Analysis of risk in mining projects

"The decision to invest capital in developing a mine and constructing a mineral processing plant and services is usually made after a feasibility study shows 'that the estimated future cash flow from mine operations will yield an adequate return on the estimated capital expenditures.The actual return on investment may differ substantially from that estimated in the feasibility study, because of the probabilities of errors in estimating capital costs, ore reserves, operating costs, mineral revenue and operating productivity. This paper outlines the R.S.S. (root sum of squares) risk analysis procedure of computing the overall probability of the actual project D.C.F. (rate of discounted cash flow), differing from that estimated in the feasibility study.Variation in Project D.C.F.It is assumed that a feasibility study of the project has been completed which has defined the estimated values for all the project parameters, such as ore reserve tons and grade, capital cost, concentrate recovery, metal revenue, daily milling capacity and operating costs.The financial analysis of the mining project will have determined that the cumulative cash flow will yield an expected D.C.F. on the capital cost if all project parameters attain the estimated values. If, however, the actual value of any parameter varies from that estimated, the actual project D.C.F. will vary from the estimated D.C.F. Risk analysis methods attempt to determine the overall effect of probable variations in the estimated values of all project parameters on the D.C.F. of the mining project. This overall effect is expressed as a probability profile, which shows the likelihood of actual D.C.F. values greater or less than that estimated.Thus, a completed risk analysis of a mine project, with an expected D.C.F. of 15.51%, would display the characteristics shown in the preceding diagram."