Principle Mining Economics01

PRINCIPLES OF
MINE ECONOMICS :
Basic Mine Investment Analysis
Dr. Rudianto Ekawan

Department of Mining Engineering
Institute Technology Bandung - Indonesia
Mine Economics Course

8-9 May 2008
Singapore
Mining Economics Course, 8-9 May 2008, Singapore
The Time Value of Money

A dollar today is worth more than a dollar in the
future.
Time value of money exists for at least three reasons:
1. Inflation
2. Uncertainty
3.Opportunity Cost
Principles of Mine Economics
Time value of money (1)

The value of money (purchasing power) changes over time
Money amount concept
A mathematical concept which result does not depend on time
$ 1.00 (yr 2000) = $ 1.00 (yr 2008)

Value of Money concept
Amount of money at different time will have different value
$ 1.00 (yr 2000) $ 1.00 (yr 2008)
Time value of money (2)

Value of money depends on :
Discount rate (i)
$ 1.00 (t=0) = $ 1.00 (t=1) + (i x $ 1.00)
Number of year
Discount Rate (1)
Discounting :
A large future amount of cash is
reduced to its smaller current equivalent
Discounted Cash Flow Analysis encounters a

problem in determining suitable discount rate value
actual discount rate determination is too complex
There are various type of discount rate
Discount Rate (2)

Type of Rate
Description
Opportunity cost of capital Foregone benefits that would have been received from
the next best investment opportunity
Risk-free alternative
Return from a risk-free instrument, such as U.S.

Treasury bill. Note that even these instruments are not
entirely risk-free because of risks related to the
exchange rate and rate of inflation.
Cost of debt
A rate based on the cost of borrowed funds
Weighted average cost of

capital (WACC)
A risk-adjusted rate that weighs a firms cost of

equality and the cost of debt by the debt-to-equality
ratio
Historical rate of return
A rate of return based on constant or current

performance of past investments
Risk-adjusted rate of
return
Any rate based on a constant or current return adjusted

for project risk. The capital asset pricing method
(CAPM) is often used to determine such a rate.
Discount Rate (3)

Type of Rate
Description
Hurdle rate
Any specified minimum rate of return, regardless of

how derived
Social rate of return
A rate used to determine the value of social projects.

This rate accounts for issues of equity and morality as
well as financial aspects of an investment
Varying discount rate

over time
A rate that reflects changes in risk overtime. For

example. The risks can change once all capital has
been recovered and minimum rate of return achieved
Varying discount rate by

cash flow line item
A rate that reflects the difference in risk among

various cash flow components. For example, working
capital and inventory charges have lower risks than
capital charges for new tecnologies
Discount factor (4)

=
=
+
+
+ e .
Investment Basic Variable

P: Present single sum
F: Future single sum
A: Amount in a uniform series of equal payments
n: Number of interest periods
i: Period interest rate
C: Capital Investment
L: Salvage Value
I: Period Income
TIME DIAGRAM
A
F
0
n-1
n-1
I
L
n
or
C
0
Interest Formula
find
given
equation
Formulas name
Functional
symbol
Single cash flow :

F
(1+i)n
1
(1 + i ) n
Single payment compound amound

Single payment
present worth
(F/P
i%,n)
(P/F
i%,n)
Uniform series (annuities) :

F
(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
Uniform series compound amount

Uniform series present
worth
(F/A
i%,n)
(P/A
i%,n)
Sinking fund
(A/F
i%,n)
Capital recovery
(A/P
i%,n)
The key to converting project alternatives to an equivalent

basis is use of "time value of money" accounting.
10
Single Payment Compound Amount Factor (1)
Company has to pay a reclamation bond to the government

for each hectare of land disturbed. The funds are in trust,
earning interest at 6% compounded annually, until
reclamation is complete, whereupon they are returned. If
you disturb 40 hectares of land this year and the bond is
$50,000 per hectare, how much do you expect to get back
when reclamation is completed in 3 years time?
Answer:
Present value (of money paid out now)
$50,000 x 40 = $2,000,000
Compound factor
(1 + 0.06)3 = 1.191
Future value
$2,382,000
11
Single Payment Present Worth Factor (1)
You have received bids from two manufacturers for purchase of a

new dragline. The first bid is very competitive but is from a
company that requires payment in full on placement of an order.
The second bid is for a higher price, but no payment is required
until the machine starts digging 3 years hence. Which is the
preferred option? If the first dragline is purchased, what is the
effective return on investment for the 3 years?
Dragline A bid price (today)
Dragline B bid price (in 3 years time)
Required return on capital (discount rate i)
Taxation
Time (n)
$30,000,000
$40,000,000
15%
Ignore
3 years
12
Single Payment Present Worth Factor (2)
Answer:
Present value of purchasing dragline B 3 years
$40,000,000 X 0.6575 = $26,300,000
Thus, dragline B has a lower cost than dragline A in present value

