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By H. K. Taylor, B. Denby, L. D. Smith

Contributions by H.K. Taylor and G.A. Davis discuss the three papers published in Transactions IMM A, vols. 103 and 104, with responses by Smith and Dowd

Dec 1, 1995

By Donald R. Lessard

I. INTRODUCTION There is no question that the choice of an appropriate discount rate is a critical element in virtually all business decisions in extractive industries. The standard textbook approach relies on a single overall cost of capital for an entire firm, itself a weighted average of the firm's cost of debt and equity. But a single rate is appropriate only if the commercial risks and financing structures are similar for all projects under consideration. In extractive industries, appropriate discount rates are likely to vary greatly from project to project. Risks of projects differ markedly by mineral, by country in which the project is located, by stage in production, and by position in the project's life. Further, for a variety of institutional reasons, financing structures vary greatly in relation to these same variables and thus the discount rate appropriate to the entire investment and, in particular, to the sponsor's equity investment will vary even more markedly. Failure to select discount rates which reflect these differences can result in extremely distorted decisions. Our interest in this subject results from our ongoing research on alternative ownership and financing structures for large scale extractive ventures in less developed countries where risks to the various participants--the sponsors, the financiers, and the host government--vary dramatically with the different options. Given the magnitude of these differences, a single discount rate for all options is clearly inappropriate. However, there appear to be few guidelines for practicing managers to follow in setting appropriate rates. In this paper, we take a first step in this direction.

Jan 1, 1977

By Christopher R. Lattanzi

"Discounted cash flow analysis provides a means of relating the magnitude of expected future cash profits to the magnitude of the initial cash investment required to purchase an asset or to develop it for commercial production. The objectives of discounted cash flow analysis are to determine:.. The net present value of a stream of expected future cash revenues and expenditures... The rate of return which the expected future cash flows will yield on a given level of initial cash investment.In the case of mineral properties, discounted cash flow analysis is generally accepted as the preferred method of valuation, whenever sufficient data are available to permit its reasoned application. Sufficient data are required to support estimation of all of the individual elements of cash revenue and cash expenditure which will be associated with the development and operation of the property, up to the end of its estimated life. It is the accuracy of these input estimates which determines the validity of the resulting determinations of profitability and rate of return on invested capital.In undertaking any discounted cash flow analysis, it is important to recognize certain fundamental attributes of the mining industty:.. The basis of any mineral development is the existence of an ore reserve... Costs are determined by the number of tonnes mined and processed, while revenues are determined by the number of pounds or ounces of metal produced. The two are related by the recovered grade of the ore... Profit is typically more sensitive to changes in revenue than it is to changes in cost... Commodity price is a principal determinant of revenue, but it is also the factor with which is associated the greatest level of financial risk.In the end, of all of the factors which must be considered in the discounted cash flow valuation of a mineral property, the most significant are the reliability of the reserve estimate, particularly with respect to recovered grade, the price at which the product is to be sold, and the risk of not maintaining the projected level of price."

Jan 1, 2003

By Lawrence Devon Smith

"This paper examines the impact of the various assumptions that go into an economic evaluation, and shows how these can be combined to show an exciting result that may not really exist. An example of an embellished case (the kind that one frequently sees when projects are being promoted) is developed and the cumulative impact is analysed to show the actual project underneath. The paper also points out some areas to watch for overly optimistic assumptions such as prices, inflation, and debt. The concept of a ""bare bones"" base case is proposed (constant metal prices, constant dollars, no inflation, no debt, no interest, on a project basis, after tax) as a common reference point.As well, the discount rate is examined as a fundamental means of reflecting risk in discounted cash flow evaluations. Current industry practice is discussed, and a methodology for the analysis of risk levels is proposed that assesses the constituent components of the discount rate: real interest, mineral project risks, and country risk.INTRODUCTIONOften, the first time that all of the technical and economic data for a mineral project comes together in one place is when the economic evaluation is developed. This typically happens when work on the project has progressed to a sufficient level of detail that the effort to produce a year-by-year cash flow is justified, usually at the pre-feasibility or feasibility study stage. The data involved will include:• production; tonnes waste and ore mined, ore grade, mining recovery, metallurgical recovery, metal sold• revenue; metal price, smelting & refining charges, marketing costs• operating Costs; mining, milling, administration, fees, royalties• capital Costs; exploration, development, construction, indirect costs (engineering, management), contingencies, start-up, inventories, working capital, replacement and sustaining capital, closure costs• taxes and royalties• exclusions; depreciation (this is not a cash item), sunk costs (only costs going forward)."

