CASE STUDY ⎯⎯

OPTIMIZING A DEPLETABLE MINE DESIGN

Rio Blanco Lateritic Nickel Deposit

From “Mineral Economics ⎯ Development and Management of Natural Resources”,

by O. Rudawsky

This case study provides a comprehensive numerical example to demonstrate the

application of several of the unique characteristics of exhaustible mineral and energy
resources under real life conditions. It starts with the basic geological data and goes to
the recoverable reserve estimates at varying levels of recovery, accounting profits, cash
flows, and finally ⎯ a complete feasibility study. To supplement the feasibility study
to maximize the net present value, a socioeconomic analysis is also conducted.
The geological data were collected at a specific lateritic nickel deposit in Latin
America. For obvious reasons, exact location and identification have been intention-
ally screened out. The deposit is called Rio Blanco, the (mythical) country, in which it
is found, is called Latinia, and the potential operator is MINETEC Corporation.
While the geological data were based on the results of a comprehensive sampling
program, cost data were developed by mining engineers and they represent conditions
existing at the end of 1980. Both operating costs and capital investment estimates are
based on very detailed machinery, labor, material, and energy needs. For the sake of
simplicity, operating costs were generalized by deriving a cost function, a polynomial
equation with the rate of recovery q as the independent variable (See equations). For
the same reason, capital investment estimates are presented in this study as a single val-
ue only for each rate and level of recovery.

GEOLOGICAL DATA
The Rio Blanco Deposit was explored by MINETEC Corporation through an exten-
sive test pits program on a 400 to 800 meters (or less) grid centers. The firm com-
pleted 229 pits, using an east-west base line of 8 kilometers and a north-south base line
for 35 kilometers. The results of the successful pits, with a minimal cutoff grade of
0.95% Ni were used to calculate the reserves-in-place.
The polygon reserve estimation method was used for computing total re-
serves-in-place. Under this method each sample is representative of a polygon area

1
composed of lines combining the mid-points on the shortest distance between the pit
and its neighboring pits. The simplified graph below (Fig.1) explains the concept of
the polygon area. Points A, B, C, D, E, and F are found half the distance between pit
56 and the neighboring pits 86, 127, 51, 187, 72, and 113, respectively. Connecting
these midpoints will form the polygon GHIJKL. The entire area of the polygon is as-
sumed to be represented by the results of pit 56. The summation of the areas of all
polygons and the weighed average of the assay will provide quantitative and grade re-
serve estimates for the entire deposit.
Table 1 lists the results of the exploratory pits in the Rio Blanco Deposit. Column
(2) lists the polygon area per
pit (in square meters); Col- 127
86
umn (3) shows the average G
thickness of the mineralized
zone in each pit, while B H
A
Column (5) provides the L
51
average assay per pit (in C
56
terms of percent Ni). Both F I
Columns (4) and (6) are 113 D
E
K
calculated from the given
data. Column (4) is the J
187
product of data in Columns 72
(2) and (3) and represents
mineralized material within Fig.1 Reserve Estimation by Polygons
the polygon. Column (6)
is the product of Columns (4) and (5).
The total reserves-in-place, using the polygon method are calculated as follows:
1) Area of Polygon × Thickness of Ore = Volumetric Reserves per Pit (measured in
m3 of ore).
2) Volumetric Reserves per Pit × Average Nickel Assay = Volume-assay Product.
3) The Sum of All Volumetric Reserves ÷ Total Polygon Areas = Average Thickness
of the Ore (in meters).
4) The Sum of All Volume-Assays ÷ Total Volume of Polygons = Average Grade of
Ore (in % Ni) for the deposit.
5) To convert from Volume to Tonnage, certain conversion factors must be used
(Unit Weight of the Ore = 1.65 t/m3).

2
Table 1 Results of Exploratory Pits (Rio Blanco Deposit)
(1) (2) (3) (4) (5) (6)
Polygon Volume
Pit Average Thickness Grade Volume-Assay
Area Factor
No. (m2) (m) (m3) (% Ni) Product
145 33,005 12.5 412,563 1.26 519,829
121 85,008 9.0 765,072 1.26 963,991
50 94,185 15.0 1,412,775 1.23 1,737,713
51 71,806 1.0 71,806 1.30 93,348
142 91,609 7.0 641,263 1.13 724,627
134 65,527 5.5 360,399 1.01 364,002
53 88,872 15.0 1,333,080 1.10 1,466,388
133 47,625 4.5 214,313 1.18 252,889
164 15,668 6.0 94,008 1.35 126,911
115 58,243 8.5 495,066 1.38 683,190
56 88,872 9.0 799,848 1.22 975,815
55 68,586 19.0 1,303,134 0.95 1,237,977
58 42,021 19.0 798,399 1.48 1,181,631
28 3,542 7.0 24,794 1.41 34,960
144 72,289 16.0 1,156,624 1.35 1,561,442
48 40,894 6.0 245,364 1.21 296,890
60 27,853 14.0 389,942 1.66 647,304
32 16,100 2.0 32,200 1.26 40,572
139 39,767 7.0 278,369 1.26 350,745
27 27,048 11.0 297,528 1.05 312,404
6 17,710 14.0 247,940 1.14 282,652
21 12,397 11.0 136,367 1.49 203,187
61 98,210 14.0 1,374,940 1.37 1,883,668
25 25,277 9.0 227,493 1.31 298,016
24 26,404 18.0 475,272 1.22 579,832
152 60,053 1.0 60,053 1.55 93,082
126 101,108 10.0 1,011,080 1.24 1,253,739
119 83,720 13.0 1,088,360 1.71 1,861,096
136 64,078 27.0 1,730,106 1.20 2,076,127
33 42,665 12.0 511,980 1.30 665,574
34 31,556 7.0 220,892 1.29 284,951
66 76,475 4.0 305,900 1.04 318,136
52 37,996 8.0 303,968 1.33 404,277
104 33,005 5.5 181,528 1.10 199,680
151 25,760 5.0 128,800 1.06 136,528
220 84,847 8.0 678,776 1.06 719,503
188 81,949 4.0 327,796 1.15 376,965
44 84,525 3.0 253,575 1.09 276,397
157 71,806 4.0 287,224 1.25 359,030
210 63,434 4.5 285,453 1.40 399,634
211 95,634 3.0 286,902 1.19 341,413
169 95,956 6.0 575,736 1.31 754,214
214 74,060 2.0 148,120 1.27 188,112
185 79,856 7.0 558,992 1.24 693,150
184 78,246 2.5 195,615 1.14 223,001
170 81,788 2.5 204,470 1.20 245,364
156 47,978 1.0 47,978 1.02 48,938
Total 2,755,013 22,981,861 28,738,894

