Economic Investment Appraisal

Cost and benefit analysis of the

BHP Ravensthorpe project

Winnie Kwok

BHP Ravensthorpe Project

• Background – The nickel industry– The Ravensthorpe project

• Financial Analysis

• Cost Benefit Analysis

The Nickel Industry

• Nickel is mainly used in making stainless steel

• Recently the demand has exceeded the supply

The Nickel Industry

Firms can’t easily increase supply• 2 types of nickel ores: sulphide and laterite

• Laterite is abundant but difficult to process

Nickel stock level and price (source: LME)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

24-Jul-98 6-Dec-99 19-Apr-01 1-Sep-02 14-Jan-04 28-May-05

LME

Daily

Sto

cks

Leve

ls (t

onne

s)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

Cash

pric

e ($

US/to

nne)

LME stock level

Cash price

The Ravensthorpe Project

BHP is investing $1.9 billion in a new technology for processing laterite ore.

Production capacity• Successful technology – 44.5 M tones/annum• Unsuccessful – 29.5 M tones/annum

Financial Analysis

Estimate the expected financial return, with consideration to the following:

• Capital expenditure• Operating cost• Tax• Depreciation/amortisation• Royalties • ……

Cost Benefit Analysis

Estimate the expected cost/benefit, with consideration to the following:

• wages• environment• social discount rate• infrastructure – housing• …….

Questions/comments?