Jan 1, 2003

By L. D. Smith

"This paper examines the impact of the various assumptions that go into an economic evaluation, and shows how these can be combined to show an exciting result that may not really exist. An example of an embellished case (the kind that one frequently sees when projects are being promoted) is developed and the cumulative impact is analyzed to show the actual project underneath. The paper also points out some areas to watch for overly optimistic assumptions such as prices, inflation, and debt. The concept of a “bare bones” base case is proposed (constant metal prices, constant dollars, no inflation, no debt, no interest, on a project basis, after tax) as a common reference point.As well, the discount rate is examined as one of the fundamental means of reflecting risk in discounted cash flow evaluations. Current industry practice is discussed, and a methodology for the analysis of risk levels is proposed that assesses the constituent components of the discount rate: real interest, mineral project risks, and country risk."

Jan 1, 2002

By Sorentino C

Mineral valuation may appear to be a special field of financial valuation when in fact it is a subset of general investment decision theory. The only significant difference in mineral valuation is that in the case of valuing an on-going mineral asset, ie a mine, often there is no initial capital outlay involved. One is required to determine what the mineral asset as it stands is worth. But this is the same problem as determining the maximum one could pay today and not incur a loss over the life of the asset. In other words one needs to determine the Net Present Value (NPV) of the asset. The two most widely used discounted cash flow methods, NPV and Internal Rate of Return (IRR) came of age with the rapid adoption of the personal computer and spreadsheet programs. The two methods are directly related as the IRR is a special case of NPV. NPV measures the absolute increase in real wealth that can be expected from a certain investment, which makes it particularly suitable for mineral asset valuation, but ignores the efficiency of the investment. In contrast, IRR gives the expected efficiency of the investment but ignores the increase in wealth aspect. IRR has two serious theoretical weaknesses; multiple IRR's and a very rigid assumption about the rate of return of reinvested proceeds, plus if no initial equity expenditure is involved there is no IRR. The choice of the ""hurdle"" rate can also be a problem and in certain circumstances one can obtain different rankings of mutually exclusive projects using IRR and NPV. Although NPV and IRR supposedly measure financial risk, in fact they only address a very narrow area of risk, namely the time value of money given the real discount rate. They side step the issue of what the real discount rate should be and varying degrees of risk. The classical way to establish the real discount rate is to use the weighted average cost of capital.

Jan 1, 1994

INTRODUCTION The after-tax rate of return that properly discounts future cash flows is usually referred to as the "discounted cash flow-rate of return" (DCF-ROR). The method is also referred to as the internal rate of return, true rate of return, and investor's rate of return in some literature. According to Stermole (1974, p. 188) industry polls indicate that the DCF- ROR method is the number one economic evaluation decision method used by more than 90% of the industrial companies that use for- mal economic evaluation procedures. Other economic evaluation methods that have been used in the past, such as payback period, accounting ROR, etc., have largely given way to DCF-ROR analysis because they fail to account properly for the time value of money. DCF-ROR is generally defined as that rate of return that makes the present worth of future generated cash flow over the life of the project (including after tax salvage value) equal to the present worth of all after-tax investments. The "present worthing" of future cash flow involves discounting future cash flow to a present value according to the mathematics of compound interest at some interest rate. The determination of the interest rate that equates the present worth of future after-tax earnings with the present worth of all after-tax investments necessary to create such earnings is properly called the discounted cash flow rate of return analysis. Although present worth calculations are usually used for determining the DCF-ROR, the same results can be obtained by comparing income and costs of any equivalent point in time, i.e., future worth, etc.

Jan 1, 1980

By O. L. Papendorf

For purposes of simplification, a case is presented for an engineer to discount cash flows in real rather than in current terms when giving evidence in a court of law. The difference between the two methods is highlighted, and a recommendation is made in the case where differential rates apply.