3
Therefore, the average grade for the entire deposit is:
Column (6) ÷ Column (4) = 28,738,894 ÷ 22,981,863 = 1.25% Ni
The average thickness of the ore is:
Column (4) ÷ Column (2) = 22,981,863 ÷ 2,755,013 = 8.34 meters
This level of recovery is designated by MINTEC Corp. as Level I.
MINTEC Corporation is also considering the possibility of selective mining of this
deposit by increasing the cutoff grade of the extracted ore. Two alternative levels are
considered: a cutoff grade of 1.05 % Ni (designated as Level II) and of 1.15% Ni (Level
III).
To recalculate reserves-in-place for Levels II and III, the polygons with an assay
value below the cutoff grade must be excluded. For Level II, exclude results from pits
No. 134, 55, 66, and 156. Therefore, the total for Columns (2), (4), and (6) is
2,496,447 m2, 20,964,452 m3, and 26,769,841, respectively.
The average grade for Level II is:
Column (6) / Column (4) = 26,769,841 / 20,964,452 = 1.28% Ni.
The average thickness for Level II recovery is:
Column (4) / Column (2) = 20,964,452 / 2,496,447 = 8.40 meters.
To calculate reserves-in-place and their quality for Level III recovery, further ex-
clude results from pits 142, 53, 27, 5, 104, 151, 220, 44, and 184. The sums of Col-
umns (2), (4), and (6) become 1,964,824 square meters, 17,006,347 cubic meters, and
22,428,661, respec-
tively. The average Table 2 Recoverable of Ore and Concentrate from Rio Blanco
grade at this level is Nickel Deposit
1.32 % Ni and the
Level I II III
average ore thick-
Cutoff Grade (% Ni) 0.95% 1.05% 1.15%
ness is 8.66 meters.
No. of Polygons 47 43 34
Table 2 right Extractable 3
(m ) 22,981,861 20,964,450 17,006,346
summarizes the re- Reserves
Extractable
serves-in-place for (t) 37,920,070 34,591,343 28,060,470
Reserves
the three levels of Average Grade (% Ni) 1.25% 1.28% 1.32%
Density (t/m3) 1.650 1.650 1.650
recovery.
Recovery Rate in
(%) 93% 90% 85%
Mining
MINING AND ORE Minable Ore (t) 35,265,665 31,132,208 23,851,400
Recovery Rate in
PROCESSING (%) 87% 90% 92%
Min. Processing
The deposit is Total Output of
(t) 30,681,128 28,018,987 21,943,288
Ore
found very close to

4
Table 3 Expected Mine Life the surface and it can easily be
Level mined in an open-pit. After re-
I II III moval of the overburden, the lat-
Annual Mining
Expected Mine Life (yrs) eritic ore can be mined by
Rate (106 t)
3.0 11.76 10.38 7.95 front-end shovels and loaded on
3.5 10.08 8.89 6.81 trucks for transportation to the
4.0 8.82 7.78 5.96
4.5 7.84 6.92 5.30
nearby processing plant. MIN-
5.0 7.05 6.23 4.77 TEC is planning to concentrate
5.5 6.41 5.66 4.34 the nickel ore and ship the 20 %
6.0 5.88 5.19 3.98
6.5 5.43 4.79 3.67 nickel content concentrate for
7.0 5.04 4.45 3.41 further smelting and refining
7.5 4.70 4.15 3.18
overseas.
MINTEC engineers are esti-
mating different recovery rates in mining and in concentrating the ore. These recovery
rates have been incorporated in Table 2.
The alternative (mutually-exclusive) recovery rates considered by MINTEC's man-
agement are from 3.0 to 7.5 million tonnes of ore per year, in increments of 0.5 million
tonnes. Because of the fixed amount of recoverable reserves in the deposit per a given
level, the different rates will result in varying mine life for the project. These expected
mine lives (rounded) are summarized in the Table 3.

