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MINE ECONOMICS :
Discounting :
A large future amount of cash is
reduced to its smaller current equivalent
Description
Opportunity cost of capital Foregone benefits that would have been received from
the next best investment opportunity
Risk-free alternative
Cost of debt
Risk-adjusted rate of
return
Description
Hurdle rate
+
+
+ e .
C: Capital Investment
L: Salvage Value
I: Period Income
TIME DIAGRAM
A
F
0
n-1
n-1
I
L
n
or
C
0
Principles of Mine Economics
Interest Formula
find
given
equation
Formulas name
Functional
symbol
(1+i)n
1
(1 + i ) n
(F/P
i%,n)
(P/F
i%,n)
(1 + i ) n 1
i
(1 + i ) n 1
i (1 + i ) n
i
(1 + i ) n 1
i (1 + i ) n
(1 + i ) n 1
(F/A
i%,n)
(P/A
i%,n)
Sinking fund
(A/F
i%,n)
Capital recovery
(A/P
i%,n)
10
11
$30,000,000
$40,000,000
15%
Ignore
3 years
12
Answer:
Present value of purchasing dragline B 3 years
$40,000,000 X 0.6575 = $26,300,000
13
A contractor has purchased a new hydraulic excavator for a 5year-life job. He expects the excavator to last 8 years but knows
that he will also have to perform a major overhaul on it costing
$1,000,000 at the end of the 5-year period. The overhaul cost will
be built into the bid price for the job, with annual payments being
placed in a sinking fund invested at 8% compounded per year. If
the excavator works 3,000 hours per year, how much should be
budgeted (and set aside) per hour to provide for the major
overhaul?
Sinking fund return on funds
8%
Taxation
Ignore for this example
Cost of major overhaul
$1,000,000
Time (n)
5 years
14
Answer:
Sinking fund factor
= 0.08/(1.085 1)
= 0.08/0.4693
=0.1705
Equivalent annual amount to set aside
= $1,000,000 x 0.1705
=$170,456/year
Hourly cost
= $170,456/3,000
= $56.82/hour
15
16
Answer:
Capital recovery factor
= 0.15 / [1 (1 / 1.15)16 ]
= 0.15 / [1 0 . 1069 ]
= 0.1679
Equivalent annual cost of shovel over 16 years
= $ 7,000,000 x 0.1679
= $ 1,175,300/year
Hourly cost $1,175,300/6,000
= $ 195.88/hour
17
18
Introduction (1)
19
Introduction (2)
20
Principle in Selecting
Investment Proposal
21
22
23
Present Value
PWB
Benefit
PWC
24
n CFt
NPV =
I0
t
t =1 (1 + i )
I0
i
n
= Early investment
= discount rate
= Total project period
25
26
n
CF t
NPV = 0 =
t = 1 (1 + IRR
CFt
I0
IRR
n
:
:
:
:
)t
I0
27
28
29
Alternative B
- 50.000.000
- 50.000.000
10.000.000
25.000.000
10.000.000
3.000.000
10.000.000
7.000.000
10.000.000
15.000.000
10.000.000
2.500.000
10.000.000
2.000.000
10.000.000
Payback Period
Basic Investment
Project Period
4
30
31
Example
Year
Cash Flow
Calculate DCFROR.
-30
-1
5.5
If minimum ROR =
15% decide
investment
feasibility!
17
20
20
-2
10
32
Example#1
An investor has requested that you evaluate the economic potential of purchasing a gold
property now (at year 0) for a $1 million mineral rights acquisition cost. Mining equipment
costs of $3 million will be incurred at year 1. Mineral development costs of $2 million will
be incurred at year 0 and mineral development costs of $1,5 million will be incurred at
year 1. Production is projected to start in year 1 with the mining of 150,000 tons of gold
ore, with uniform production of 250,000 tons of gold ore per year in each of years 2, 3,
and 4. Gold ore reserves are estimated to be depleted at the end of year 4. Reclamation
costs of $0.5 million will be incurred at the end of year 4 when $1.0 million is projected to
be realized from equipment salvage value. All gold ore is estimated to have an average
grade of 0.1 ounces of gold per ton of ore with metallurgical recovery estimated to be
90%.