Jan 1, 1981

SINCE I have told you of the distillation of waters and the extraction of oils from things-all ingenious and useful processes-I wish to continue to speak of the arts. I am reminded that I first wish to write down for you the discourse that I made to you on another occasion a few days ago concerning the operation of a mint, so that if you have lost it from your memory (and this would not be surprising since you have had no practice in it) you may repossess it if you should need to practice it or even to talk about it, and if you find yourself in this activity it may not be new to you. I told you, as I believe you will remember and so again I repeat, that a very great and constant diligence is required by one who wishes to operate a mint well, or to have it operated, because it has many parts which it is necessary for anyone who enters this work to understand very well; indeed, if he wishes that all the work of his helpers be done well, he will have to do it himself. And if it were possible, he should have a hundred hands and a hundred eyes together, and at the same time should be in different places, because some loss often occurs in what is handled because of the carelessness of the workers or because of their little real trustworthiness. It is understood that such things require great hard labors and many kinds of knowledge. The material handled in this work is most often either gold or silver all ready to be spent, and these things are very attractive to those who handle them. In addition to being made into pieces of money likely to disappear, it is very easy to lose, and whatever part is lacking for any reason whatever [132v] brings detriment and loss to the patron since it is a thing of value. Therefore, in short, anyone who wishes to exercise this art well, without being fraudulent therein, must watch the weights with all care because the essence of this art is naught but the division of a quantity of weight into many exactly defined pieces and the alloying of gold by carats and of silver by leghe, exactly established in accordance with what the prince grants you as remedy.* If through negligence you exceed in perfection

Jan 1, 1942

AVING started to tell you of working potter's clay for making crucibles and shells, the wish came to me to tell you of the practice of this art also. Although it may seem at first glance to be outside the order and purpose of my writing, he who considers well will see that it is not unrelated to it but proper, since it is wholly dependent on the agency and power of fire if it is to be brought to its perfection. Moreover, the potter's glazes and colors are all substances of various metals or impure minerals and therefore belong to fire. Since it is my intention to treat of fire, minerals, and metals for you, I surely should not have omitted this, particularly because it is a necessary art which enriches and is greatly praised both for its ingenuity and its beauty. The art of the potter has two sources as its principal basis. One comes from the art of design, the other from various alchemical secrets and elemental mixtures. In regard to these, I find that, in my opinion, all this art depends in the last analysis on four things: on good judgment in general, and on the art of design so as to be able to make the vessels beautiful and of good shape, as well as to ornament them with painting; after baking them well the first and second times, the next thing is to know how to make and apply the glaze well and to paint them with varied and appropriate colors. The fourth is to see that you have good, fine clay without small stones or lumps-indeed this is to be considered as the first thing. Now this that I have called clay is what many call cretaceous earth and some call argil. It is found and dug up when the masters wish to make use of it and is put in a container to be moistened. When it is moistened, it is beaten on a bench with an iron rod and very well prepared. Mixing it carefully, every small stone, lump, or other hardness that it contains is removed and cleaned away. Then a shaft [145V] of iron is fitted as the journal in a large wheel. On the other end of the journal a small wheel is made which forms an instrument for working that is called a lathe. Having put some clay on this, it is made to rotate by pushing with one foot, and, by rotating it, vessels are worked into a pleasing shape and size. Then they are taken off and put on a board to dry. After drying artificially or naturally they are painted red,

Jan 1, 1942

By John Stubbs

Sub-Surface Shaft excavation Mine development Headframes Surface Production facilities Product storage and loading Tailings area Infrastructure Discovery Lodge Utilities Operations complex Port Marine loading Rail unloading and storage

May 1, 2013

While SME is hosting its Annual Meeting at the Phoenix Convention Center, Feb. 28 to March 3, one of the finest collections of mining history will be on display just 15 blocks away at the Arizona Mining and Mineral Museum. Inside the museum, visitors will be treated to a treasure trove of minerals, gems, me¬teorites, rocks, fossils, mining artifacts, historical exhibits and interactive displays on modern mining. The museum is located at 1502 West Washington. For SME Annual Meeting attendees, this is a free, eight-minute Dash bus ride 15 blocks west of the Phoenix Convention Center.