ACCOUNTING COSTS
Total operating costs must be divided into two parts; total mining costs (TCM) and
concentration costs (CC). While mining costs will vary with both the rate and level of
extraction, concentration costs will tend to be the same for each of the levels (only the
recovery rate will vary). CC are estimated at $US 55.00 per tonne of concentrate.
Based on detailed cost estimates, the following mining cost functions have been de-
rived for the three different levels. These cost functions follow the polynominal equa-
tion TC = a + bq + cq2 + dq3, where a is fixed costs (FC) and the rest represents variable
costs (VC).
Level I TCMI = 5132.5 + 1127.6q - 93.131q2 + 17.598q3
Level II TCMII = 6197.4 + 589.95q + 39.662q2 + 10.112q3
Level III TCMIII = 2697.1 + 3370.3q - 544.06q2 + 49.051q3
where TCM is expressed in thousand of US dollars and q (mining rate) in millions of
metric tonnes per year.
Figure 2 shows the estimated relation between mining cost and production rate of

5
 Annual Mining Cost (103 $/106 t of ore) Unit Mining Cost ($/t of ore)
20,000 4.00

15,000 3.00

10,000 2.00

5,000 1.00
Level I
Level II
Level III

0 0.00
0.0 2.0 4.0 6.0 8.0 10.0
6
Annual Production Rate (10 t of ore/year)

Fig.2 Cost-Production Curves of Rio Blanco Operation

Rio Blanco Operation.

To calculate the accounting cost of the output of a 20 % Ni contained concentrate, a
concentration ratio must be computed. This concentration ratio simply determines
how many tonnes of ore are needed to produce a single tonne of concentrate. It is de-
pendent on the average ore grade and the recovery rate in concentration, as shown be-
low:
Average Metal Content in Concentrate
Concentration Ratio(CR) = (1)
(Average Grade of Ore) × (Recovery Rate in Concentration )
For the three levels of recovery, the following concentration ratios have been com-
puted:
CRI = (20 % Ni) ÷ (1.25 % Ni × .87) = 18.39 tonnes of ore/tonne of concentrate
CRII = (20 % Ni) ÷ (1.28 % Ni × .90) = 17.36 tonnes of
ore/tonne of concentrate
CRIII = (20 % Ni) ÷ (1.32 % Ni × .92) = 16.47 tonnes of
ore/tonne of concentrate
The concentration ratio is multiplied by the average unit cost of mining to yield the
cost of the ore as a feed material for concentration. These costs of feed material are
added to concentration costs (CC) to provide the unit total cost (UTC) per tonne of

6
Table 4 Cost Breakdown, Rio Blanco Operation
Level Level Level Level
I II III I II IIII II III I II III
Concentration Ratio (t of Concentration Cost (t of
ore/t of concentrate) : CR concentrate) : CC
18.38 17.40 16.48 55.00 55.00 55.00
Annual Mining 3 6 Unit Mining Cost ($/t Unit Mining Cost ($/t of Unit Mining Cost ($/t of
Mining Cost (10 $/10 t/y)
Rate (106 t) of ore) concentrate) concentrate)
q TCMI TCMII TCMIII UCOI UCOII UCOIII UCCI UCCII UCCIII UTCI UTCII UTCIII
3.0 8,152 8,597 9,506 2.72 2.87 3.17 49.96 49.87 52.23 104.96 104.87 107.23
3.5 8,693 9,182 10,201 2.48 2.62 2.91 45.66 45.65 48.04 100.66 100.65 103.04
4.0 9,279 9,839 10,883 2.32 2.46 2.72 42.65 42.81 44.85 97.65 97.81 99.85
4.5 9,924 10,577 11,586 2.21 2.35 2.57 40.54 40.90 42.44 95.54 95.90 97.44
5.0 10,642 11,403 12,348 2.13 2.28 2.47 39.13 39.69 40.71 94.13 94.69 95.71
5.5 11,445 12,324 13,207 2.08 2.24 2.40 38.25 39.00 39.58 93.25 94.00 94.58
6.0 12,347 13,349 14,198 2.06 2.22 2.37 37.83 38.72 39.00 92.83 93.72 94.00
6.5 13,360 14,485 15,358 2.06 2.23 2.36 37.78 38.78 38.95 92.78 93.78 93.95
7.0 14,498 15,739 16,725 2.07 2.25 2.39 38.08 39.13 39.38 93.08 94.13 94.38
7.5 15,775 17,119 18,334 2.10 2.28 2.44 38.67 39.72 40.30 93.67 94.72 95.30

concentrate. Table 5 20 % Ni Concentrates f.o.b. Prices

Table 4 lists the breakdown of to- Annual Output f.o.b. Price
tal costs and per unit cost for the (t of concentrate) ($/t of concentrate)
various rates and levels of extraction.
Up to 200,000 140.00
200,000 to 249,999 137.75
PRICES AND PROFITS
250,000 to 299,999 135.40
Prices for the concentrates are
300,000 to 349,999 132.85
assumed to be constant (in real terms)
350,000 to 399,999 130.05
for the life time of the mine. These
400,000 to 449,999 126.70
prices will tend to vary with the an-
Over 450,000 123.20
nual output of concentrates and will
show an inverse relation ⎯⎯ the
higher the annual sales, the lower will the price per ton be.
The prices have been calculated back to the mine (f.o.b.), and their schedule is as
follows in Table 5:

