Search Documents

By David C. N. Cockburn

INTRODUCTION This paper analyses certain of the financial considerations which will commonly apply in relation to the following questions: - what equity structure or project vehicle should be adopted for the exploration and/or exploitation of a project by more than one unrelated participant? - what vehicle should be adopted by a participant for its participation in a multiparty project? Due to local, politically motivated laws in certain jurisdictions, or due to the overriding requirements of a dominant participant, there may be little choice of the underlying multiparty structure which may be adopted for the exploration, appraisal and/or development phases of a project. Nevertheless, even in such circumstances, attention should be given, at least in the preparation of the related documentation, or in considering methods of participating or funding the project, to certain of the points discussed below. This discussion of financial considerations in the context of the more commonly adopted multiparty structures concentrates primarily on fiscal, financial accounting, financing and funding aspects. TYPES OF PROJECT VEHICLE FOR MULTIPARTY INTERESTS The well known types of vehicle adopted for the participation in a project by more than one participant (assuming that the participants are effectively unrelated) are as follows. Joint Venture (unincorporated joint venture) By far the most commonly adopted structure for mining ventures, a joint venture is usually defined and documented in terms to distinguish it from a partnership for important tax and legal reasons. In essence, this is a contractual association of more than one participant to carry out a specific commercial project or purpose. The relationship between the separate participants and their respective rights, interests, obligations and liabilities are agreed between the participants in one or more contracts (viz Joint Venture Agreements or Joint Operating Agreements together with ancillary documentation). Unlike other project vehicles of participation, in most jurisdictions there is no specific body of law governing joint ventures. The participants thus enjoy contractual freedom to negotiate whatever deal they may wish between themselves. Jointly-Owned Project Company (corporate joint venture) A very familiar vehicle, this is a separate and distinct legal and tax entity incorporated under the company laws of the place of incorporation to undertake specific objects, and granted specific powers, in relation to the Project. Although certain rights, interests and obligations may be circumscribed in the governing corporate instruments by the promoter participants, the corporation laws of the relevant place of incorporation, and the selection of such governing laws (assuming freedom of choice) and future political changes in such corporate laws, should be carefully considered. The use of a company in a multiparty structure may be peripheral to the project itself as a specific purpose vehicle (for example, a joint sales agent or marketing company or a joint borrowing vehicle) or it may form a central function such as in the case of a tolling company which will own the project for legal and taxation purposes and raise financing with the backing of the shareholder participants commonly by the adoption of take-off, throughput and/or user agreements. Partnership This is a legal relationship, subject to the often wide-sweeping restrictions of the relevant local partnership laws, under which the participants have agreed to carry on a business venture together with a view to profit. The effect of the relevant partnership laws, as well as the various types of partnerships and the

Jan 1, 1985

By A. H. C. A. Zimmerman

WE have just heard what must be regarded as a thoughtful, constructive and somewhat painful analysis of the financial function of our industry. While thinking about this, it is interesting to reflect on the conditions which have stunted the growth of the financial side of our affairs. Mining must be regarded as a wealthy business. •while immeasurable grub takes and development budgets have been lost, there can be little argument that a productive ore-body nearly always produces the type of wealth that breeds some extravagance. I recognize that this statement can be attacked from many sides, but an historical comparison with a commercial enterprise involving similar investment will demonstrate what I mean. However, these old times are be-ginning to disappear for a variety of reasons. High amongst these are: ( l) Increased costs of exploration. (2) Remoteness of many new finds. (3) Fixed or declining metal prices (particularly when expressed in constant dollars). ( 4) Constant demands for higher wages.

Jan 1, 1962

A variety of environmental financial assurance instruments are in use across the globe. This paper reviews some of the more common forms currently used in New Zealand, Canada, USA and Australia. In order to be effective, the form of assurance instrument selected needs to be aligned with a countryÆs specific environmental objectives, geography and political climates and also allow for a healthy investment climate. Industry and Government both have a strong interest in ensuring financial assurance criteria meet these objectives.   Recently Golder Associates have been involved in financial assurance assessments for various mining and quarrying companies across the South Island. Multiple stakeholders and regulatory agencies can make the setting of effective and fair financial assurance criteria a complex exercise for both regulatory agencies and industry.  The author relates experience gained in assessing financial assurance under current New Zealand legislation (RMA, 1991), effectively dealing with issues such as ôdouble bondingö and overviews potential approaches to dealing with transitional issues for historic and existing operating mine sites.

