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Market Capitalization 69

600
London Metal Exchange Copper
London Bullion Market Silver
500 London Bullion Market Gold Bullion
London Metal Exchange Platinum
London Metal Exchange Nickel
400 Hamersley Iron Ore
London Metal Exchange Zinc
London Metal Exchange Aluminum
300

200

100

0
September September September September September September
2003 2004 2005 2006 2007 2008

Note: These are indexes, not prices.

Source: Bloomberg 2009.


figure 2.3-4 Rebased commodity prices, 5-year view

vAluATion of PRoDuCing Mining CoMPAnieS: Table 2.3-2 Production cost standard


inTeRnAl fACToRS AffeCTing CASh floWS guideline features
The graphic representation of the life cycle of a mining proj-
Cash operating costs All direct and indirect operating cash costs related
ect (Figure 2.3-3) points to the factors that affect cash flows directly to the physical activities of producing metals,
in a single-project company. Any larger mining group would including mining, processing, and other plant costs;
simply be a portfolio of such projects, often at very different third-party refining and marketing expense; on-site
stages of development. Those mining groups typically rated general and administrative costs; and net of by-product
most highly by the equity investors have the right balance revenues earned from all metals other than the primary
metal produced at each unit
of such projects to ensure that, as a major producing asset
starts to tail off in terms of grade and production life, oth- Total cash costs Same as cash operating costs plus royalties and mine
production taxes
ers are waiting to replace it, thus achieving a relatively stable
or growing production profile. This is the part of the revenue Total production costs Same as total cash costs plus depreciation, depletion,
amortization, and accretion of asset retirement
line that management teams are expected to influence, even
as sales and earnings remain vulnerable at another level to the
vagaries of the commodity price cycle.
Two key internal components will affect cash flows from
any mining project: Equity investors thus rate mining companies according
to their relative position on the industry cost curve. Due to
1. The size and quality of the mineral deposit, which will deter-
the lack of consistency across the industry in reporting cash
mine the production potential. In the early stages of explora-
costs of current production, it is worth clarifying what items
tion, when confidence is low for geological information, the
are included in various levels of cost categories. Table 2.3-2
potential is expressed as resources. At later stages, when drill-
contains broad guidelines that are followed by conservative
ing and geological modeling increases levels of confidence,
investment analysts.
the potential is expressed as reserves. The size of the eco-
In addition to the cost items listed in Table 2.3-2, a num-
nomic deposit will determine the life of the mine and the
ber of other (sometimes indirect) expenses should be built into
economies of scale to be achieved in mining it, whereas the
any projections that cover the life of the mine:
quality refers to the grade of metal found in the surrounding
“waste” material (i.e., the higher the ratio of metal to waste in • Exploration and mine development expenses, which
the deposit, the more economic the project). are typically capitalized. While not related to the cur-
2. The cost of extracting and treating the ore to turn it into rent production, hence the exclusion from the current cost
a salable product (either an intermediate concentrate that per ounce, this expenditure needs to be incurred to ensure
requires refining by an independent refiner or as a fully that there are ounces to mine in the future. A key element
refined end product—for example, a gold bullion bar). of this is stripping. The correct measure of the minimum
For a given commodity price, the cost of production can cash expenditure required should thus be “total cash costs
differ substantially between projects (and sometimes plus the essential capital expenditure required for ongo-
countries), thus affecting the profit margin earned. ing mining.”

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