CASH FLOWS AND PRESENT VALUE CALCULATIONS

It has been noted earlier that accounting profits are only partially relevant in modern
economic evaluation processes. Most feasibility methods currently in use employ cash
flows and apply the concept of time value of money ⎯⎯ there is an emphasis on dis-
counting and the need to maximize the net present value of the mine's income over the
economic life time of the property for the optimal design of both rate and level of ex-

7
Table 6 Summary of Revenues, Costs, and Profits of Rio Blanco Operation
Level 1 Cocentraton Ratio : 18.38 t of ore/t of concentrate
Annual Annual FOB Price Total Total Profits
Cost ($/t of Total Cost Annual Profit Mine Life
Mining Output (t of ($/t of Revenue over Mine
concentrate) ($) ($/y) (yrs)
Rate (106 concentrate) concentrate) ($) Life ($)
3.0 163,191 140.00 22,846,697 104.96 17,127,755 5,718,942 11.8 67,227,426
3.5 190,389 140.00 26,654,479 100.66 19,164,162 7,490,317 10.1 75,471,719
4.0 217,588 137.75 29,972,690 97.65 21,246,393 8,726,297 8.8 76,934,664
4.5 244,786 137.75 33,719,276 95.54 23,387,647 10,331,629 7.8 80,967,062
5.0 271,984 135.40 36,826,699 94.13 25,601,122 11,225,577 7.1 79,175,490
5.5 299,183 135.40 40,509,369 93.25 27,900,016 12,609,353 6.4 80,850,404
6.0 326,381 132.85 43,359,766 92.83 30,297,528 13,062,238 5.9 76,774,754
6.5 353,580 130.05 45,983,057 92.78 32,806,857 13,176,200 5.4 71,487,301
7.0 380,778 130.05 49,520,215 93.08 35,441,200 14,079,015 5.0 70,929,402
7.5 407,977 126.70 51,690,651 93.67 38,213,757 13,476,894 4.7 63,369,549

Level 2 Cocentraton Ratio : 17.40 t of ore/t of concentrate

Annual Annual FOB Price Total Total Profits
Cost ($/t of Total Cost Annual Profit Mine Life
Mining Output (t of ($/t of Revenue over Mine
concentrate) ($) ($/y) (yrs)
Rate (106 concentrate) concentrate) ($) Life ($)
3.0 172,384 140.00 24,133,711 104.87 18,078,333 6,055,379 10.4 62,839,102
3.5 201,114 137.75 27,703,490 100.65 20,242,921 7,460,569 8.9 66,361,137
4.0 229,845 137.75 31,661,131 97.81 22,480,428 9,180,703 7.8 71,453,890
4.5 258,575 135.40 35,011,120 95.90 24,798,438 10,212,682 6.9 70,654,077
5.0 287,306 135.40 38,901,244 94.69 27,204,535 11,696,710 6.2 72,828,880
5.5 316,037 132.85 41,985,475 94.00 29,706,303 12,279,172 5.7 69,505,046
6.0 344,767 132.85 45,802,337 93.72 32,311,326 13,491,011 5.2 70,000,827
6.5 373,498 130.05 48,573,404 93.78 35,027,188 13,546,216 4.8 64,880,557
7.0 402,229 126.70 50,962,354 94.13 37,861,473 13,100,881 4.4 58,265,623
7.5 430,959 126.70 54,602,522 94.72 40,821,765 13,780,757 4.2 57,203,388

Level 3 Cocentraton Ratio : 16.48 t of ore/t of concentrate

Annual Annual FOB Price Total Total Profits
Cost ($/t of Total Cost Annual Profit Mine Life
Mining Output (t of ($/t of Revenue over Mine
6 concentrate) ($) ($/y) (yrs)
Rate (10 concentrate) concentrate) ($) Life ($)
3.0 182,000 140.00 25,480,003 105.75 19,245,838 6,234,165 8.0 49,564,516
3.5 212,333 137.75 29,248,920 101.77 21,609,811 7,639,108 6.8 52,058,122
4.0 242,667 137.75 33,427,337 98.73 23,959,272 9,468,065 6.0 56,456,648
4.5 273,000 135.40 36,964,204 96.45 26,331,009 10,633,195 5.3 56,359,239
5.0 303,333 132.85 40,297,837 94.82 28,761,810 11,536,027 4.8 55,030,079
5.5 333,667 132.85 44,327,621 93.77 31,288,464 13,039,157 4.3 56,545,846
6.0 364,000 130.05 47,338,205 93.26 33,947,758 13,390,447 4.0 53,230,149
6.5 394,333 130.05 51,283,055 93.26 36,776,481 14,506,574 3.7 53,231,090
7.0 424,667 126.70 53,805,272 93.75 39,811,422 13,993,850 3.4 47,681,844
7.5 455,000 123.20 56,056,006 94.70 43,089,368 12,966,637 3.2 41,236,327

traction.

