Mining Economics - MinE 402

Introduction to Mining Economics

• Mining & Metallurgical Economics corresponds to MinE 402, Term 2 - 2025 at King Abdulaziz University

Topics Covered

• Introduction to mining economics will cover a range of concepts.
• Cash flow models.
• Commodity price forecasting.
• Mineral resource and ore reserve estimation and classification.
• Cut-off grade and mining recovery optimization.
• Capital and operation costs analysis.
• Depreciation and taxation effects on mine economics.
• Time value of money and discount rate calculations.
• Inflation and exchange rate impacts on project valuation.
• Comprehensive mine project valuation techniques.

Grading Structure

• Individual Assignments (IA): 15% of the final grade.
• Group Assignments & presentations (GA): 5% of the final grade.
• ABET Assessment/Project SO 3 and 7 (PR): 10% of the final grade.
• Quizzes (QZ): 10% of the final grade.
• Mid Term (MT): 20% of the final grade.
• Final Exam (FE): 40% of the final grade.
• Total: 100%

Recommended Textbooks

• "The Mining Valuation Handbook" 4th ed. by Dr. Victor Rudenno.
• "Mining Engineering Handbook" 3rd ed. Edited by Peter Darling.
• "Mining Economics and Strategy" by SME, Ian Runge.
• "Engineering Economics / Fundamentals".

Learning Outcomes

• Understand the purpose and objectives of mineral economics.
• Understand the mineral project evaluation process.
• Recognize the specific uniqueness and uncertainties associated with mining projects.

Mineral Economics Defined

• It is the academic discipline studying the economic and policy issues related to the production and consumption of mineral commodities.
• Gordon & Tilton (2008) define it as a discipline with an overview in Resource Policy.

Scope of Mineral Economics

• Mineral economics optimizes geological exploration using advanced technology.
• Reduces costs in mining, processing, and manufacturing.
• Involves financing, capital, and investment in new mine sites, plants, smelters, and refineries.
• Encompasses calculating economic feasibility, cash flow, extraction, processing, and trading.

Economic Geology vs. Mineral Economics

• Economic Geology focuses on the application of up-to-date tech in geological exploration, extraction, and ore processing from a geological point of view.
• Mineral economics is broader, including geology, mining, metallurgy, as well as other sciences like engineering.
• Mineral economics informs policy and provides solutions for private sector decisions.

Purpose of Economic Analysis

• To effectively forecast the financial performance of resource companies and their projects

Consequences of Incorrect Project Decisions:

• Rejecting a good project can lead to lost gains and benefits.
• Accepting a bad project can result in lost profit, disasters, and bankruptcy.

Objectives of Economic Analysis

• Investment decisions provides the ability to choose among technically feasible solutions and projects
• Decision making assists in the ability to make a statement summarizing why the potential investment committee buy-in to your project
• Investment decisions defines choice credibility in a very risky and complex environment
• Decision Making shows why a particular project will add more value than other projects

Resource Company Aims

• Resource companies aim to find, develop, and extract mineral resources.
• The challenge is identifying minerals that can be mined economically.

Development Stages of a New Resource

• Exploration determines size and grade distribution.
• The Feasibility study develops engineering, financial, and economic models.
• Followed by development, extraction, processing, and refining.

Mining Evaluation Applicability

• Evaluation methods apply during exploration, early evaluation, and feasibility/operating stages.
• The course focuses on mining and metallurgical projects.

Project Evaluation Purpose

• Project evaluation identifies the economic project feasibility.
• Requires a capital investment and informs investment decisions.
• Mineral projects are often involved and come with geological risks.

Uncertainties in Mineral Projects

• Capital cost.
• Geologic reserve estimation.
• Forecasting commodity prices (e.g., Gold, Silver).
• Forecasting production costs.
• Other costs such as regulatory and enviromental factors etc.

Evaluation Process Phases

• Valuation uses project data to assess project feasibility with merit measures.
• Decision-making involves selecting a project.
• Based on the economical evaluation
• Principal of decision making and operation research

Mine Investment Valuation Uncertainty

• Investors require compensation for high-risk investments through prospects of high returns.
• Risks in investments are commonly not fully known or understood.
• The results of lack of knowledge include: unrepresentative investment evaluation, poor decision making and losses
• Lacking critical information cannot be compensated for by investment evaluations or analysis.
• Investment analysis provides a quantitative risk assessment if risks are known and characterized.

Types of Evaluation Users

• Private investors are risk-takers seeking compensation for their investments.
• Lenders are risk-averse.
• Governments consider social, environmental factors, regulations, taxes, and welfare.

Uniqueness of Mineral Projects

• Location, grade, and characteristics.
• They are long-lived investments.
• Predicting prices and costs is difficult.
• Early planning decisions impact future operations, like high-grade extraction first.
• Decisions involve new and existing projects modification.
• There is a lot of uncertainty for extraction rates, average grade, and cut-off grade.

Certainty vs. Uncertainty:

• Evolution differs for projects with known vs. volatile metal prices.
• Investor's opportunity cost of capital.
• Project risks/uncertainty.
• Discount rates account for investor's opportunity cost of capital and project risks/uncertainty. For example, a 3% risk-free rate and 8% for underground mine.

Components of Economic and Financial Analysis

• Includes capital cost, revenue, and operation cost.
• Includes other costs (leasing, royalties etc).
• Includes depreciation and taxation.
• Cash Flow.

Valuation

• It comprises of production operations inflows and development construction outflows.
• Missing in Design, planning and management costs

Decision-Making

• Involves production operations inflows and construction outflows, affecting time value.

Individual Assignment - LA.1

• Read and Summarize: (2023) Evaluation studies of the new mining projects. Open Geosciences, 15(1). Al-Bakri, A. Y., Ahmed, H. a. M., Ahmed, H. M., & Hefni, M. A. https://doi.org/10.1515/geo-2022-0466 (ISI Web of Knowledge – Q3)
• Read and Summarize Chapter 1 of “The mining Valuation handbook” 4th Edition from page 1 to page 12.

Introduction to Mining & Metallurgical Economics (MinE 402) at King Abdulaziz University. Covers cash flow models, commodity price forecasting, and mineral resource estimation. Also includes cut-off grade optimization, cost analysis, and project valuation techniques.