approach outlined above. In particular, please review recent resource property sales/acquisitions and market values of public companies with coal properties and the methodologies employed in those appraisals, taking into account that most of these sales are for operating mines and advanced properties about which there is much more firm cost, price and geological information than for the property in question. What further advice can be provided on the market value given this review of comparable properties?

9. Identify and discuss the considerations and risks inherent in the estimates provided due to the limited geological information, volatile resource prices, input price inflation or other factors. What caveats are advisable in relation to the estimated market value provided?

II. Valuation of Parcel 82: 18211.5 Hectares (70.3 sections)

Most of the potential coal resource in this larger block is not amenable to surface mining. Consequently the initial technical data used for the valuation will be different from that used for the Parcel 73 analysis.

The valuation is envisaged to include the above same steps 3 through 9 as for Parcel 73, but with the following two different steps 1 and 2 with respect to the coal resources within Parcel 82:

1. Construct a distance from portal versus tonnage table that also describes in general terms the coal quality (rank) in each category and dip of strata. Much of this information will be provided by the geological report.

2. Develop conceptual mine plans, outlining general mine infrastructure for those mines which are to cover all potentially underground and surface mineable resources in Parcel 82. Use the resource assessment and conceptual mine plans to generate a table of mining costs per clean tonne for each year over the projected lives of the projects.

2 Deliverables

1. Copies of all digital and hardcopy data created in the course of the valuation.

2. A report summarizing the results of the valuations with the contractor's acknowledgement that the resulting information (report, analyses, digital data) may be made available to the public at the discretion of the federal or provincial governments.

3 Timing

The work is to commence as soon as possible and be completed within 2 months of the award, if possible.

4 Basis of Award

The contract is to be awarded to the best technical proposal within the stated budget of $50,000 exclusive of GST, as established in the appended evaluation criteria (Attachment 3).

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