In order to be able to run a Net Present Value or a Discounted Cash Flow analysis,
several adjustments must be made to the previous data:
1) A capital investment estimate for each rate of output must be prepared, including
a depreciation schedule and expected salvage values;
2) A taxation and depletion allowance policy must be established;
3) Annual net cash flows can then be prepared for the anticipated economic
life-time of the mine;

8
 4) A minimal discount rate (or rates) must be selected to enable conversion into Net
Present Value; and
5) To enable a meaningful comparison and rank-ordering of the mutually exclusive
production rates/levels, either Present Value Ratio (NPV) or Discounted Cash
Flows Rates of Return (DCF-ROR) analyses should also be performed.
MINTEC engineers have prepared a detailed capital investment estimate for each of
the extraction rates, based on an extensive list of equipment and machinery items and
their expected capacity. The capital investment is divided into two major groups ⎯⎯
replaceable equipment (mostly mining and haulage machinery) with an expected life
time (service life) of 5 years and other investments (surface facilities, roads, etc.) that
will last the entire life time of the mine. Using constant dollars in their estimates the
engineers assumed replacement of all replaceable equipment, at the end of its fifth year
of operation, at the original cost. They also determined that changes in the levels of ex-
traction will not affect the capital investment needs. The initial capital investment is
assumed to be undertaken at the present (year 0), with full output starting at year 1.
A careful study of Latinia's taxation policy indicated the following regulations:
1) Only straight-line depreciation is allowed; there are no allowances for first year
accelerated depreciation or capital investment credit.
2) Latinia allows a percentage depletion allowance of 15 % of total working inter-
ests, not to exceed 50 % of profits before depletion.
3) The royalty rate to the government is 12.5 % of gross income from sales.
4) The income tax rate for corporations is 50 % of the accounting profits.
There are no other state or local taxes.
5) No loss carryover to future years is allowed.
Table 7 lists the capital investment requirements for the varying rates of output, the

Table 7 Capital Investment Requirements and Salvage Values, Rio Blanco Operation
Life time 5 years Total
Annual Salvage Salvage Salvage
Investment Salvage Investment Salvage Investment
Mining Value (103 Value (103 Value (103
s (103 $) (%) s (103 $) (%) 3
s (10 $)
Rate (106 t) $) $) $)
3.0 3,750 20% 750 9,983 20% 1,997 13,733 2,747
3.5 3,850 23% 886 10,783 20% 2,157 14,633 3,042
4.0 4,394 25% 1,099 12,992 20% 2,598 17,386 3,697
4.5 4,515 28% 1,264 13,481 20% 2,696 17,996 3,960
5.0 4,532 31% 1,405 14,074 20% 2,815 18,606 4,220
5.5 4,893 34% 1,664 16,247 20% 3,249 21,140 4,913
6.0 5,129 39% 2,000 17,413 20% 3,483 22,542 5,483
6.5 5,530 44% 2,433 17,756 20% 3,551 23,286 5,984
7.0 24,037 27% 6,490 24,037 6,490
7.5 25,216 30% 7,565 25,216 7,565

9
equipment's expected life and the percentages and values of salvage at the end of the
period.
Table 8 summarizes the depreciation allowances for the varying rates and levels of
extraction.
The data for compiling detailed tables of annual cash flows for each of the rates and
the levels of extraction are now available. We can use the total revenue data (Table 6),

Table 8 Annual Depreciation Allowance, Rio Blanco Operation

Level 1 Life time 5 years Total
Annual Depriciable Annual Depriciable Annual Total Annual
Lifetime Service
Mining Investment Depreciation Investment Depreciation Depreciation
6 (yrs) Life (yrs)
Rate (10 t) (103 $) (103 $) (103 $) (103 $) (103 $)
3.0 3,000 11.76 255 7,986 5.0 1,597 1,852
3.5 2,965 10.08 294 8,626 5.0 1,725 2,019
4.0 3,296 8.82 374 10,394 5.0 2,079 2,453
4.5 3,251 7.84 415 10,785 5.0 2,157 2,572
5.0 3,127 7.05 443 11,259 5.0 2,252 2,695
5.5 3,229 6.41 504 12,998 5.0 2,600 3,103
6.0 3,129 5.88 532 13,930 5.0 2,786 3,318
6.5 3,097 5.43 571 14,205 5.0 2,841 3,412
7.0 17,547 5.04 3,483 0 5.0 0 3,483
7.5 17,651 4.70 3,754 0 5.0 0 3,754

Level 2 Life time 5 years Total

Annual Depriciable Annual Depriciable Annual Total Annual
Lifetime Service
Mining Investment Depreciation Investment Depreciation Depreciation
(yrs) Life (yrs)
Rate (106 t) (103 $) (103 $) (103 $) (103 $) (103 $)
3.0 3,000 10.38 289 7,986 5.0 1,597 1,886
3.5 2,965 8.89 333 8,626 5.0 1,725 2,059
4.0 3,296 7.78 423 10,394 5.0 2,079 2,502
4.5 3,251 6.92 470 10,785 5.0 2,157 2,627
5.0 3,127 6.23 502 11,259 5.0 2,252 2,754
5.5 3,229 5.66 571 12,998 5.0 2,600 3,170
6.0 3,129 5.19 603 13,930 5.0 2,786 3,389
6.5 3,097 4.79 647 14,205 5.0 2,841 3,488
7.0 17,547 4.45 3,945 0 5.0 0 3,945
7.5 17,651 4.15 4,252 0 5.0 0 4,252

