QVS is an acronym for the Quantitative Valuation of Significances. The acronym has as its main origin the phrase “Quo Vadis” - where are you going - which best describes the question that is faced by both Borrower and Lender with respect to the development of a financing structure which can meet their respective needs. The tool has a number of features:

• Produces probabilities of default for cashflows modelling the financial transaction
• Defines level of significance as to the the contribution of the selected factors towards enhancing/reducing the capacity of the borrower to meet debt service
• Defines risk-reward curves so that financing institutions can optimize pricing in relation to the actual risk measurable from the cashflow model
• Produces estimate of the level of provisioning indicated under Basel II
• Incorporates country risk element utilizing, and taking further, slotting criteria approaches highlighted from the Basel II Accord
• Tailor-made interface can be produced so that client can run their own simulations

Examples of the type of output from the QVS tool are given below. These examples are based on actual projects undertaken by SCL:

Example of default frequency: here the level of occurrence of a significant exposure should a default occur (“EAD”) is plotted against the number of times it occurs. In this way the overall probability of default can be assessed according to different levels of volatility (10-50% as indicated by the different coloured lines)

The above profile shows significant incidence of potential loss. The trend below shows a more ideal case:

Depending on the structure, repayment profile, performance risk and pricing, risk-reward curves can be generated, which compare the risk adjusted return on capital with the probability of default. The trends observed are similar to those shown below which differ according to the pricing used. The upwards arrow indicates an increasing margin (from 1 to 4% p.a.) for the case stated. The position of the horizontal brown line shows an illustrative (high) hurdle rate which might be set if the transaction is to satisfy investment expectations. The position of the hurdle rate of course remains a matter for internal discussion by the investor; the risk-reward line itself remains a direct measure of the relevant risks involved in the tested transaction.

As a result, investors can obtain a quantitative estimation of an appropriate cost of capital which is commensurate with the actual risk associated with a transaction.

The above diagrams have been used in decision-making processes in determining the attractiveness of specific mineral exploitation project proposals.