Jan 1, 2006

By M Pizey

After 60 years of operation, coal extraction at Solid Energy New ZealandÆs (SENZ) Strongman Mine, near Rapahoe is scheduled to end in early 2005. Up until 2003 the closure bond for Strongman Mine was only $930, and both SENZ and the West Coast Regional Council (WCRC) agreed that a more realistic level of bonding was required.   A conceptual closure plan has been developed by Golder Associates, and the cost of the work estimated. Closure includes decommissioning of equipment and facilities, rehabilitation and replanting of all disturbed areas and a period of maintenance and monitoring to verify that closure objectives have been met. Significant maintenance allowances are included to cover management of underground fire, subsidence and slope instability. These make up much of the potential ongoing environmental liability at the Strongman. All costs incurred beyond year 1 of closure are discounted to present value. Uncertainty in costs is addressed by Monte Carlo simulation, with an 80 % confidence level adopted.   A bond quantum of $3.0 million has been calculated for the first year of closure at Strongman. A three-year ærollingÆ bond is proposed. Progress will be reviewed annually, with the bond adjusted up or down accordingly. It is then renewed for a further three years. This allows for progressive return of the bond as rehabilitation objectives are met and verified. Similarly, if there are delays in meeting objectives, a proportion of the bond may need to be kept in place for a longer period than assumed. The level of bonding in place for the Strongman operation at any time in the future will therefore reflect the cost to complete the closure work programme.

Jan 1, 2004

By C. M. Jones

Cyprus Sierrita Corp. has developed a training program that has led to several significant improvements in safety performance and productivity. Truck productivity has increased 6% as measured by truck cycle times. Increased skill levels and awareness on the part of the mine's operators are due to the new training effort. Costs associated with productivity training have been about $185,300. This includes program development and execution costs, as well as lost productivity during the training itself. These costs are offset by $1.9 million in savings attributable to the increased skill levels of technicians due to the training effort. Cyprus Sierrita is a subsidiary of Cyprus Amax of Englewood, CO. The company operates a copper and molybdenum mining and processing facility south of Tucson, AZ, near the town of Green Valley. The Cyprus Sierrita operation produces about 109 kt/a (240 million lbs/ year) of copper, 11.3 kt/a (25 million lbs/year) of molybdenum, 31.1 t/a (1 million oz/year) of silver and 1.8 t/a (4,000 lbs/year) of rhenium. The opera¬tion employs 770 people at the site. About 200 of these employees work in the mine operations. Mining at Sierrita uses standard open-pit techniques. Crews of 43 people rotate on 12-hour shifts. Hourly technicians are nonunion and do not use rigid job classifications to define pay. Rather, the system is designed to pay employees for what they are able to do. Administering this effort requires that training opportunities are provided to those people who desire them. Successful training opportunities al¬low people to gain skills. The more skills an employee can demonstrate, the higher his or her "tech level." A technician's pay is commensurate with his or her tech level. Much of Sierrita's training in past years concentrated on building basic

Jan 1, 1998

By C. M. Jones

The training program developed at Sierrita over the last twelve months has led to several significant improvements in both safety performance and productivity. Our most easily quantified results have been in truck productivity, where we have also experienced a 6% decrease in truck cycle times. We feel this is due to increased skill levels and awareness on the part of our operators due to our new training effort. The cycle time improvement has resulted in an increase in Truck productivity of 6%. Costs associated with productivity training have been $160,300. This includes program development and execution costs, as well as lost productivity during the training itself. These costs are offset by $1,400,000 in savings directly attributable to the increased skill levels of our technicians due to our training effort. As such, this represents a solid, high return investment at Sierrita.