Level 3 Life time 5 years Total

Annual Depriciable Annual Depriciable Annual Total Annual
Lifetime Service
Mining Investment Depreciation Investment Depreciation Depreciation
(yrs) Life (yrs)
Rate (106 t) (103 $) (103 $) (103 $) (103 $) (103 $)
3.0 3,000 7.95 377 7,986 5.0 1,597 1,975
3.5 2,965 6.81 435 8,626 5.0 1,725 2,160
4.0 3,296 5.96 553 10,394 5.0 2,079 2,631
4.5 3,251 5.30 613 10,785 5.0 2,157 2,770
5.0 3,127 4.77 656 11,259 5.0 2,252 2,907
5.5 3,229 4.34 745 12,998 5.0 2,600 3,344
6.0 3,129 3.98 787 13,930 5.0 2,786 3,573
6.5 3,097 3.67 844 14,205 5.0 2,841 3,685
7.0 17,547 3.41 5,150 0 5.0 0 5,150
7.5 17,651 3.18 5,550 0 5.0 0 5,550

10
which is then adjusted to allow for payment of the royalty to the Latinia Government.
Also useful are the total cost data in the same table, it should be adjusted to allow for
the depreciation and depletion allowances. Tax liability and capital investment expen-
diture complete the required values for the annual cash flows tables.
MINTEC Corporation has decided to use a discount rate of 15 % as its acceptable
rate for this mine, if a favorable decision to develop it is reached. This rate of discount
is used for each of the mutually exclusive rates and levels of extraction; however, for
the purpose of rank-ordering, these alternatives must be comparable. Therefore, dis-
counted cash flow rates of return must also be calculated.
Only three annual rates for each level of extraction are presented. These annual
rates are 3.0, 5.0, and 6.5 million tonnes of ore.

Table 9a Annual Cash Flow at Production Rate = 3 million t/year and Level I
Annual
Mine Life
Production IRR
(106 t/y) (years)
3.0 11.76 4.208%
Year
0 1 to 5 5 6 to 9 10 11 12
Total
(1) Revenues ($/y) 0 22,846,697 22,846,697 22,846,697 22,846,697 22,846,697 17,254,320
(2)=(1)x12.
Royalty
5% 12.5% 0 2,855,837 2,855,837 2,855,837 2,855,837 2,855,837 2,156,790
Working
(3)=(1)-(2) Interest ($/y) 0 19,990,859 19,990,859 19,990,859 19,990,859 19,990,859 15,097,530
Total Cost
(4) ($/y) 0 17,127,755 17,127,755 17,127,755 17,127,755 17,127,755 12,935,251
Total
(5) Depreciation ($/y) 0 1,852,486 1,852,486 1,852,486 1,852,486 1,852,486 1,399,037
(6)=(3)-(4)-
Balance 1
(5) ($/y) 0 1,010,619 1,010,619 1,010,619 1,010,619 1,010,619 763,241
(7)=(1)x15 Deplet.
% or Allowance ($/y) 0 505,309 505,309 505,309 505,309 505,309 381,621
Taxable
(8)=(6)-(7) Income ($/y) 0 505,309 505,309 505,309 505,309 505,309 381,621
(9)=(8)x50
Tax Liability
% ($/y) 0 252,655 252,655 252,655 252,655 252,655 190,810
After Tax
(10)=(8)-(9) Profits ($/y) 0 252,655 252,655 252,655 252,655 252,655 190,810
(11)=(5)+(7
Noncash Add.
) ($/y) 0 2,357,795 2,357,795 2,357,795 2,357,795 2,357,795 1,780,658
Capital
(12) Investment ($/y) 13,733,000 0 9,983,000 0 9,983,000 0 0
Salvage Value
(13) ($/y) 0 0 1,996,600 0 1,996,600 0 2,746,600
(14)=(10)+
Annual Cash
(11)-
Flow
(12)+(13) ($/y) -13,733,000 2,610,450 -5,375,950 2,610,450 -5,375,950 2,610,450 4,718,068
Discount
Factor 15.0% 1.000 0.870 0.497 0.432 0.247 0.215 0.193
NPV
($/y) -13,733,000 2,269,956 -2,672,797 1,128,570 -1,328,853 561,099 912,531
Cumulative
NPV ($) -13,733,000 -11,463,044 -8,953,020 -7,824,450 -6,576,524 -6,015,426 -5,102,895

11
Table 9b Annual Cash Flow at Production Rate = 5 million t/year and Level I
Annual
Mine Life
Production IRR
(106 t/y) (years)
5.0 7.05 16.759%
Year
0 1 to 4 5 6 to 7 8
Total
(1) Revenues ($/y) 0 36,826,699 36,826,699 36,826,699 1,956,713
(2)=(1)x12.
Royalty
5% 12.5% 0 4,603,337 4,603,337 4,603,337 244,589
Working
(3)=(1)-(2) Interest ($/y) 0 32,223,362 32,223,362 32,223,362 1,712,123
Total Cost
(4) ($/y) 0 25,601,122 25,601,122 25,601,122 1,360,264
Total
(5) Depreciation ($/y) 0 2,695,200 2,695,200 2,695,200 143,204
(6)=(3)-(4)-
Balance 1
(5) ($/y) 0 3,927,040 3,927,040 3,927,040 208,655
(7)=(1)x15 Deplet.
% or Allowance ($/y) 0 1,963,520 1,963,520 1,963,520 104,328
Taxable
(8)=(6)-(7) Income ($/y) 0 1,963,520 1,963,520 1,963,520 104,328
(9)=(8)x50
Tax Liability
% ($/y) 0 981,760 981,760 981,760 52,164
After Tax
(10)=(8)-(9) Profits ($/y) 0 981,760 981,760 981,760 52,164
(11)=(5)+(7
Noncash Add.
) ($/y) 0 4,658,720 4,658,720 4,658,720 247,532
Capital
(12) Investment ($/y) 18,606,000 0 14,074,000 0 0
Salvage Value
(13) ($/y) 0 0 2,814,800 0 4,219,720
(14)=(10)+
Annual Cash
(11)-
Flow
(12)+(13) ($/y) -18,606,000 5,640,480 -5,618,720 5,640,480 4,519,416
Discount
Factor 15.0% 1.000 0.870 0.497 0.432 0.373
NPV
($/y) -18,606,000 4,904,765 -2,793,497 2,438,535 1,686,446
Cumulative
NPV ($) -18,606,000 -13,701,235 -5,296,048 -2,857,513 949,398

