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Lecture No. 1

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Role of mining and processing of rawmaterials

Diversification of multinational miningcompanies grass roots exploration tosmaller resource companies

Level of exploration declined in 1990’s due todepressed metal prices and availability offunds

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Exploration – successful exploration willresult in dramatic increase in value of the

company Definition – quantity and quality of resource Feasibility studies – economic viability of the

resource Development – if project is justified Extraction – taking the ore from the orebody

and separating from the waste rock

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Processing – mineral processing,beneficiation, extractive processes

Refining – further processing to producesaleable commodity

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Volatility of share prices Exploration – necessity, therefore higher risk

Finite reserves – definite volume, finite life

Proven Reserve Probable Reserve Measure Resource

Tonnage: 2 million Tonnage: 3 million Tonnage: 8 million

Grade: 1.2% Cu Grade: 1.0% Cu Grade: 0.8% Cu

Cu: 24,000MT Cu: 30,000MT Cu: 64,000 MT

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Great effect on the value of the company Reliance on International Commodity prices

Dependent on demand and economicconditions globally

Effect of exchange rate – most prices arequoted in US$

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Exploration – funds are needed to define anddelineate reserves – speculative.

Economics of scale – continuing decline ofthe quality of ore reserves – move largevolume of material

Isolation – remote location of mineralreserves result in high cost of infrastructure

Power and water – requirement in all miningoperations

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Ensure minimum impact on environment Environmental impact statement (EIS)

Processing Water consumption

Carbon dioxide emission

SO2 emissions Decommissioning

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Surface owners Indigenous people

Local government units

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Lecture No. 2

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Analysis of financial data Forecast the future financial performance of

the company

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Capital Costs Revenue

Operating Costs Other costs Depreciation Taxation Cash flow

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Developing access to the orebody Mining equipment

Processing plant Support infrastructure – power

station/transmission, water source, airports,housing, roads, etc.

Replacement of old equipment Working capital

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Price of product x quantity sold Importance of forecasting of prices

Exchange rate Production schedule Marketing costs plus insurance and

transportation must be deducted

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Day to day cost of production and processing Include: Consumables – chemicals & explosives

Wages

Transportation

Power Commonly quoted in cost/ton or ore mined or

cost/ton ore milled Total cost usually in cost/production: i.e. US$/lb

Cu produced

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State royalties Leasing costs

Interest or financing costs

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Non-cash item Recovery of capital expenditure over the life

of the project for tax purposes Defines the “book” value of capital or assets

of the company

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Varying rates Varies from country to country

Royalties from the sale of mineral products iscalled “excise tax” 

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Cash needed to get the project into operation(negative)

Cash from the project the owners get afterdeducting all costs (positive)

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Lecture No. 3

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Feasible – practicable and possible In resource industry

Physical aspects – i.e. reserves, location Economic aspects – cost, metal prices

Risk of failure vs. financial reward Initially, inferred from previous success “back of the envelope” valuation 

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Best mine configuration based on currentknowledge of the orebody

An estimate of likely operating and capitalcosts Initial metallurgical studies (bench tests) to

determine likely mill design and likelyrecovery

Availability of power, water, transport andinfrastructure requirements

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Environmental issues Product markets and future commodity price

profile Preliminary financial model

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Grade Tonnage

Recovery Mining rate Open cut or underground mining Capital cost Operating cost

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Studies Cost Time Accuracy

Scoping $100,000s months Low

Pre-feasibility $millions months Fair

Final/BankableFeasibility &EngineeringDesign

$10 millions Year (s) Good

ConstructionphaseDetailedengineering

Variable Year(s) Very Good

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Summary and recommendations Mine location and description

Development plan Plant product and capacity

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Topographical maps Soil/geology reports

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Geology Resource and reserves

Geo-technical Mine plan Mine production schedule Mine equipment Mine services

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Site plan Process flow sheets

Energy balance Material balance Heat balance Major equipment Minor equipment General arrangement drawings Detailed structural drawings

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Building and piping drawings Electrical drawings

Management systems Equipment vendors

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Environmental policy and plan Environmental risks

Health and safety risks Environmental impact assessment Environmental permits issued Environmental monitoring plan Statutory requirements Closure plan

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Project plan Project business systems Cash flow forecast Construction work plan Construction contract configuration Construction schedule

Future work Labor rates Labor productivity Construction equipment

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Major equipment bids Minor equipment bids

Site preparation, earthwork Building foundations Equipment foundations Structural steel Cladding Architectural Mechanical

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Staffing levels Labor rates

Consumable/utility consumption Maintenance supplies Spares Power and water unit costs Fuel unit costs Supplies and reagents unit costs Transport and logistics

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Working capital Sustaining/replacement capital

Training Ramp up Insurances Escalation Foreign currency provisions Target accuracy

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Determine the profits and cash flow for theequity holders

Valuation methods are employed todetermine financial viability Sensitivity and probability analysis consider

issues such as project risk

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Financing for capital expenditures Assets of the project are used as collateral,

not the assets of the borrower

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Cash flow should show that there are enoughfunds for payment of the interest

Debt service coverage ratio Compare present value of forecast cash flow

available for financing with the principaloutstanding

Life of the project debt service coverage ratio

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Advantages:

Provides capital allowing the corporate to own

multiple projects

Relatively low cost finance

Worldwide capital market

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Disadvantages: Longer transaction time

Higher fixed cost with restrictive covenants Extensive hedging to mitigate commodity

price risk Increased level of due diligence and frequent

monitoring of performance Default with the lender gaining ownership of

the asset

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Reserves Markets and commodity pricing

Construction time and costs Operational costs Political, labor and environmental issues Ownership, tenure and tax

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Debt service coverage ratio – ability for theproject to repay debt periodically

Cash flow available for debt service (CFADS)

divided by

Debt service, where debt service = principal plus

debt

If DSCR 1.2