Jan 1, 1998

By John L. Halls

INTRODUCTION In this section, it is assumed that the reader is an engineer with sufficient training in underground mining work, preferably with budgetary control, to understand the mining methods outlined in other sections of this handbook. The mining-method descriptions are not repeated herein; only sufficient information is provided to enable the reader to comprehend the development of the costs presented. All costs are in 1977 US dollars, except where explicitly stated otherwise. CAPITAL INVESTMENT The capital investment in the underground mining portion of any mining property includes the following: 1) The development of original access involving adits, shafts, declines, etc. It includes the necessary equipment for transporting men, materials, and rock. 2) The purchase of mine equipment including loaders, underground haulage equipment, fans, pumps, electrical distribution, surface facilities associated with the underground mine, etc. 3) Sufficient preproduction mine development to assure steadily increasing production after startup. De- pending upon the mining method used, the preproduction development should provide a supply of three months to one year of ore that is developed and is ready to be stoped. Underground development also includes excavations other than shaft stations, loading pockets, sumps, etc., which usually are associated with the means of access and are excavated by the contractor. These excavations could include a crusher cavern, an ore- storage pocket, and underground workshops that may or may not be included by the shaft-sinking contractor. Portions of these could be delayed until after production begins, but it is preferable to complete them during the development phase, so there is no interference with the production buildup. 4) The staff and labor costs for all phases from inception through final production. 5) The provision of mine-surface equipment and facilities strictly applicable to the underground portion of the operation. The required facilities include a changehouse with a lamp room, a first-aid station, compressors, an electrical substation, workshops, a ware- house, water pipelines to the concentrator, water storage tanks, explosive storage, etc. A concrete-batch plant, a sand-fill plant, and boilers for heating may be required. 6) Other direct and indirect costs. 7) Engineering, design, and procurement costs. 8) Contingency allocations. 9) Contractor's fees, startup costs, and owner's costs. Original Access As part of a study for the US Bureau of Mines, Dravo Corp. conducted an extensive literature research survey covering underground operations in the United States between 1963 and 1973. Table 1 is compiled from the section of that study pertaining to the types of access to underground mines. Table 1 does not include distances attributable to the deepening of existing shafts, nor does it include shafts bored by raise drills or downhole machines that need existing underground workings for the disposal of the cuttings. During the period under review in the report ( 1963 through 1973). concrete-lined circular vertical shafts were the predominant means of providing the first access to a new underground mine; these shafts accounted for 80% of the original access in terms of the number of accesses completed, and 75% in terms of the total verti- cal linear distances. The inside diameters of the conventional circular shafts ranged from 3.7 to 7.0 m (12 to 23 ft). Most (72% ) of these conventional shafts were for production,

Jan 1, 1982

By William Mayrsohn

INTRODUCTION The net smelter return (NSR) calculations made on various smelter-refiner alternatives, is usually done by taking the gross metal value less metal deductions, smelter-refiner charges and transportation-insurance costs. An important further step in the calculations is the financial charges imputed by refining time, transportation delays, to the time gold is returned (if tolled) or paid for if bought by the refiner. Metal that is priced in advance of payment also requires a forward premium that the mine may or may not be getting. This is a hidden cost that is often omitted from the calculations. Segmentation of each of the above costs are vital to see where improvements can be made through negotiations, better choice of metal pricing or transportation alternatives. BASIC NSR CALCULATIONS SMELTER-REFINER CHARGES Payable Metals - Treatment Refining Charges: Since these can vary from one smelter to another, the effect of a $25 per ounce price increase/decrease should be calculated and kept in mind. This effect is compared to differences in refining/treatment charge and a total smelter/refiner cost on a cost per ounce of dore, gold, or a dry ton of concentrate. Transportation - Insurance: Research has to be done on transportation alternatives perhaps with some assistance from the smelters, railroads or trucking companies. For dore, the U.S. postal service is viable and inexpensive. For railroads, deal with the regional office ie., B&N El Paso, if production warrants regular bulk shipments. Spot rates tend to be higher. A small mine producing concentrates usually goes to the nearest smelter due to extremely high transportation costs. Here is where a refiner can help. Insurance-Quotes for rates on dore/ concentrates are easily obtainable, but the mine has to shop for the best rates. Your insurance broker is the best source of this information. Differences between Mine and Smelter/Refiners Metal losses can be caused by the following: - Concentrate dry weight differences caused by moisture determination or faulty scales (often at the mine). - Sample bias by poor preparation practices on either side ie., grinding of the sample removing gold; or a poorly mixed concentrate. Dore bullion has no such difficulties.

Jan 1, 1987

By D. Drymonitis, G. Gialoglou

"Placer gold mineralizations have been observed in the north-eastern parts of Greece. Some of them have been at first evaluated to be of special interest so, exploration campaigns have been designed and carried out. Among the other exploration techniques applied on the sites of interest, drilling was the one to give the detailed information and data for the evaluation of the deposits. Having collected the data from trenching and two consecutive drilling campaigns, they were processed geostatistically to estimate the ore reserves and therefore the economic interest of the deposits. The latter was done by using exploitability indices, which would give a rough idea whether the deposits were economically feasible. A small number of such deposits have been spotted in the area and have been explored and evaluated as above. The present paper deals with the most important of them, giving all the process followed and the results derived from the exploration carried out."