The price of gold is estimated to be $300 per ounce in year 1 and to escalate 15% in year
2, 20% in year 3 and 10% in year 4. Operating costs are estimated to be $20 per ton of
ore produced in year 1, and escalate 8% per year.
Calculate the project IRR and NPV for a minimum rate of return of 15%.
Principles of Mine Economics
33
Answer#1
34
Example#2
A company is considering the installation of automated equipment in a
processing operation to reduce labor operating costs from $300,000 to
$220,000 in year 1, from $330,000 to $240,000 in year 2, from
$360,000 to $260,000 in year 3, and from $400,000 to $290,000 in year
4. The automated equipment will cost $200,000 now with an expected
salvage value of $50,000 in four years. The minimum rate of return,
i*, is 20%.
Use IRR and NPV analysis to determine if the equipment should be
installed from an economic viewpoint. Then consider an increase in the
minimum ROR to 40% from 20% and re-evaluate the alternatives.
35
Answer#2
36
Example#3
An existing production facility must be shut down unless an environmental
capital cost of $150 million is incurred now at year 0. This improvement will
enable production to continue and generate estimated profits of $60 million per
year for each of the next 8 years when salvage value of the facility is projected
to be zero. An alternative under consideration would combine process
improvement and expansion with an environmental cost change for a cost of
$200 million now at year 0, plus $150 million cost at year 1 to generate
estimated project profits of $60 million in year 1 and $120 million profit per year
in each of years 2 through 8. The minimum ROR is 12%.
Evaluate which of these alternatives is better using IRR & NPV analysis. Then,
change the minimum ROR to 25% and analyze the alternatives using the same
techniques
Principles of Mine Economics
37
Answer#3
38
40
41
42
43
44
Explorations expenditures
Capital expenditures for new mine development,
expansion, modifications, equipment replacement,
or environment control
Operating costs
Royalty, option or lump-sum payments made to
acquire mineral rights
Income and mining taxation payments
Transportations and further processing charges
45
46
165,463,454 tonne
SaleableCoal
165,463,454 tonne
CostEscalation
1.5% peryear
RevenueEscalation
1.0% peryear
IRR(InternalRateofReturn)
20.17%
DiscountRate
10% peryear
NPV(NetPresentValue)
54,680,226
PBP(PayBackPeriod)(Years)
6.36
BlockACoalPrice
28.00 US$/Ton
BlockCCoalProce
25.00 US$/Ton
CoalSellingPriceChange
0.0%
OperatingCostsChange
0.0%
ExchangeRate
9000 RP/US$
14.80%
19.45%
18.38%
17.67%
17.09%
16.36%
16.52%
CostEscalationFactor
1.0000
1.0150
1.0302
1.0457
1.0614
1.0773
1.0934
1.1098
1.1265
1.1434
1.1605
RevenueEscalationFactor
1.0000
1.0102
1.0103
1.0105
1.0106
1.0108
1.0109
1.0111
1.0113
1.0114
1.0116
Year
CoalProduction
tonne
SaleableCoal
tonne
TotalGrossRevenue
Royalty
13.5%
1,058,278
2,068,310
3,037,195
4,559,662
6,049,707
6,083,368
6,057,062
6,072,034
10
6,080,761
6,108,103
1,014,381
2,021,656
3,019,811
4,536,327
6,027,127
6,082,491
6,057,678
6,071,497
6,080,741
6,107,539
26,781,032
53,527,547
78,590,526
116,515,438
153,779,312
155,165,114
154,532,890
154,894,656
155,119,727
155,797,446
3,615,439
7,226,219
10,609,721
15,729,584
