Note:
1. RF prob is the implied probability that expresses Dr Ferrier's discount rate as the combination of the agreed discount rate for approved quarry with a probability of approval.
2. Tonnage from each area includes saleable overburden.
3. After the RMS land acquisition, Mr Lonergan values the resources closer than 300m at nil, relying on ABM's blasting expert (Mr Reed). In Mr Lonergan's opinion, even if it were technically possible to blast in this zone, a purchaser would attach a low value to this resource (equivalent to no more than 10% probability factor) due to the high risk of non-approval and uncertainty about blasting costs. Dr Ferrier assumes the same risk for this zone before and after the RMS land acquisition, relying on RMS's blasting expert's opinion that it could be utilised.
4. Differences of view in respect of the value of this region have limited effect on the value of the loss as the before and after value of this region only differ by the additional costs (blasting and related).
- Following their second joint conference Mr Lonergan, Mr Reed, Dr Ferrier and Mr Briggs disagreed on the following (exhibit 23):
(c) the DCF excludes the value of the remediated land comprising the quarry (ABM) or includes the value of the remediated land (RMS) (p 12-14, 22);
(e) the acquisition resulted in the loss of a portion of the andesite resource within a buffer of 300m (ABM) or 200m (RMS) from the HEX (p 5, p 9 par 27(e));
(g) there is a chance of non-approval of planning consent represented by probability factor of 90% (ABM) or 12.25% discount rate (RMS) for quarrying beyond the 40ha quarry circle (p 5, p 8 par 27(d); p 18, par 65, 66, 67, 68);
(h) the annual production rate would be 700,000 tonnes pa or more (ABM) but more than 100,000 tonnes pa is not approved (RMS) (p 18, par 63, 64);
(k) rehabilitation costs are not avoided due to reduced extraction volumes (p 11, par 27(r)); and
(u) costs associated with bio-banking credits (p 16, par 51, 52).
- In addition RMS identified disagreement in relation to how blasting costs should be factored into the DCF model (RMS closing submissions p 103, 105) (roman i). The date of incurring costs for dust suppression, weather stations, security fencing and road sealing is not agreed (RMS closing submissions p 105, 117) (roman ii).
- The topics (k) and (u) were no longer disputed in final submissions by RMS and I do not need to further consider these.
- The resource valuation experts were cross-examined in relation to their respective approaches. Mr Lonergan was cross-examined extensively about the beta figure he adopted but as this could relate only to the base discount rate of 9% which was agreed by the business valuers it is unnecessary to set out this evidence.
- Mr Lonergan explained the difficulties associated with determining the subjective input variables required to properly calculate the discount rate, such difficulties being overcome by the adoption of a probability based approach.
- Dr Ferrier concurred with Mr Lonergan's explanation of such difficulties, adding that caution is required in reflection of risk in either the discount rate or the cash flow (but not the same risk in both) and the challenges of reflecting risks specific to the subject property separately to risks generic to the industry. However, Dr Ferrier added that there was no scientific basis for the level of probabilities assessed by Mr Lonergan.
- Mr Lonergan did not agree that his approach to the assessment of probability was inconsistent with the example in his book (which provided three assessments of probability by way of example), having adopted a "central best estimate" rather than considering a series of scenarios and selecting the most appropriate.
- Mr Lonergan stated that Mr Briggs provided no scientific basis for the adjustment to the discount rate adopted. In his opinion if the same discount rate is applied to all cash flows then the cash flows that don't need to vary based on any risk are adversely affected in the same way as cash flows that do vary. The inputs to the discount rate are not intended to be subjective but rather are to be based on objective verifiable evidence, unlike the approach of Mr Briggs which introduces unnecessary uncertainties.
- In cross-examination it was proposed that the adjustment of the discount rate by 5% by Mr Briggs was so general and unsupported by reasoning as to be unreliable. Mr Briggs stated that the determination of the discount rate was based on his informed value judgment based on his experience and was very subjective. Mr Briggs agreed that the 1979 consent had no limit placed on tonnage extracted or truck movements. Mr Briggs identified twelve matters affecting the discount rate. It was put to him that his approach was likely to lead to a disproportionately erroneous valuation because the discount rate he selected is applied to all the cash flows, not just specific cash flows to which the risk attaches, which proposition he did not accept or deny.
- Dr Ferrier agreed that the columns attributed to him by Mr Lonergan in the table in par 15 of the second joint report (exhibit 23) were a "mathematical exercise" to interpret his discount rate approach in the form of Mr Lonergan's probabilistic approach and were acceptable although he would not express his conclusions in that way.