Jan 1, 2005

By James H. Boettcher, W. Durand Eppler

INTRODUCTION In the second quarter of 1979, Rapid Mining Co., Inc. ("Rapid") inquired whether Crocker National Bank ("CNB") would provide $4 million in term loan financing to help ("Dry Creek") acquire the outstanding shares of the Dry Creek Coal Company ("Dry Creek") in West Virginia. Prior to approaching CNB, Rapid had sought financing with the assistance of a financial advisor from a number of commercial banks without success. A summary of the initial terms requested by Rapid is shown in Table 1 compared with the actual terms on which the transaction closed. It is not difficult to note that the two sets of terms differ significantly. This is often the case when financing requests based on the expectations and vision of a mine developer are juxtaposed with more pragmatic requirements of a commercial bank. The "art" and fund of structuring financing plans for mining ventures (highly leveraged acquisitions or grass roots) comes in working with mine developers to arrive at a final financial structure that meets their objectives and constraints as well as those of the bank or other financial institutions providing much of the financing. Beginning with the terms requested by Rapid and ending with the terms that closed the transaction, this article briefly describes the process we went through with Rapid Mining. The Seller and Buyer The Dry Creek Coal Company was established in 1961, after its owner acquired the coal leases from Republic Steel. Republic has mined the primary coal seam from 1948-1961. Dry Creek was owned as a subchapter S corporation (i.e., for federal income tax purposes, income is taxed at the shareholder level) and had been run on a low key basis. Since the company had virtually no debt and limited cash needs, the owner produced primarily when rail cars were available and income was required. Output was therefore erratic as is shown in the top of Table II, but the result was a profitable little company with an attractive free cash position. Because the owner wished to retire and enjoy his wealth in a more readily spendable form, he had put the mine, with stated recoverable reserves of approximately 13 million tons, up for sale. In contrast, Rapid Coal's investors consisted of a number of investors of disparate financial situations. They had agreed upon a primary objective of income maximization and planned an annual production rate of 120,000 TPA which they and the current owner believed realizable. The Formulation of a Financing Structure Figure 1 presents a simplified overview of the sequence of steps taken in the financing process which lasted approximately three months from start to finish. Since banks see many requests for funding and considerble time is required to follow up on each, an important step was determining, after a brief review of the materials provided to us, whether the basic "eonomic entity" was viable. In this case, the size and quality of the reserves, the inherent operating cost characteristics, the sales arrangements, the management/labor situation and Rapid's principles all appeared to be sound enough to warrant investing the time necessary to do a thorough analysis of the project. Once this decision was made, the evaluation and analytic process shown in Figure 2 was initiated. The first and most fundamental concern of any banker is whether the loan will be paid back as scheduled from the cash flow generated by the project. The amount of debt relative to the owner's equity is of course crucial in such a determination. Before the debt/equity issue was addressed, however, a number of more qualitative factors had to be studied and if

Jan 1, 1985

By P. J. Petit

Financial evaluation is necessary to investigate the viability of implementing and/or utilising new technology in mining projects. It establishes a techno-economic base for decision-making and justifies capital expenditure. This paper aims to present a monetary appraisal of the electric rock drilling system in a typical feasibility project, whose purpose is to increase the production rate. The in situ environment is a platinum orebody, and the stoping operations occur in UG2 reef. The results are a function of production requirements, technical parameters and financial outlay of the drills. The costs involved in implementing and operating electric rock drills are assessed to the current method of drilling, namely the compressed air operation. A comparison of the electric and pneumatic rock drills in terms of financial outlays for drilling and service requirements, peripheral equipping and training is discussed. Other factors that affect the business case are technical advantages, safety and risk management and the environmental objective of the company.

Jan 1, 2006

By Xu C

This paper describes the structure and operation of an interacth.. computer program for mineral industry financial analysis and production planning. It includes comprehensive risk analysis with correlated variables and optimal production scheduling using Lane's balancing cut-off grades and the general dynamic programming approach.

