Mining project evaluations

A synopsis

Factors affecting the evaluation• Geology, resources and reserves• Process, plant and equipment required• Environmental impacts• Capital costs to invest • Operating costs• State regulations and fiscal • Cost of production • Market prices• Project viability in a global strategy

Present values,

interest rates and

discounting factors

Applied to a project or an operating business, we can say that investing 747 million in year 1 and getting an annual income of 100 million during 20 years, is as if we had saved and invested 747 million at a rate interest of 12%.

Whereas by investing 982 million in year 1 and getting the same annual income of 100 million during 20 years, it is as if we had saved and invested at an interest rate of 8%.

It is clear that getting an interest rate of 12% is better than 8%: it is 4 percentage points higher and we get the same annual income by saving and investing 235 million less or 24% less. The use of this saving investment is therefore more productive in absolute terms.

Internal rates of return

The two projects are compared in graph 8.

This clearly shows project A to be better than project B.

Project A generates more wealth than project B so it has more potential for sharing between the stake-holders:

--State for development, infrastructures and social expenses (through taxes),

-- lenders (through interest payments) and

-- equity owners (through surplus cash generated; on this more later).An interesting point, is that the PWVs of project A are always far above project B PWVs; but the difference decreases as the discount rate increases. After 16% discount rate, project B becomes better than project A. This reflects the higher sensitivity of big capital projects to the interest/discount rate.