Preface

Mining used to be a business primarily focused on the technical aspects of

getting valuable ore out of the ground and extracting the minerals in a
metallurgically efficient way. Although the importance of these skills cannot
be denied, a narrow focus on technical issues is no longer sufficient to
guarantee success, even in the richest orebodies. Skill in economics is an
essential partner to technical skill in every step of the mining process. The
economic way of thinking starts from before the first drillhole is put in the
ground. It includes not just the most economic way of mining, but also the
most economic way of going about assessing mining projects. It directs
mining strategy and takes equal notice of the forces of world progress and
the forces governing individual human action. The scope of this book
includes what is meant by a cost-effective mining scheme. It includes the
economics of information, as well as the procedures for rational evaluation
of mining projects under uncertainty. It reexamines the definition of ore from
an economic perspective. In particular, it specifically considers the economic
influence of scheduling on ore reserves. This book addresses discounted
cash flow (DCF) techniquesthe most widely used evaluation technique for
investment decision makingin detail. Although this technique has been
known and used in the mineral industry for decades, the widespread use of
spreadsheets has been a feature of DCF evaluations only since the mid1980s. The assumption of the use of spreadsheets is a significant point of
differentiation in this text from previous mining-focused economics texts. It
means that more meaningful examples can be included. Formulas
developed to overcome previous computational difficulties have been
omitted. Further, examples in the text are available in spreadsheet format.*

* A CD-ROM containing spreadsheet files and sample financial modeling

software is available from the author to original purchasers of this book (see
instructions at the end of the book). If instructions for obtaining this CD-ROM
are missing from the last page of the book, please contact the author
directly (E-mail: irunge@runge.com) or via Runge Ltd., www.runge.com.

The application of DCF techniques in an operating mine environment is

given expanded coverage, and examples are drawn from real-life studies.
The differences between economic decision makinga forward-looking task
and the reporting of results via accounting methodsa historical or
backward-looking activityare reviewed. Nevertheless, it is not the intent in
this book to provide a comprehensive coverage of general economics or
corporate finance principles. (The book is intended as a stand-alone text in
mining economics and strategy; however, for corporate finance issues of a
generalized nature, a text such as Brealey and Myers [2003] is highly
recommended.) This book gives extensive coverage to capital and to
decisionmaking procedures associated with capital investments in a risk
environment. Comprehensive case studies for capital investment in an
operating mine are included. Many traditional approaches to mine valuation
overlook important strategic elements, leading to results that frequently fall
short of expectations. If, for instance, one mine plan can accommodate
change more easily than another plan, but at some cost, how can the value
of that flexibility be understood? Many of these elements are definable in
advance; the difficulty is in finding the mechanism to incorporate them into
decisions. The theory of decision making under uncertainty is briefly
examined, and the applicability of this theory to understanding the
risk/return trade-off is highlighted. Comprehensive examples investigate
value from a risk reduction perspective and from a perspective of expected
return on investment. A case study using probabilistic analysis derives
analytically tractable results for valuing equity participation in a major
mining project under conditions of uncertain offtake. A theme in the book is
that many mining projects that fail to achieve expectations do so because of
their inability to adapt to change. This problem can be partially addressed
through greater predictability in future conditions. It can also be addressed
through mining schemes that can sustain returns over a greater range of
foreseeable future conditions. In the context of making investments, assets
can be differentiated into components reflecting their contribution to
profitability, adaptability, and risk reduction. This book sets out a new
technique allowing calculation of capital that is at risk from capital that is
not at risk. The use of this technique is a precursor to mine design that is
less sensitive to changes that are outside mine operators control. The
technique promises significant advance in the way that investments are
made and capital is valued in the industry. Although the book starts from
and largely maintains a technical perspective, it also recognizes that the
institutional environment within which the industry operates has a
significant influence on the degree of success of mining ventures.

The book finishes with an overview of mining strategy, with a strong

emphasis on knowledge effects. It suggests that, in mining at least,
imperfections in knowledge play a significant role in determining mining
strategy and are also a significant contributor to less-than-perfect decision
making evidenced throughout the mining world. It draws upon current
trends in strategy in the wider business environment, applying them to the
mining industry. It sets out some promising future directions for mining
strategy and potential for added value through enhanced decision making in
the industry.

Acknowledgments

This book is the outcome of technical and economic analysis spanning 30

years of involvement in mining projects, major investments, and proposed
investments worldwide. The outline for the text was initially prepared in
1984 for a series of courses entitled Design of Integrated Open Pit Coal
Mines that I conducted while I was employed with Runge Ltd. (Brisbane,
Australia). Since 1992, the economics components of this coursework have
been refined and expanded through two courses: (1) Mining Economics,
used as the basis of the first 11 chapters of the text, and (2) Capital
Investment Strategy, used in the balance of the text. These courses have
been presented throughout Australia, North America, Africa, and Southeast
Asia by myself and by Runge Ltd. personnel. I am indebted to the hundreds
of attendees at these courses for substantial feedback and suggestions
and in particular to Mike Rowlands, Hugh Thompson, Tony Savva, Donna
Luxton, Christian Larsen, Tony Kinnane, and other senior staff from Runge
Ltd. for contributions and critiques of many parts of the work. The subject
matter is a vast one that cannot be comprehensively covered through the
examples and experiences of one person alone. I acknowledge the
inevitable errors of omission, as well as the equally inevitable errors of
commission, that must remain my own. Feedback and further contributions
toward the advancement of mining economics along the lines developed in
this text are welcome and appreciated.