Jan 1, 1995

By Lynton B. Manssen

Introduction Net Present Value (NPV) techniques are becoming widely used in industry as a standard analytical tool in making capital budgeting decisions. However, NPV techniques are often misused in "common practice." A comparison was made between the use of NPV techniques in common practice and an Adjusted Net Present Value (ANPV) approach to capital budgeting in the financial analysis of a mining project. The comparison was made by applying both methods to a hypothetical copper project. The intent of the analysis is to provide an example for practitioners to follow when financially analyzing mining (or other) projects. To maintain the thrust of the analysis, the project has been evaluated as a stand alone, total project. No consideration has been made of the division of cash flows accruing to various owners over the life of the project. This omission will not affect the comparative nature of the analysis. This discussion assumes that the reader is familiar with present value as a concept and as a tool in capital budgeting. Finance theory has embraced NPV analysis as the correct way to evaluate capital budgeting alternatives. Many articles have been written expounding the virtues of NPV over other capital budgeting methods, such as Internal Rate of Return (IRR), Payback, Accounting Rate of Return, and others. It is not the purpose of this article to review all of the literature in this area; suffice it to say that in academic circles NPV concepts are accepted as the norm. A survey by Schall, Sundem, and Geijsbeck (1978) indicates that major US companies are finally following in academia's footsteps. Fifty-six percent of the companies responding to the survey use NPV techniques in their capital budgeting process. Further, some 86% of the companies surveyed use discounted cash flow methods (NPV or IRR) for capital budgeting decisions. This compares with a survey by Klammer (1972) that showed 57% of companies using both techniques, a considerable increase in seven years. With the increasing use of NPV techniques in industry, there are certain uses in common practice that can give misleading results. Five common errors in NPV analysis of large projects are: • No distinction is made between real and nominal cashflows. • The discount rate(s) used in the NPV analysis is not formally adjusted for risk. • There is no distinction of possible differences in the riskiness of different project cash flows; i.e., revenue vs. depreciation. • There is no recognition of the cash benefits to the project from interest tax shields (interest payments on the project's debt that are tax deductible). • There is no clear recognition of subsidies to the project from concessionary debt financing. No Distinction Between Real and Nominal Cash Flows Often, expected cash flows for a project are stated as a mixture of real (in constant dollars) and nominal (in current dollars) cash flows. For example, expected revenue cash flows may be stated in real terms and depreciation may be stated in nominal terms. If cash flows are added together to give an after tax cash flow, and this single cash stream is discounted, care must be taken to ensure that cash flows are consistently stated. All cash flows should either be stated in nominal terms or in real terms. In addition, the discount rate used must be stated in the same terms as the cash flows being discounted. Real cash flows must be discounted using real discount rates and nominal cash flows using nominal discount rates. Discount Rate Not Adjusted Numerous methods for obtaining discount rates are used in common practice. Schall and others

Jan 6, 1983

By Sarah R. Hindle

Carbon capture and storage has jumped to the forefront of climate change mitigation efforts for its capacity to sequester large amounts of carbon. Mineral carbonation is one prominent option, mimicking and accelerating the natural weathering process of certain silicate minerals. This has the ability to produce stable carbonate minerals that can store carbon on geologic time scales with little to no risk of leakage. Commercialization of this process is ideally suited for integration into the proposed mining operations at the Turnagain Nickel site in Northern BC. This is due to the abundant supply of suitable ultramafic feedstock material, as well as the economic benefit of sharing costs while reducing net emissions and bringing value to otherwise valueless and costly waste rock. While studies have shown this process to be technologically viable on a laboratory scale, assessing the economic and financial viability of such a process on an industrial scale is necessary. An evaluation of the financial feasibility of integrating mineral carbonation into the mining cycle at Turnagain under a proposed cap-and-trade system is presented.

May 1, 2010

By Hugh Douglas

This paper discusses the financial health of the U.S. mining industry and its ability to meet the future raw material requirements of this country in the context of resource independence. The title of this paper begs several questions, and three will be raised here. The answers to them will form the basis for discussion. The three questions are: What does one mean by resource independence. How is the U.S. mining industry defined. How is financial health measured.

