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June 04, 2018
Brattle Principals Examine Issues in Valuing Natural Resources Investments

Brattle Principals Richard Caldwell, Darrell Chodorow, and Florin Dorobantu have authored a chapter exploring the issues that arise in quantum analysis for natural resources investments matters for a new book, Contemporary and Emerging Issues on the Law of Damages and Valuation in International Investment Arbitration.

In the chapter, “Valuing Natural Resources Investments,” the authors focus specifically on quantum issues related to the mining, oil and gas, and renewable energy industries. Investments in these industries comprise a significant share of investor-state cases, and tend to involve larger claims. The assets at issue, which often require large upfront investments followed by the expectation of long-term cash flow generation, are often subject to claims before production begins or early in their operating lives. Such early-stage valuations sometimes raise concerns in arbitration that valuation is speculative, and result in awards based on historical cost.

The authors conclude that historical cost is often not a reliable measure of fair market value for natural resources investments, and unique aspects of the natural resources industry allow reliable valuation of early-stage projects in some cases. Even for early-stage projects, it may be possible to develop reliable cash flow projections for extractive and renewable projects, making the discounted cash flow (DCF) method an important tool. Additionally, the authors explain that true comparability may be difficult to find among natural resources investments, making the use of comparables analysis unreliable in some cases. However, reliable market evidence may still be available through the analysis of share prices for publicly traded companies, although this information cannot always generate reliable results. The authors expand on the basis for these conclusions in their chapter.