Jan 1, 2010

By B. W. Dyer

IN 1924, the Crescent Eagle Oil Co., while drilling the salt section of the Paradox formation in Grand County, Utah, encountered a salt that did not appear to be sodium chloride. This salt was analyzed and showed the presence of potash minerals, both sylvite (KC1) and carnallite (KMgC12.6H20). Because of the high potash content of the sample, there was considerable speculation: (I) as to whether the hole had been salted, and (2), if not, the extent, richness, and the depth at which the deposit occurred. The discovery caused a large amount of activity in the area. During the next few years, 68 potash prospecting permits were issued by the Government, 24 under the Act of 1917 and 44 under the Act of Feb. 7, 1927, each including about four sections of land. Several holes, all shallow, were drilled for potash. A number of holes were drilled for oil into the salt horizon and the cuttings collected at the oil wells were examined petrographically and chemically. The shallow test holes were not sufficiently deep to reach the potash horizon and revealed nothing of value, but several of the oil test holes gave some indication of where potash might be found. LOCATION AND GEOLOGY OF DEPOSITS The potassium and magnesium salts have been found in various places from the Denver and Rio Grande Western Railroad tracks about seven miles west of Thompsons, in eastern Utah, to Cane Creek, a tributary of the Colorado Rivera distance north and south of about 35 miles. In this locality, there appear to be five separate deposits: the Crescent Eagle area, which is in T. 22 S., R. 19 E.; the Salt Valley area, in the vicinity of the north-south line of T. 23 S., between R. 20 E. and R. 21 E.; the Seven Mile area, in the eastern part of T. 25 S., R. 2o E.; the Cane Creek area, on the Colorado River, in T. 26 S. and T. 27 S., R. 2o E. and R. 21 E.; and the Salt Wash area, in T. 22 S. and T. 23 S., R. 16 E. and R. 17 E. (Fig. I.) The Crescent Eagle and Salt Valley areas are in the Salt Valley anticline, some of the wells being in the fault graben and others outside. Structurally, the Salt Valley anticline is very complex, and can be described in general terms as a northwesterly plunging collapsed anticline about 15 miles long. In the Crescent Eagle area, the valley graben is about 1 mile wide and the salt probably forms a plug, the apex of which is in the vicinity of the Crescent Eagle well. Owing to the complex structure, there has been every opportunity for flowage in the salt to cause local thinning or thickening of beds. The regular succession of formations in the general area* is: [Cretaceous Mancos Dakota Jurassic Morrison Summerville Entrada Carmel]

Jan 1, 1945

By Sherwin F. Kelly

THAT gold ores occur in Georgia is a fact apparently not widely known outside of that state, yet in the last hundred years nearly $18,000,000 worth of gold has been mined there. The discovery of gold-hearing quartz was made in 1823 on the "Forty Acre Lot" (which now belongs to the Columbia Mining Co.), in McDuffie County, and about seven years later the first stamp mill on record was erected near there. In recent years Georgia's gold production has dwindled to an insignificant figure. However, with the increase in gold price, interest in this district has been revived, so an electrical geophysical survey was undertaken to aid in discovering new quartz veins, on a part of the Forty Acre Lot, the adjoining Hamilton mine, and the nearby Woodall property.

Jan 1, 1934

By Kentwell D. J, Cusak C. J, Harvey-Kelly F. E L, M D. Goodz

The Morning Star Gold Mine presents an example of a prolific operation with considerable historical records, mine workings, drill hole logs and countless plans from greater than 20 adjacent mines which have now been consolidated to form the current project. Implementation of 3D computer modelling in the planning stages has provided an additional tool to integrate and refine geological models as a guide to some exploration strategies. It has allowed for a re- interpretation of the host rock units, dimensional constraints, new exploration extensions and provisional resource modelling. The initial consideration of this project was to integrate 135 years of mining history into a single database. Each historic mining area had an unrelated mine grid, often established parallel to the long axis of their main stopes; some were based on magnetic or true north. Survey plans were in chain, imperial or metric units. Through the manipulation and rotation of old grids, previously unrelated mine workings began to form continuous mineralised zones, with unmined portions still remaining in between the existing development. Furthermore the current drillhole database of >433 holes showed numerous confirmatory intersections of new mineralisation. A series of tiered tables were created within a relational database to derive guidelines for assessing data to attribute a Mineral Prospectivity Value [MPV] based on key indicators of mineralisation. Indicator logging now forms the basis of geological descriptions.