Jan 1, 1977

In constructing a financial model of a project significant effort is expended on capital and operating cost estimation, commodity price forecasts, and choice of discount rates while uncertainty in the primary input, the reserve, is often completely overlooked. The aim of this paper is to highlight the impact of uncertainty in the resource/reserve estimation process on the assessment of the financial performance of a project. Four qualitative processes have an impact on resource/reserve uncertainty. These stages are: 1.Ore definition 2.Geological interpretation 3.Resource estimation 4.Ore reserve estimation and mine planning. Each stage contains a number of tasks that may be considered as key performance activities (KPAs). Optimizing the manner in which these KPAs are completed can remove a great deal of uncertainty and error from the resource/reserve process. Examination of these KPAs within a company can also provide an insight to the quality of the information underlying the project. This will allow the company to identify any shortcomings in the data and to assess the resulting risks (Gilfillan, 1998). A hypothetical financial model based on a gold operation has been used to estimate the potential effect of resource/reserve uncertainty on revenue. Monte Carlo simulation has been employed to simulate a number of hypothetical scenarios: 1.a base case scenario which assumes no major errors or biases, but contains realistic margins for uncertainty that would exist in any project where work is being completed to the limit of best endeavours 2.a poor sampling scenario which assumes poor sampling practice and lack of understanding of sample preparation 3.a poor resource estimation scenario which assumes poor modelling and inappropriate choice of interpolation technique, and 4. a ?typical? scenario which represents a project where the majority of KPAs are not performed as best as they could be. The results show that realistic uncertainty ranges can generate changes in the estimate of potential revenue of plus or minus 30%.Therefore, it is important to allow for errors in these processes in any financial analysis or feasibility study. It is recommended that, when building a financial model, are view of relevant resource/reserve KPAs be carried out and appropriate ranges for uncertainty be applied to provide a range of potential outcomes. These outcomes can then be factored into the detailed cash flow analysis in order to ensure that technical uncertainty is built into financial decisions.

Jan 1, 1999

By Peter J. Maxworthy

INTRODUCTION There is no hard and fast rule on whether functions within a company, diversified or otherwise, should be strongly centralized or decentralized. In all diverse organizations, there are certain basic functions which remain common (or central) to each element of the business, viz: Personnel Management Cash Management Taxation Management Legal Planning Accounting Standards It would follow that each of these common factors requires some supervision at a central level to ensure that overall group objectives are met. It is true that other functions including: Industrial Relations Marketing and Distribution Production Research and Development Purchasing Management Accounting may also be common to each element of the organization. However, there is far less commonality in the degree to which these functions are central to the efficient performance and financial well-being of the business. Role of Operating Units The resources of operating centers may be viewed as a bank of funds, the nature of which can be changed from time to time, but the employment of which must provide for ongoing increases in the net worth of the total enterprise expressed in terms of market values. Operating units are required to continually review products, methods, and opportunities and to monitor avenues for incremental investment--all with a view to attaining the necessary additive net present value of future cash flows of the enterprise. Operating units should be permitted sufficient autonomy to enable the best use to be made of the skills and experience of the people it employs in order to produce a return appropriate to the value of assets employed. Role of Head Office The head office will typically comprise a specialist group--the leaner the better if one strongly adopts the decentralist approach--often acting as Service Centers but also performing a control function in the corporate sense. The head office function is a cost center. It may be instrumental in developing strategies for increasing revenues or reducing costs on a group scale, but it does not generate revenue. Every dollar spent on this function is an extra dollar to be generated by the operating centers in order to achieve an increase in corporate wealth. TREASURY MANAGEMENT Treasury management is concerned with the provision of finance, cash-flow management, and risk analysis. Each decision taken within the enterprise has a cash implication. It follows that a well-integrated central Treasury function can, in all likelihood, produce economic benefits. The degree to which the function should be centralized depends largely upon the unique nature of the operating units it is servicing. Levels of ownership, the calibre of unit operating managers, and the nature and geographic distribution of the business are all factors determining the degree to which the Treasury function is centralized. In the case of Peko-Wallsend, the Treasury Department is small, comprising four people. While divisional cash-flow management is largely decentralized, Treasury is responsible for the daily management of funds surplus to the immediate needs of operating units. Treasury also operates as central banker and provides funds to

Jan 1, 1985

In-stope long hole drilling (face parallel drilling) is a new technology currently being applied to shallow dipping (