20,760,207
20,947,290
20,861,940
20,910,779
20,941,163
21,032,655
+Salvagevalue
1,745,120
115,000
257,500
310,000
45,000
1,797,620
+Bookvalue
23,165,593
46,301,328
67,980,805
100,785,854
134,764,225
134,332,823
133,928,450
134,293,877
134,223,564
136,562,411
29,171,576
41,623,535
53,662,416
71,907,449
88,423,127
90,655,999
91,944,056
93,494,325
94,994,056
96,812,504
2,778,408
NETREVENUE
OperatingCost
PreDevelopment
5,655,556
DebtInterest
3,375,767
2,700,614
2,025,460
1,350,307
675,153
Depreciation
2,530,908
2,737,908
2,737,908
2,737,908
2,737,908
2,737,908
2,778,408
2,778,408
2,778,408
Amortization
36,172
70,695
103,812
155,850
206,780
207,930
207,031
207,543
207,841
208,775
9,451,209
24,634,341
42,721,257
40,730,986
38,998,955
37,813,602
36,243,259
36,762,724
NETINCOMEBEFORETAX
Tax
30%
NETINCOMEAFTERTAX
(5,655,556)
0
(5,655,556)
(11,948,830)
0
(11,948,830)
(831,423)
0
(831,423)
2,835,363
7,390,302
12,816,377
12,219,296
11,699,687
11,344,081
10,872,978
11,028,817
6,615,846
17,244,038
29,904,880
28,511,691
27,299,269
26,469,522
25,370,281
25,733,907
+Depreciation
2,530,908
2,737,908
2,737,908
2,737,908
2,737,908
2,737,908
2,778,408
2,778,408
2,778,408
2,778,408
+Amortization
36,172
70,695
103,812
155,850
206,780
207,930
207,031
207,543
207,841
208,775
8,439,418
8,439,418
8,439,418
8,439,418
8,439,418
1,150,000
3,275,000
4,150,000
750,000
20,636,200
1,375,000
3,275,000
4,150,000
750,000
21,011,200
PrincipalPayment
WorkingCapital
5,814,799
+WorkingCapitalReturn
CapitalCost
54,466,756
+Borrowed
42,197,088
CASHFLOW
(23,740,022)
(18,971,168)
(9,737,238)
(3,131,852)
10,948,378
3,773,950
30,082,529
27,009,707
25,305,472
27,606,530
7,709,890
CUMMULATIVENETCASHFLOW
(23,740,022)
(42,711,190)
(52,448,427)
(55,580,279)
(44,631,901)
(40,857,951)
(10,775,423)
16,234,285
41,539,757
69,146,287
76,856,177
47
to k 0 1
p e r io d e
in v e s t a s i
c a s h
f lo w
( ju t a $ )
p e r io d e
p ro d u k s i
r e k u lt iv a s i
to k 0 1
6 0
4 0
2 0
A u s t r a lia
0
- 2 0
p e n g e lu a r a n e k s p lo r a s i
b ia y a d e v e lo p m e n t
re v e n u e o n g k o s p ro d u k s i
- 4 0
4 0
K a n a d a
2 0
0
- 2 0
2 0
3 0
4 0
5 0
6 0
7 0
w a k tu
8 0
9 0
(ta h u n )
- 4 0
48
Cash Flow
Structure (10)
Production
Selling Price
Gross Revenue
Royalty
Net Revenue
Operating Expenses
Operating Earning
Depreciation
Amortization
10
Interest
11
12
13
13
=
=
14
Taxable
Taxable Income
Income Before
Before Loss
Loss Forward
Forward
Loss Forward Deduction
15
Taxable Income
16
Income Tax
17
Net Income
18
Depreciation
19
Amortization
20
21
Capital Expenditure
22
Borrowed Money
23
Principal Payment
24
25
CASH FLOW
49
Example#4
An investment project required the year 0 investment of $20,000 for depreciable
assets and $5,000 working capital. The assets will be depreciated straight line
for a 4 year life with no salvage value. Annual project income is expected to be
$25,000 with annual operating costs of $11,000. The effective tax rate is 30%
with no investment tax credit and depletion.
a) Calculate project DCFROR under equity investment
b) Calculate project DCFROR with equity of 30% and a loan with an interest
rate of 10% per year for the rest of the investment. Assuming the loan will be
paid off with uniform and equal mortgage payments in 4 years.
