Metallurgy and Economics of the Minerals Industry PDF (Fall 2023)

Mining Optimization Laboratory 13 Economics of the Minerals Industry 13 Mine Economics • Finding an ore deposit and putting it into production as a mine requires the execution of many complex tasks: – Exploration and evaluation, planning, development, production processing and reclamation. • Ke...

Mining Optimization Laboratory 13 Economics of the Minerals Industry 13 Mine Economics • Finding an ore deposit and putting it into production as a mine requires the execution of many complex tasks: – Exploration and evaluation, planning, development, production processing and reclamation. • Key components to a successful project: – – – – 14 Ahlam Maremi Capital and start-up funds; Mine must make a profit; Day-to-day operations must be efficiently managed; Operations must be in conformance with all Local and National laws. 14 Mining Optimization Laboratory Project Stages and Expenditure 15 15 Profitable Exploitation of a Mineral Deposit • Evaluation of mineral properties: – Prefeasibility study to assess the mining the deposit. • Mineral property feasibility studies: – Account for engineering, economic, permitting and environmental variables (consider modifying factors). • Cost and cost estimation methods – Part of the feasibility study; – Estimated annual operating profit must be sufficient to recover the cost of developing, closing and reclaiming the mine; • Investment analysis – Determine whether the project development will provide sufficient economic returns to justify initial and ongoing investments; • Consider cost of capital funds and risk involved; 16 Ahlam Maremi 16 Mining Optimization Laboratory Interest and Interest Rates 17 • If you had the money today, you could do something productive with it in hopes of benefit in the future. – For example, you could buy an asset like a machine today, and could use it to make money from your initial investment. • What does this mean? One dollar today is worth more than one dollar in the future. • This is because a dollar today can be invested for productive use, while that opportunity is lost or diminished if the dollar is not available until some time in the future. 17 Interest and Interest Rates • Interest (I): – Is the difference between the amount of money lent and the amount of money later re-paid. • An amount of money today, P (principal amount), can be related to a future amount, F, by the interest amount I, or interest rate i: F = P + I = P + Pi = P (1 + i ) • i: interest rate, • P: present value/worth of F • F: future value/worth of P 18 Ahlam Maremi 18 Mining Optimization Laboratory Interest and Interest Rates 19 • Present and Future Worth/Value F =P+I 19 Interest and Interest Rates - Example 20 • Samuel bought a one-year guaranteed investment certificate (GIC) for $5,000 from a bank last year. • The bank was paying 10% on one-year GIC at the time. • How much did Samuel cashed in his certificate for 1 year? F = P + I = P + Pi = P (1 + i ) F = $5, 000 + I F = $5, 000 + $5, 000 10% F = $5, 000 + $500 = $5,500 20 Ahlam Maremi Mining Optimization Laboratory Accounting Rate of Return (ARR) ARR ( %return ) = 21 Average return during period Average investment • If ARR = 7%, then it means that the project is expected to earn seven cents out of each dollar invested (yearly). • ARR does not account for time value of money. • Decision criteria: – If ARR higher than or equal to the required rate of return, the project is acceptable, otherwise it is rejected. 21 Accounting Rate of Return (ARR) - Example • ABC Company is buying a new machine, which costs $420,000, would increase annual revenue by $200,000 and annual expenses by $50,000. The machine is estimated to have a useful life of 12 years. – Step 1: Calculate Average Annual Profit – Step 2: Calculate Average Investment – Step 3: Use ARR Formula 22 Ahlam Maremi 22 Mining Optimization Laboratory Accounting Rate of Return (ARR) - Example 23 The Average Annual Profit Inflows, Years 1 to 12 = 200, 000 12 = $2, 400, 000 Annual Expenses = 50, 000 12 = $600, 000 Cost = $420, 000 Total Profit = Inflows − Annual Expenses − Cos t Total Profit = $2, 400, 000 − $600, 000 − $420, 000 = $1,380, 000 1,380, 000 = $115,000 12 year1 book value ( cost ) + year12 book value ( salvage ) ] The Average Annual Profit = The Average Investment = 2 salvage value = 0 The Average Investment = $420, 000 + $0 = $210,000 2 $115, 000 = 54.76% $210, 000 Therefore, this means that for every dollar invested, the investment will ARR = return a profit of about 54.76 cents. 23 24 Payback Period Payback = Cost of investment Annual cash flow • Amount of time it takes to recover the cost of an investment • Example: what is the payback period if you buy a piece of equipment at $5,000 and savings are $100/month: • Decision criteria: – If calculated payback is less than acceptable value to the company, the project is accepted. Payback = 24 Ahlam Maremi Cost of investment $5, 000 = = 50month = 4.2 years Monthly cash flow $100 Mining Optimization Laboratory Payback Period - Example 25 • ABC company invests $1 million in a project that is expected to save the company $250,000 each year. XYZ project costs $1.5 million it is expected to make a total of $8 million by the end of year 20. How long will it take to pay the investment back? Which project will you go for knowing that your maximum desired payback period is 3 years? Initial investment Annual payback $1, 000, 000 The payback period (ABC)= = 4.0 years $250, 000 Annual payback for XYZ = $8, 000, 000 / 20 = $400, 000 / year The payback period = The payback period (XYZ)= $1,500, 000 = 3.75 years $400, 000 25 Net Present Value (NPV) • NPV: difference between the present value of cash flows and the present value of cash out flows over a period of time • Present value (PV) – Amount of money at time zero (current) equivalent to discounted cash flow – Dependent on interest rate (i) – Commonly used for costs and profits to get NPV 26 Ahlam Maremi 26 Mining Optimization Laboratory Net Present Value (NPV) 27 NPV =  Present Value(cash benefits) −  Present Value(costs) cash flow − initial investment (1 + i )t i = discount rate, interest rate NPV = t = number of time periods • Example: A project requires an initial capital investment of $20,000. The project is anticipated to generate revenues of $4,000, $10,000 and $15,000 in the next 3 years and the company’s interest rate is 7%. Calculate the PV and the NPV. NPV = $4,000 $10,000 $15,000 + + − $20,000=$4,717.17 1 2 (1 + 0.07) (1 + 0.07) (1 + 0.07)3 27 Learning Outcomes • By the end of the lecture: – Describe the difference between mineral processing and metallurgy. – Describe hydrometallurgy and each of it’s three main processes: • Leaching, • Solution purification, and • Metal recovery. – Describe pyrometallurgy and each of it’s three main processes: • Roasting, • Smelting and • Converting. – Economics of the minerals industry 28 Ahlam Maremi 28 Mining Optimization Laboratory Don’t Forget! • • • • 29 Ahlam Maremi Check your LU email and D2L regularly. Review additional resources available on D2L Field Trip – Glencore Smelter – on Nov 23rd Final Exam Dec 7th B-GYM – Lec10 to the End 29