To allow for termination of extraction operations prior to the end of the final year,
that year's relevant cash flow components are multiplied by the appropriate fraction (i.e.
for a life time of 11.76 years, the fraction for the twelfth and final year of operations is
0.76).
In Table 9, the result of cash flow analysis (NPV and IRR/DCF-ROR) is given.
The calculation procedure can be reviewed as follows.
Row (1) First, obtain the annual total revenue from Table 6 or by multiplying an-
nual production by f.o.b. price of the concentrate.
Row (2) Calculate the required royalty with the assumption that the royalty rate =
12.5 % or 1/8 and it will be applied to the gross revenue given in Row

12
 (1).
Row (3) Working Interest is Total Revenue less Royalty.
Row (4) Total Cost in Table 6, which can be represented by the product of unit
mining cost plus unit milling cost (t of concentrate) and annual output of
concentrate.
Row (5) Total Depreciation in Table 8
Row (6) Balance I is Working Interest minus sum of Total Cost and Total Depre-
ciation

Table 9c Annual Cash Flow at Production Rate = 6.5 million t/year and Level I
Annual
Mine Life
Production IRR
(106 t/y) (years)
6.5 5.43 4.841%
Year
0 1 to 4 5 6
Total
(1) Revenues ($/y) 0 4,016,570 45,983,057 1,956,713
(2)=(1)x12.
Royalty
5% 12.5% 0 2,008,285 5,747,882 244,589
Working
(3)=(1)-(2) Interest ($/y) 0 2,008,285 40,235,174 1,712,123
Total Cost
(4) ($/y) 0 1,004,143 32,806,857 1,360,264
Total
(5) Depreciation ($/y) 0 1,004,143 3,411,747 143,204
(6)=(3)-(4)-
Balance 1
(5) ($/y) 0 5,420,033 4,016,570 208,655
(7)=(1)x15 Deplet.
% or Allowance ($/y) 23,286,000 0 2,008,285 104,328
Taxable
(8)=(6)-(7) Income ($/y) 0 0 2,008,285 104,328
(9)=(8)x50
Tax Liability
% ($/y) -23,286,000 6,424,175 1,004,143 52,164
After Tax
(10)=(8)-(9) Profits ($/y) 1 1 1,004,143 52,164
(11)=(5)+(7
Noncash Add.
) ($/y) -23,286,000 5,586,239 5,420,033 247,532
Capital
(12) Investment ($/y) -23,286,000 -17,699,761 17,756,000 0
Salvage Value
(13) ($/y) 0 0 3,551,200 4,219,720
(14)=(10)+
Annual Cash
(11)-
Flow
(12)+(13) ($/y) -18,606,000 5,640,480 -7,780,625 4,519,416
Discount
Factor 15.0% 1.000 0.870 0.497 0.373
NPV
($/y) -18,606,000 4,904,765 -3,868,346 1,686,446
Cumulative
NPV ($) -18,606,000 -13,701,235 -8,813,464 949,398

Row (7) Depletion Allowance is the smaller value of 15 % of Working Interest or

13
50 % of Balance I

14
 Annual Cashflow (103 $/y)
40,000

Income
30,000

20,000

10,000

0
0 1 2 3 4 5 6 7 8 9 10 11 12
-10,000

-20,000

-30,000

Expenditure
-40,000

Fig 3a Annual Cash Flow Diagram at Production Rate = 3 million t/year and Level I

Annual Cashflow (103 $/y)

40,000

Income
30,000

20,000

10,000

0
0 1 2 3 4 5 6 7 8 9 10 11 12
-10,000

-20,000

-30,000

Expenditure
-40,000

Fig 3b Annual Cash Flow Diagram at Production Rate = 3 million t/year and Level II

15
 Annual Cashflow (103 $/y)
40,000
Income
30,000

20,000

10,000

0
0 1 2 3 4 5 6 7 8 9 10 11 12
-10,000

-20,000

-30,000
Expenditure
-40,000

Fig 3c Annual Cash Flow Diagram at Production Rate = 3 million t/year and Level III

Row (8) Taxable Income = Balance I less Depletion Allowance

Row (9) Tax is 50 % of Taxable Income
Row (10) After Tax Profit = Taxable Income minus Tax
Row (11) Non Cash Add. is sum of Total Depreciation and Depletion Allowance
Row (12) Capital Investment given by Table 7
Row (13) Salvage Value given by Table 7
Row (14) Annual Cashflow = Row (10) + Row (11) – Row (12) + Row (13)
Row (15) Discount Rate = 1/(1+IRR)Year =1/1.15 Year
Row (16) Discounted Cashflow
Row (17) Cumulative Discounted Cashflow = NPV at given IRR