50
Example#5
A company is trying to evaluate the economic merits of purchasing or leasing a
plant. It can be purchased installed on company land for $1,000,000 cash or
leased for $200,000 per year. Annual income is expected to be $800,000 with
$200,000 annual operating costs. The life of the plant is estimated to be 10
years with zero salvage value for depreciation calculation purposes. Actually the
net salvage value of the plant is estimated to be $400,000 at the end of the 10year life. The effective tax rate is 30%. Depreciation is straight line. Consider
ordinary income tax on salvage value gain over book value.
Determine the DCFROR that the company would receive on the $1,000,000
extra investment that must be made to purchase rather than lease. If 10% is
the minimum DCFROR, should the company lease or purchase? Verify the result
with NPV analysis. Assume end of year lease payments and the investment tax
credit is not applicable .
Principles of Mine Economics
51
EXERCISE #2
0
($2,000)
10
$800
$800
$800
$800
$800
$800
$800
$800
$800
($200)
($100)
$0
$500
($150)
$350
$100
($2,000) $450
($200)
($100)
$0
$500
($150)
$350
$100
$450
($200)
($100)
$0
$500
($150)
$350
$100
$450
($200)
($100)
$0
$500
($150)
$350
$100
$450
($200)
($100)
$0
$500
($150)
$350
$100
$450
($200)
($100)
$0
$500
($150)
$350
$100
$450
($200)
($100)
$0
$500
($150)
$350
$100
$450
($200)
($100)
$0
$500
($150)
$350
$100
$450
($200)
($100)
$0
$500
($150)
$350
$100
$450
$800
200
($200)
($100)
$0
$500
($150)
$350
$100
$650
10
$800
$800
$800
$800
$800
$800
$800
$800
$800
($200)
$0
($200)
$400
($120)
$280
$0
($1,000) $280
($200)
$0
($200)
$400
($120)
$280
$0
$280
($200)
$0
($200)
$400
($120)
$280
$0
$280
($200)
$0
($200)
$400
($120)
$280
$0
$280
($200)
$0
($200)
$400
($120)
$280
$0
$280
($200)
$0
($200)
$400
($120)
$280
$0
$280
($200)
$0
($200)
$400
($120)
$280
$0
$280
($200)
$0
($200)
$400
($120)
$280
$0
$280
($200)
$0
($200)
$400
($120)
$280
$0
$280
$800
0
($200)
$0
($200)
$400
($120)
$280
$0
$280
2
$170
3
$170
4
$170
5
$170
6
$170
7
$170
8
$170
9
$170
10
$370
$842
19%
0
($1,000)
$1,720
25%
PURCHASE - LEASE
ANNUAL CASH FLOW
0
1
($1,000) $170
NPV @10%
DCFROR
$122
13%
SELECT PURCHASE
52
Example#6
A mine is considering two economic alternatives of whether to lease or purchase a fleet of
10 trucks. The total purchase cost of new trucks is $60,000. They are depreciable by SL
depreciation over 3 years. Investment tax credit is applicable. Salvage value is expected to
be $20,000 three years from now when the trucks will be traded or sold. Insurance and
maintenance costs for all 10 trucks are expected to be $10,000 the first year, $12,000 the
second year and $14,000 the third year. The ten trucks can be leased for $22,000 per
year including maintenance costs. Total insurance costs on the leased trucks will be
$4,000 per year. Operating costs other than maintenance and insurance for the trucks will
be the same as whether they are purchased or leased. The effective tax rate is 30%.
If the mines minimum rate of return is 15%, do the economics dictate leasing or
purchasing? The mine has sufficient income to enable it to use all allowable tax deductions
in the year in which they are incurred.