terms.
Compound factor for investment in dragline A vs dragline B

$40,000,000/$30,000,000 = 1.3333
Effective return on investment over 3 years
(1+i)3 = 1.3333
i = 1.33330.3333-1
= 10.06%
13
Sinking Fund Factor (1)
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
Sinking Fund Factor (2)
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
Capital Recovery Factor (1)
The expected life of a rope shovel is 16 years, after

which time the mine will close and the salvage value
will be effectively zero. What is the annual owning
cost, including allowance for return on your capital
invested in the rope shovel? If the shovel works 6,000
hours per year, what is the hourly cost?
Required return on capital (discount rate i)
15%
Taxation
Ignore for this example
Cost of rope shovel
$7,000,000
Time (n)
16 years
16
Capital Recovery Factor (2)
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
Investment Evaluation Technique
18
Introduction (1)
Investment evaluation techniques is used to convert

information and experience regarding exploration,
exploitation and project interest to get expected value and
risk criteria
Investment evaluation technique may be applied to study
exploitation planning based on cash flow estimation and
time value
19
Introduction (2)
20
Principle in Selecting
Investment Proposal
Larger profit is better than the smaller one
Faster profit is better than the slower one
Evaluation result must be consistent and realistic
21
General Equation in Investment Analysis
Present Worth (PW) equation :

PW Cost = PW Revenue
Annual Worth (AW) equation :

Eq Annual Cost = Eq Annual Revenue
Future Worth (FW) equation :

FW Cost = FW Revenue
22
Net Value Analysis (1)
Based on differences between Net Revenue/Positive

Cash Flow (inflow) and Net Cost/Negative Cash
Flow(outflow)
Net Value Analysis is divided into :
Present value
Annual value
Future value
23
Present Value
A present amount of money (beginning of a project, t

=0) which has an equivalent value in the future ( along
the life of a project) at a certain rate of return (i)
Estimation of value or assets
S
PWB
Benefit
PWC
24
NPV = A (P/A i,n) + S (P/F i,n) C

or
n CFt
NPV =
I0
t
t =1 (1 + i )
CFt = Cash flow on year t
I0
i
n
= Early investment
= discount rate
= Total project period
25
Internal Rate of Return (1)
Rate of return value to investor that is calculated every year

Measurement of capital use efficiency or the rate of wealth
accumulation
IRR indicates the return per invested money
The larger IRR the more profitable an investment in
restoring the capital
26
Investment rate of return (%) when NPV = 0
n
CF t
NPV = 0 =
t = 1 (1 + IRR
CFt
I0
IRR
n
:
:
:
:
)t
I0
Cash flow in year

Intial investment = CF0
Discount rate @ NPV = 0
Total project period
27
Differences between IRR and NPV
28
Payback Period (1)
Time (in year) needed for a project revenue to

recover investment or capital amount invested in the
project
Evaluate how fast an investation may return
29
Payback Period (2)

Annual Cash Flow
Alternative A
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
Discounted Cash Flow Rate of Return

(DCFROR)
Investment rate of return in % when NPV = 0

Investment rate of return when Positive Present
Worth and Negative Present Worth accumulation
equal zero
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%.
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
37
Answer#3
38
Basic Cash Flow
Cash Flow (1)
Cash flow is a profitability measurement technique for decision

making
Cash flow = Ann.Cash Inflows Ann.Cash Outflows
Cash flow consists of Cashinflows and Cash-outflows

Cash flow
Net Income After Tax+ Depreciation + Depletion + Amortization +
Deferred Deductions Capital Costs
40
Cash Flow (3)
Free cash flow = total cash available for

distribution to owners and creditors after funding
all worthwhile investment activities
Discounted cash flow = a sum money today having
the same value as a future stream of cash receipts
and disbursements
Cash flow from operating activities = Net cash flow
Changes in current assets and liabilities
41
Simplified Mining Corporation Cash Flow

REVENUE
* Sale of Metals or Ore or Coal

* Dividends from Subsidiary Companies and Other
Deduct EXPENSES incurred in earning Revenue

* Production, Selling and Administration Costs
* Exploration Expenditure
* Interest on Loans and Royalties
Deduct DEPRECIATION write-off

Equals PROFIT BEFORE INCOME TAX
Deduct INCOME TAX
Equals NET PROFIT
Add DEPRECIATION write-off
Equals CASH FLOW of Company
42
43
Cash Flow (5)

Cash inflows consists of:
Revenue from ore sales or other type of mineral products

Royalty, option or lump-sum payments received for
mineral rights
Salvage value realized from the sale of used equipment
Custom milling income or smelter contract payments
received
Tax credits
Return of working capital at the end of a mines
productive life
44
Cash Flow (6)

Cash outflows consists of :
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
Cash Flow (7)
46
Example of Cash Flow

