A Critical Examination Of Mineral Valuation Methods In Current Use

The academic community and the larger and more sophisticated mining companies have largely rejected the older mineral valuation methods such as the Hoskold and Morkill concepts and replaced them with "discounted cash flow" (DCF) techniques. The relevancy and usefulness of the older methods have been questioned primarily on the basis of their underlying assumptions that mining companies do not have numerous alternative investments and must use sinking funds deposited at market or "safe" rates of return to recover the purchase price of mineral reserves. The ability to reinvest in numerous (often nonmining) alternative business ventures, the changing purchasing power of the dollar, corporate income and other taxes, depreciation and depletion allowances, and modern financial management practice all militate against the continued use of the older valuation methods, especially for the larger mining companies. Small mining companies and individuals still use these methods largely out of habit and familiarity. The Hoskold Mineral Reserve Valuation Method The Hoskold method was developed prior to the evolution of modern accounting practices and before the days of the corporate income tax. At the time of its development, annual earnings of the firm were represented by the difference between cash revenues and cash expenses and were not subject to taxation by the government. Thus, earnings at that time were equivalent to what is today known as cash flow.