Jan 1, 2003

By S G. Gemell

"The financial model is an integral component of any project evaluation based on mineral resources, ore reserves and (at least internally) exploration targets. Given the unity of purpose for preparing financial models for project evaluation purposes, the diversity of both format and content of the finalised models is surprising. Many models are prepared by staff or consultants who are comfortable with a particular format that may be used for other purposes, such as budget preparation or financial reporting. It is natural in these situations that the practitioner will take these models and adapt them to the purpose. The end result may or may not succeed in providing a clear, accurate and sufficiently detailed view of the project’s economic viability.When preparing a model, the practitioner should be cognisant of the interpretation and review, or audit, process. The auditor may be a consultant or employee of a bank, potential equity provider or of the project sponsor itself. Depending upon the scale of the project and the level of participation of the entity that the auditor represents, the financial model will be interrogated more or less rigorously. In any event, the end user will require the model to permit easy change of inputs and will wish to confirm that such change is appropriately and thoroughly transmitted throughout.Accordingly, there are some ‘dos and don’ts’ that can be readily applied in the creation of the financial model that will greatly assist the end user, not just in the change of inputs, but also in reviewing the model’s integrity. The less time and effort required by an auditor in this regard is reflected directly in the cost of the review process.CITATION:Gemell, S G, 2016. Financial modelling with the auditor in mind, in Proceedings Project Evaluation 2016, pp 172–180 (The Australasian Institute of Mining and Metallurgy: Melbourne)."

Mar 8, 2016

By E. Kendall Cork

The traditional financial objective for a single mine company has been to operate as frugally as possible and to pay out most of the earnings as dividends. If the business is cyclical (as it is for most metals) the dividends might fluctuate quite widely. When the mine is exhausted the company disappears. This is still quite a viable strategy for a single mine company. It is not however a viable strategy for the world as a whole. The mining industry is built by mine development companies who can mobilize the people and capital to bring new mines into production. Their skills must include marketing, engineering, finance and other politics. It is very rare for a property to be brought in without the support of a major company that can provide all these services. The exceptions will usually have some other form of big brother support, for example the U.S. government uranium contracts at guaranteed generous prices. The mine development company will seek as a minimum to perpetuate itself by developing new mines in order to replace those which are running out. The more common and more ambitious objective is to grow -- that is to add to its ore reserves and current production by developing more new mines. The financial objectives for that company are very different. Obviously if all the earnings were paid out in dividends there would be nothing left to work with. The first financial policy then is to spend an appropriate amount on exploration for new properties. The next is to retain enough of the earnings to provide the capital for new projects at least sufficient for the equity. There is no magic formula as to what proportion of earnings should properly be distributed as dividends by a growth-oriented mine development company. As a rough rule of thumb distributing half or more will probably leave too little to work on and 30% or so is probably a good balance. However the circumstances differ widely from company to company. It may be useful to set an objective for the rate of growth of a company's earnings. Some have picked rates such as 15% per annum compounded. Others have set a target in real terms which might appear as 10 or 11% plus inflation. Obviously the arithmetic of compound interest is very attractive; however in practice there is much variation. Indeed current returns from existing operations swing widely with the business cycle and there is no assurance that economic new properties will be found according to someone's arbitrary time schedule. For example, Western Mining Corporation Limited in Australia explored for 30 years with little to show for it, but then found the great Australian nickel deposits and more recently the huge Roxby Downs copper. That long dry spell could not have fitted anyone's arbitrary calendar of growth and yet they would not have found such orebodies without that long period of effort. Should they have abandoned the search? Once a new property has been found or acquired there has to be a threshold rate of return on the new capital to be invested against which to evaluate the property's economics. Conventionally this seems to be 15% after tax, a number common in other heavy industries as well. In some cases it is expressed as a lower number plus allowance for inflation. Discounted cash flow analysis is a very useful tool but it does not make the decision. In the end a "go" decision depends on judgment of many factors some of which are numbers used in the DCF calculation whose credibility must be examined. It is curious how frequently investment proposals come in with the rates of return very close to 15%. The project advocates know that a number much less than 15% will not fly and that a number much more is not necessary. With much higher nominal and real interest rates of recent years, even though before tax, logic suggests that the hurdle rate should also rise. The power of compound interest is so great that 20% is very hard to achieve in any cash flow projection but 18% may be a sensible yard - stick. Once again it is remarkable how many project proposals come in with an 18% return. On the record the mining industry as a whole has not been overly restrictive in choosing its hurdle rates of return. This is shown by the abundance of metals in recent years and the failure of metal prices to keep up with inflation. All of the foregoing is standard text book stuff.

Jan 1, 1985