TotalCoalProduction
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
Cash Flow (9)

w a k t u ( ta h u n )
There is a gap between

deposit discovery and its
initial
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

Component
Cash Flow
Structure (10)
Production
Selling Price
Gross Revenue
Royalty
Net Revenue
Operating Expenses
Operating Earning
Depreciation
Amortization
10
Interest
11
12
13
13
=
=
W/H tax on Interest, Royalty

Component
Other Deduction
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
Loss Forward Deduction
21
Capital Expenditure
22
Borrowed Money
23
Principal Payment
24
W/H Tax on Divident
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 .
51
EXERCISE #2

PURCHASE
- CAPITAL COST
= REVENUE
+ SALVAGE VALUE AT YEAR 10
- OPERATING COST
- DEPRECIATION
- LEASE FEE
= PROFIT BEFORE TAX
- TAX, 30%
= NET PROFIT
+ ADD BACK DEPRECIATION
= ANNUAL CASH FLOW
NPV @10%
DCFROR
LEASE
- CAPITAL COST
= REVENUE
- OPERATING COST
- DEPRECIATION
- LEASE FEE
= PROFIT BEFORE TAX
- TAX, 30%
= NET PROFIT
= ANNUAL CASH FLOW
NPV @10%
DCFROR
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
$4,000 per year. Operating costs other than maintenance and insurance for the trucks will
be the same as whether they are purchased or leased. The effective tax rate is 30%.
If the mines minimum rate of return is 15%, do the economics dictate leasing or
purchasing? The mine has sufficient income to enable it to use all allowable tax deductions
in the year in which they are incurred.
53
EXERCISE #3
Mining Economics Course, 8-9 May($,000)

2008, Singapore
PURCHASE
- CAPITAL COST
= REVENUE
- OPERATING COST
- DEPRECIATION
- LEASE FEE
= PROFIT BEFORE TAX
- TAX, 30%
= NET PROFIT
= ANNUAL CASH FLOW
NPV @10%
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
ANNUAL CASH FLOW
($60)
NPV @10%
IRR
($60)
LEASE
- CAPITAL COST
= REVENUE
- OPERATING COST
- DEPRECIATION
- LEASE FEE
= PROFIT BEFORE TAX
- TAX, 30%
= NET PROFIT
= 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
Mining Economics Course,

May 2008, Singapore
( in $8-9
)
Capital Expenditure
Exploration Expenditure
Tax Rate
Annual Throughout
Strip Ratio
O perating Cost
- M ining
- Increasing Annual at
- M illing
- Incresing Annual at
M ill Head G rade Cu
M ill Head G rade M o
Sales Prices
Contained Cu
Contained M o
Debt at Jan 1996
Loan Replacem ent
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%
750 $/t increasing annual

5,000 $/t increasing annual
30,000,000 Interest
7,500,000
0
2008
(
-
$' 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)
(23,198) (25,518) (28,070) (30,877) (33,964)

(18,000) (18,900) (19,845) (20,837) (21,879)
(41,198) (44,418) (47,915) (51,714) (55,844)
72,000
60,000
132,000
- 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

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PRINCIPLES OF

Basic Mine Investment Analysis

Dr. Rudianto Ekawan

Mine Economics Course

Mining Economics Course, 8-9 May 2008, Singapore

The Time Value of Money

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Time value of money (1)

$ 1.00 (yr 2000) = $ 1.00 (yr 2008)

$ 1.00 (yr 2000) $ 1.00 (yr 2008)

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Time value of money (2)

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Discount Rate (1)

Discounted Cash Flow Analysis encounters a

actual discount rate determination is too complex

There are various type of discount rate

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Discount Rate (2)

Return from a risk-free instrument, such as U.S.

A rate based on the cost of borrowed funds

Weighted average cost of

A risk-adjusted rate that weighs a firms cost of

Historical rate of return

A rate of return based on constant or current

Any rate based on a constant or current return adjusted

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Discount Rate (3)

Any specified minimum rate of return, regardless of

Social rate of return

A rate used to determine the value of social projects.

Varying discount rate

A rate that reflects changes in risk overtime. For

Varying discount rate by

A rate that reflects the difference in risk among

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Discount factor (4)

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Investment Basic Variable

F: Future single sum

A: Amount in a uniform series of equal payments

n: Number of interest periods

i: Period interest rate

Mining Economics Course, 8-9 May 2008, Singapore

Single cash flow :

Single payment compound amound

Uniform series (annuities) :

Uniform series compound amount

The key to converting project alternatives to an equivalent

Mining Economics Course, 8-9 May 2008, Singapore

Single Payment Compound Amount Factor (1)

Company has to pay a reclamation bond to the government

Principles of Mine Economics

Mining Economics Course, 8-9 May 2008, Singapore

Single Payment Present Worth Factor (1)

You have received bids from two manufacturers for purchase of a

Principles of Mine Economics