Equity Calculations

Submitted by-
JAANNASHEEN SINGH
ROLL NO.- 13155043
 Equity Calculations with Several
Partners

Often exploration projects are run by syndicates in order to spread the risk. As a rule,
each partner pays his share of exploration expenditure pro rata. If a partner decides
to withdraw from the project while the others continue exploration, his equity is
diluted. Generally, his equity is also calculated pro rata in the dilution phase.
 An Example

Assignment. Three partners join in an exploration venture, each bearing a third of the cost. Expenses
during the first phase are US $6 million. At the end of Phase 1, partner A decides to withdraw and accept
a dilution of his equity. Expenses in Phase 2 are also US$6 million. What is the equity of partner A at the
end of Phase 2?

At the end of the second phase US $12 million will have been spent of which partner A has paid US $2
million. Hence his equity is

Partners B and C have an equity of 41.7% each. In the reverse case, the called farming-in concept,
calculations are often more complex. Partner A has carried out an exploration project with promising
results. Since exploration expenses increase progressively with each stage, he is looking for a partner in
order to reduce his financial exposure. Since he financed the initial and riskier phase himself, he will ask
for a premium and demand from partner B a disproportional share of the exploration expenses until the
latter has caught up, i.e. earned his equity (catch-up point).
 Calculation of Foreign Equity in Exploration and Mining Projects

Two fundamental cases need to be distinguished:

• In some countries, e.g. Canada, a mining company is
considered local as long as foreign equity does not
constitute the majority. Thus a company or a mine is
either foreign or local, without any intermediate steps.

• In other countries, most significantly in Australia,

foreign equity is graded and the involvement of
subsidiaries and their daughter companies has a
bearing on the calculation of foreign or local equity.
Ownership in a Cu
deposit
 An Example
Local zinc company LZC is 40% controlled by a foreign mining company FMC. LZC, in turn, has a
15% equity in FMC. What is the foreign equity in LZC?
Step 1:
Local equity in LZC will be called lz, local equity in FMC-lm, foreign equity in LZC-fz foreign equity
in FMC-fm
As a result, the following equations are valid:
1 = lz + fz , and
1 = lm+ fm
Step 2: Local equity in FMC is, lm = 0.15lz and foreign equity in LZC is, fz = 0.4fm
Step 3: Now we have four equations with four unknowns. By mutual substitution we obtain
fz = 0.4fm= 0.4(1 – lm)
fz = 0.4(1 – 0.15 lz)
fz = 0.4(1 – 0.15[1 – fz]) = 0.4 – 0.06 + 0.06fz
0.94fz = 0.34
fz = 0.362
i.e. foreign equity in the Local Zinc Company is 36.2%. With a foreign equity ceiling
of 49%, a 100% foreign owned company could still acquire 12.8%.