Jan 1, 1997

By . A. J. Erickson

The Park City District, one of three major mining districts in Utah, is located approximately 20 miles southeast of Salt Lake City on the eastern slope of the Wasatch Mountains. The district has been in near continuous production since 1869. Production has been sustained from exceptionally long bedded replacement ore bodies in the Thaynes, Park City, and Humbug formations and also from several major veins. District production is summarized below. TABLE NO. 1 Park City District, Total Production, 1869 thru 1968 (Source r Various Company Records) [ ]

Jan 1, 1970

By ELIHU THOMSON

IN 1877, Professor Thomson delivered at the Franklin Institute, [Philadelphia, five lectures on electricity. The object of the lectures and the demonstrations, which were numerous and many of them original even to the employment of special apparatus constructed by the lecturer, was to show clearly that electricity, of whatever name, was the same., differing only in tension (as it was termed) and in the current flowing, or quantity (the old term), in steadiness or in wave-like character. In those days, the textbooks divided the subject into statical and dynamic electricity, with sub-divisions such as frictional electricity, voltaic electricity, magneto electricity, electromagnetism, thermo electricity, and animal electricity. The well-known Ruhmkorff coil,' or spark coil as it is now called (as when used for the ignition of automobiles), was employed to step, up a battery current to a high-tension discharge which would charge condensers, such as Leyden jars.

Jan 1, 1921

By Gregor de Ratmiroff

Field prospecting for bauxite in Venezuela has had a long but interrupted history having till now oferred but evidence of occurrences. The Venezuelan Government, trough the Corporación Venezolana de Guayana (C.V.G.), in 1974, formalized a major effort in prospection for bauxite in the Shield area and the Orinoco Delta in orden to establish the possibility of raw material supply to an upcoming and expanding aluminium industry. The Corporation, in turn, created and delegated to the Division of Geological Stu- dies, the formulation of the necessary infrastructure and execution of work in orden to determine the existence of economically exploitable bauxite deposits.

Jan 1, 1979

By John M. Arnold

Several years ago it became apparent to some of our people that; there was developing a very definite need for largee coal reserves in the West to satisfy- the need for fuel for the furnaces of electric generating plants with the rapid development of, the West, of both population and industry, it was impossible for hydro-electrics plants to keep up with the ever increasing demand for electricity. In 1960, Mr. E. R. Phelps, then associated with the engineering department of Peabody Coal Company, began a search for and development of coal deposits in the very remote northeast section of Arizona near the village of Kayenta. Travel to this section of the country was not easy even at this late date, and it was an eight hour drive from Farmington, New Mexico to Kayenta, Arizona, a distance of some 130 miles. The trip was over roads that even' a-horse and wagon had trouble negotiating and a four wheel drive vehicle was about the only type of transportation that could satisfactorily traverse these roads, as testify many badly beaten sedans and coupes that tried it. Since that time a very excellent road has been constructed from Shiprock; New Mexico to Cameron, Arizona where it junctions with another excellent road that runs north to Page, Arizona and the Lake. Powell area and south to Flagstaff, Arizona on highway 66. Kayenta is a small village nestled at the foot of the Black Mesa near its northeast extremities. The coal deposits of interest were on the surface of the mesa. This location presented another problem, as the only trail to the top of the mesa was intended for walking, horseback, or a brave soul In a horse and wagon. Once again the four wheel drive vehicle was about the only answer. To reach the coal deposits you must climb the mesa, which is vertical ascent of some 1,500 feet, and then proceed southward into the bowl of the mesa with an ensuing descent of some 1,000 feet, finally coming to an elevation of 6,500 feet, at which elevation the coal outcrops become apparent.

Jan 1, 1969

ALTHOUGH everybody is familiar with coal, few persons have an exact idea of, the great impor-tance of this precious fuel. Coal is the black bread of industry. Without it, industrial activity is much restrained; and so the great industrial countries of Europe and the United States of America are the great producers of coal. The 1913 production of coal in Belgium was 22,842,-000 tons, valued at 418,700,000 fr., nearly a half billion. In 1919, it was 18,483,000 tons, about 81 per cent. of the production before the war; in 1920, it had reached 22,414,000 tons, approximately the production before the war. To show the importance of coal production of Belgium, let us say that the coal industry employed 168,000 workers in the year of 1920, the metallurgical industry only 129,000 and the textile industry 103,000. The coal industry, then, employs the greatest number of workers. The value of the coal production in 1919 is estimated at 1,121,000,000 fr. On the basis of the production before the war, the value of the production of iron in 1919 would have been 701,000,000, of finished steel 1,086,000,000, and of zinc 415,000,000; therefore, in 1919 the value of the coal industry was greater than that of the metallurgical production.

Jan 8, 1922