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MinE 408: Mining Enterprise Economics

Course Information

Overview
Grading scheme / Labs and assignments
Course syllabus
Books

MinE 408: Mining Enterprise Economics


Description: Fundamentals of economic evaluation. Cost estimation,
commodity price modelling and revenue forecasts and taxation related
to mine development. Economic evaluation of mining ventures,
profitability, risks and uncertainty analyses. Commodity markets and
mine management strategies.

Pre-requisites:

ENGG 401 or 301: Fundamentals of Engineering Economic Evaluation


STAT 235: Fundamentals of Probability, Statistics and Risk Analyses

Lectures: Monday and Wednesday from 9:00 to 9:50 PM in NREF 2-080


Seminar: Friday from 2:00 to 3:50 PM in NREF 2-118

Teaching Staff and Office Hours:


Instructor: Dr. Jeff Boisvert
Office Hours:
???

jbb@ualberta.ca

T.A.:
Maksuda Lillah
Office Hours:
TBA

lillah@ualberta.ca

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Course Resources

Course Textbook

Notes:

Other References

None officially
Online (hopefully) before class

Gentry, D.W. and T.J. ONeil, 1984, Mine Investment Analysis; (c) SME, Littleton,
Colorado.
Runge, I., 1998. Mineral Economics and Strategy, SME, Littleton, Colorado.
Vogely, W.A. (Editor), 1985, Economics of the Mineral Industries, 4th Edition; (c) by
AIMMPE Inc., New York.
Gocht, W.R. et al., 1988, International Mineral Economics; (c) by Springer-Verlag,
Berlin Heideberg.
Ostwald, P.F., 1974, Cost Estimating for Engineering and Management; (c) PrenticeHall, Englewood Cliffs, NJ.
Price Waterhouse, 1994, Canadian Mining Taxation; (c) Price Waterhouse, Toronto,
Ontario.
Rudenno V,The Mining Valuation Handbook. Wrightbooks, 2009, 539.
(good general/current book)

Software Packages
Decisioneerings Crystal Ball (likely just Excel)

Grading
Final grades will be established
on the following basis:
Assignments/Labs
40 %
Midterm Examination 25 %
Final Examination
35 %

Descriptor

Excellent

Good

Some optional readings posted online.


Guest lectures provide questions for
exams/assignments
All examinations are closed book.
Only non-programmable calculators
allowed.

Satisfactory

Poor
Minimal Pass
Failure

Letter Grade

Grade Point Value

A+

4.0

4.0

A-

3.7

B+

3.3

3.0

B-

2.7

C+

2.3

2.0

C-

1.7

D+

1.3

1.0

F or F(R)

0.0

Note: F(R) denotes eligibility of a student to apply for a


reexamination of a course.

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Key Dates (Flexible if you bring the issue


to my attention before Jan 27)
Wednesday, February 15
(SAME AS MinE 422)

Midterm Examination (in-class)

February 21 - 25

Reading Week

April 18 (tentatively)

Final Examination

All examinations are closed book.


Only non-programmable calculators allowed.

University Policy
Policy about course outlines can be found in Section 23.4(2) of
the University Calendar. (GFC 29 SEP 2003)
The University of Alberta is committed to the highest standards
of academic integrity and honesty. Students are expected to be
familiar with these standards regarding academic honesty and
to uphold the policies of the University in this respect. Students
are particularly urged to familiarize themselves with the
provisions of the Code of Student Behavior (online at
www.ualberta.ca/secretariat/appeals.htm) and avoid any
behavior which could potentially result in suspicions of cheating,
plagiarism, misrepresentation of facts and/or participation in an
offence. Academic dishonesty is a serious offence and can
result in suspension or expulsion from the University. (GFC 29
SEP 2003)

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Plagiarism
Cite correctly
No excuses (including ignorance)

My Policy on Late Submissions


Deadlines are hard.

All submissions are picked up Friday at noon

What qualifies as late?


Nothing HARD deadlines

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Participation
How to listen to a technical talk
Pad of paper
Notes
Ideas
Questions

3 questions that you came up with throughout the lecture


Include guest speakers name
Include the date

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Major Topics

DCF
MCS
Real Options
Assessing costs

Questions on logistics

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MIN E 408: Mining Enterprise Economics


Fundamentals
Mining Economics
Valuation vs. Evaluation

What Is Mining Enterprise Economics?

Financial aspects of the mining business:


Microscopic: operation specific activity, e.g. equipment, production,
processing costs vs. revenue generated from commodity
Macroscopic: overall industry-related activity, such as market structure,
commodity markets, organizational structure

What is unique about mining industry?


1. Capital intensity

Major investment occur early in project life


Inflationary economics
Cost of equity and borrowed capital is real
Opportunity costs exists for investments
Investors must postpone their pleasures

2. Long pre-production periods

Long and expensive exploration and development time

3. High risk

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Capital Investment in Canada


http://www.energy.alberta.ca/OilSands/791.asp
http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic21inve.html

Mining Venture Risk


Types of Risk

Commodity market risks


Geological risks
Development/operating risks
Financial risks
Environmental risks
Engineering risks
Technological risks
Political risks
Risks due to force majeure
Risks due to social upheaval

Consequences of Risk

Windfall profits
Unexpected growth in company
Huge losses in capital & revenues
Over/under-estimation of reserves
Wrong investment choices
Wrong timing of investments
Liability of company assets
Over/under-estimation of value
Complete project failure
Bankruptcies in critical situations

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Valuation vs. Evaluation


Valuation
placing a dollar or other currency value on the worth of a mining
project as a whole.
value of a mining project refers to a measure of the desirability of
ownership of that property.

Evaluation
assessment of the relative economic viability of the mining
project or investment opportunity.
estimates of project ore reserves, mining rates, revenues, costs,
expected returns and associated risks, etc., as well as the dollar
worth (valuation) are made for each project or investment
opportunity.

Reasons for Valuation

Project Acquisitions

Corporate Taxation

Financing Requirement

Regulatory Requirement

Liabilities Preclusion

Negotiating Tool

Basis Of Decision

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Approaches to Mine Valuation


1.
2.
3.

COST APPROACH
MARKET (COMPARATIVE SALES) APPROACH
EARNINGS APPROACH

Cost Approach

Asset Value = The Cost Of Exactly Re-producing That Asset

Used In Evaluating Commercial Buildings

Less Applicable In Mining Property Evaluation

Approaches to Mine Valuation

Market approach
Concept assumes open market conditions
Supply & demand determine asset price
Not applicable in mining because there are few sales of
unique mining properties

Earnings Approach
Stream of income from an asset >= its value
Asset value is sum of the discounted net future earnings to
the present time
Widely used in the mining industry
Used in mining venture evaluation

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Mine Evaluation Procedure

Tonnage and grade of estimated ore reserve are important variables in


determining optimum mine size
Mine size affects production costs, as economies of scale are often
enjoyed with larger production rates
The level of production costs for the project as a whole determines
what material can be mined at a profit (cutoff grade) and therefore
determines the magnitude of the ore reserve

Each time a variable changes, the analyst


must assess the impact of this change on
all other project variables and on the
subsequent financial and economic results

This iterative procedure must be repeated


until the most economical design is achieved

Review Of Main Points


Nature of the mining industry is unique.
Capital intensity
Long pre-production periods
High risk

Industry sensitivities:
Global economy
Environment / Social / Political pressures

Valuation Approaches
Cost Approach
Market (or Capital Market) Approach
Earnings Approach

Evaluation Approach
Important iterative procedure

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