Banks' focus in using cash flow methods can differ
markedly from that of equity investors. This paper attempts to explain and describe bankers'
approach by: outlining the fundamental difference between
banks' and investors' risk / return profiles. describing lenders' consequent use of cash flow
methods in mineral valuation. areas. explaining lenders' specific treatment of key risk Fundamental to understanding banks' appraisal of
mineral projects is the appreciation that lenders have a
basically different risk profile and outlook from those
familiar to equity investors. Lenders do not normally
participate in any project upside. The economics of
lending dictate that banks can only accommodate a low
probability of loan default and consequently banks'
principal focus in mineral ""valuation"" is ensuring an
acceptably comfortable probability of debt repayment.
A simple conceptual explanation of lenders' risk / return
position is outlined.