53
EXERCISE #3
0
($60)
0.3
NPV @10%
$0
$0
($10)
($13)
$0
($23)
($7)
($16)
$13
($3)
($12)
($13)
$0
($25)
($8)
($18)
$13
($4)
$0
$20
($14)
($13)
$0
($7)
($2)
($5)
$13
$8
$0
0.3
$0
$0
($4)
$0
($22)
($26)
($8)
($18)
$0
($18)
($4)
$0
($22)
($26)
($8)
($18)
$0
($18)
$0
$0
($4)
$0
($22)
($26)
($8)
($18)
$0
($18)
($45)
PURCHASE - LEASE
($60)
NPV @10%
IRR
($60)
LEASE
- CAPITAL COST
= REVENUE
+ SALVAGE VALUE AT YEAR 3
- OPERATING COST
- DEPRECIATION
- LEASE FEE
= PROFIT BEFORE TAX
- TAX, 30%
= NET PROFIT
+ ADD BACK DEPRECIATION
= ANNUAL CASH FLOW
$15
($15)
-4%
SELECT LEASE
$14
54
$26
Example#7
Determine the Discounted Cash flow Rate of Return and Net Present Value at10% discount Rate, which
can be expected to be achieved from the mining of a copper-molybdenum ore body. The deposit is to be
mined by an integrated open-pit and flotation operation. The period of interest for the valuation exercise
is Jan 1, 2008 to Dec 31, 2013 and the following conditions of operation have been identified.
a. Unclaimed Exploration and Property Acquisition Cost, $10 m
b. Allowable capital write offs at January 1, 2008
On site plant, installed cost
$40 m 5 years S.L
Open pit haulage trucks
$ 5 m 5 years S.L
Product transportation facilities
$ 5 m 5 years S.L.
Town site assets
$70 m 5 years S.L.
c. Tax rate is 30%
Royalty for Cu 4% while for Mo 4.5%.
d. Annual mil throughout 12,000,000 tonnes
e. Open Pit Stripping Ratio 2:1 = Waste : Ore (tonnage basis)
f. Operating Costs
Mining 2008 $0.60/t increasing at an annual compound rate of 10%
Milling 2008 $1.50/t increasing at an annual compound rate of 5%
g. Mill Head Grade 0.8% Cu, 0.1% Mo
h. Anticipated Metal Prices received by mine for concentrate shipped.
Contained Cu $750 per tonne in 2008 increasing at 5% per annum.
Contained Mo $5,000 per tonne in 2008 increasing at 3% per annum.
i. As at January 1, 2008 the operation carries a debt of $30 m at 10% compound interest charge. Loan
Principal
replacement
is $7.5 m per annum.
Principles
of Mine
Economics
55
EXERCISE #4
120,000,000
10,000,000
0.30
12,000,000 tonnes
2.00 waste : ore
0.60 $/t
10%
1.50 $/t
5%
0.80% M o
0.10%
(
-
$' 000)
Capital Cost
Unclaim ed Exploration Expenditure
O perating Cost
- M ining
- M illing
Subtotal
= Revenue
Cu
Mo
Subtotal
DCFRO R
Net Present Value @ i=10%
1
2009
5%
3%
10%
2
2010
3
2011
4
2012
5
2013
(100,000)
(10,000)
- 4% royalty for Cu
- 4.5% royalty for M o
- Interest Paid
- Depreciation
- Am ortization
= Profit Before Tax Incom e
- Tax, 30%
= G ross Profit After Tax
+ Add Depreciation & Am ortization
- Loan Repaym ent
Annual Net Cash Flow
0.001
75,600
61,800
137,400
79,380
63,654
143,034
83,349
65,564
148,913
87,516
67,531
155,047
(2,400)
(2,472)
(2,546)
(2,623)
(2,701)
(2,700)
(2,781)
(2,864)
(2,950)
(3,039)
(3,000)
(2,250)
(1,500)
(750)
0
(24,000) (24,000) (24,000) (24,000) (24,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
46,702
59,479
62,209
64,876
67,463
(14,011) (17,844) (18,663) (19,463) (20,239)
60,712
77,323
80,871
84,338
87,702
26,000
26,000
26,000
26,000
26,000
(7,500)
(7,500)
(7,500)
(7,500)
(7,500)
(100,000)
20%
6,190
33,500
33,500
33,500
33,500
56
33,500