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    6 Mineral Investment Desicion Making

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    6 Mineral Investment Desicion Making

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    mine

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    7 views3 pages

    6 Mineral Investment Desicion Making

    Uploaded by

    joneshnad211094
    mine

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 3
    MINERAL INVESTMENT DECISION MAKING A Study of Mining Company Practices Ross R. Bhappu, manoger economic evluaion, ond Jaime Guzman, tireor economic evaluation, Newmont Mining Corp.* isks associated with technical and commercial aspects of ‘mining investments have always been high. Recently, however, the new elements of political risks have increased, especially in the United States due to possible ‘changes in the mining law and increasingly stringent permitting regulations. Recognizing that domestic poliieal sks are changing “and WEPhining companies must look at foreign projects, a survey ‘of 20 mining companies was taken to determine what current prac tice is being used when evaluating minerals investments Specifically, this survey attempts to determine which capital bud- geting tools are most commonly used. what methods of analyzing, ‘ost of capital are being employed and how companies are evaluat ing foreign projects and mitigating country risk. The survey also reports the average cost of capital and minimum rate of return for ‘the mining companies. Similae surveys have been performed on oil and gas industry practices (Dougherty, 1993 and Boyle, 1985); however, no similar study has been performed on mining industry investment analysis. Results ofthis survey are compared to those. reported for the oil and gas industry Capital Budgeting Methods ‘Although DCF methods are still overwhelmingly the choice of min- ing companies, recently, practitioners have shown increasing con- ‘cem with the traditional approaches to investment analysis. While DCF techniques may be useful and appropriate in valuing safe busi ‘esses with predictable cash generation, they fail in the valuation of businesses with significant growth opportunities or intangible assets. DCF methods are unable to capture the value of flexibility introduced by managerial response o events external tothe project such as commodity price fluctuations in a mining project. A new class of investment analysis techniques appears to be emerging ‘based on the concept of options and fostered by the development, of an option valuation mechanism. It seems thet these new tech- Aiques exhibit improved ability to replicate market values where DCF methods typically undervalue projects, ‘Very litte has been published on actual practice by mining com- panies whea performing economic evaluations of capital budget ing alternatives. Numerous articles and surveys, however, have been published about capital budgeting practice inthe oil and gas industry. ‘Most notably are two ances, one by Boyle and Schenck (1985) and the other by Dougherty and Sarkar (1993). These two anicles repor the results of surveys of oil and gas producers with, fegard to investment practice. ‘The numerical results of these two surveys are compared with the results of this survey and are included inthe anicle’s conclusions. A telephone survey of 20 mining companies located in the United States, Canada, Mexico, Australia, and Great Britain was “Tis ares sed ona paper bythe ator fn presente te Mineral Econom s8—ww The Yanacocna joint-venture gold-ming, in aorthern Peru, is an excellent xampe ol good investment analysis. And revartably the decision was made belorethe eons Sender Luminaso group was decapilad (According (9 ‘goverment pot it tne all ts capal ns st year of operation £3] Proto: ERM/Phelps made. ‘The companies surveyed ranged in size from almost no annual revenue to $15B in annual sales. The survey deat almost exclusively withthe current capital budgeting practice being uti- lized and included producers of coal, copper, gold, iron ore, lead. and zine. ‘The survey explored how the company in question treated for- «ign projects and how their economic evaluation might change

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