Figs. 3a to 3c also show the annual cashflow diagram of the Rio Blanco operation at
3 million t/year and at Level I to III, respectively. Finally, Table 10 summarizes the
results (NPV @ discount rate of 15 % and IRR/DCF-ROR).
It is clear from the preceding results that none of the thirty combinations of rates and
levels will satisfy the goal of attaining the return of 20 % on its investment in Rio
Blanco. The erratic behavior of the IRR/DCF rate of return can be explained by the
irregular increments to the capital investment requirements as the annual rate q in-

16
Table 10 Summary of the results ⎯ NPV at discount rate of 15% and IRR/DCF-ROR.
Level Level
I II III I II III
Annual
NPV ($) @ 15% IRR (%)
Mining Rate
3.0 -5,102,895 -4,985,740 -4,358,094 4.21% 2.45% 4.58%
3.5 -2,056,075 -1,374,081 -3,287,388 10.42% 12.32% 6.50%
4.0 -929,508 -1,208,964 -3,504,748 13.47% 12.77% 6.19%
4.5 1,191,419 -1,043,429 -3,284,307 17.07% 12.92% 5.80%
5.0 949,398 118,303 1,768,352 16.76% 15.25% 18.76%
5.5 -161,635 -3,225,476 1,170,646 14.71% 8.00% 17.36%
6.0 -2,529,669 -3,839,144 -921,474 10.17% 6.26% 13.15%
6.5 -4,729,408 890,846 -929,835 5.15% 16.50% 13.08%
7.0 2,052,690 -1,873,308 -2,913,329 18.20% 11.74% 8.82%
7.5 -1,337,514 -2,522,108 -6,313,649 12.90% 10.66% 1.61%

creases and by the inflexible depreciation schedules. A better correlation between the
rate of extraction and the capital investment and among the depreciation allowances,
scrap values, and the expected life-time of the operation could have produced a
smoother series of return in which certain range of rates for each level are clearly more
favorable to the company than others.

SENSITIVITY ANALYSIS
MINTEC's management is still seeking to find ways of undertaking this project
without compromising the expected returns to the company. They realize that, under
the existing Mining and Revenues Laws of Latinia, new foreign investment mining
projects can negotiate directly with the government for the appropriate royalty rate.
Assuming that the company is suc-
cessful in reducing the rate from Table 11 Effects of reduced royalty (12.5 % to
1/8 to 1/10 of gross revenue, how 10 %) ⎯ IRR/DCF-ROR.
will it affect the return to the com- Level
I II III
pany for several of the more favor-
Annual
able alternatives? IRR (%)
Mining Rate
Table 11 shows the result of 3.0 9.34% 8.76% 9.83%
3.5 15.97% 17.09% 12.40%
sensitivity analysis, using the re- 4.0 17.79% 17.56% 12.24%
duced royalty rate. 4.5 21.80% 18.24% 12.71%
5.0 21.94% 21.06% 23.87%
5.5 20.02% 14.27% 22.34%
6.0 15.94% 13.09% 18.19%
SOCIOECONOMIC IMPACTS OF RIO
6.5 11.68% 21.42% 18.37%
BLANCO'S DEVELOPMENT 7.0 22.97% 16.86% 14.26%
7.5 17.76% 15.83% 7.04%
In view of the favorable results

17
of the sensitivity analysis, using a lower royalty rate, the management of MINETEC
Corporation has decided to proceed with the negotiation stage to change the rate ac-
cordingly. To enhance MINETEC's case, the corporation undertook a study of the di-
rect impacts of the development and extraction of the Rio Blanco deposit on the econ-
omy of Latinia.
A list of the potential direct benefits to the Latinian economy includes the following
items:
1) Revenue to the government from royalty payments;
2) Income tax payments
3) Revenue to the Latinian railroad company for shipments of nickel concentrates
from the mine to the port, at a rate of $4.50 per tonne;
4) Revenue to the Latinian Port Authority in the form of loading fees, at a rate of
$2.15 per tonne of concentrates;
5) Revenue to the Latinian Port Authority from unloading imported mining and
concentration machinery and equipment;
6) Revenue to the Latinian railroad company for haulage of the above equipment
and machinery;
7) Salaries and wages paid to 112 local employees during the preproduction period
for plant construction and equipment assembly, at an average rate of $9,500 per
year;
8) Revenue to local firms and individuals for providing materials and manpower as
subcontractors during the pre-production period;
9) Salaries and wages paid to 139 local employees during the extraction period, at
an average rate of $10,700 per year;
10) Payment for maintenance and service supply contracts with local Latinian firms,
estimated at $650,000 per year; and
11) Revenue to local citizens for providing housing and personal services to the
management group from abroad, estimated at $275,000 per year.
In addition, MINTEC Corporation economists point out to an estimated income
multiplier effect of 3.2 the unquantifiable effects of income in foreign currency for
Latinia, and the favorable effects of local people training in modern technical and man-
agement practices.
On the cost side, MINTEC's economists list the following items:
1) Relocation of residents from the sites of the open-pit mine and the concentration
plant;
2) Increased haulage capacity by purchase of additional 21 freight cars and 1 loco-

18
 motive for the Latinian railroad company;
3) Increased loading capacity at the port (more cranes);
4) Expansion of schooling, health, and communication facilities at Campania, the
town closest to the mine site;
5) Construction of a power transmission line from a hydroelectric power plant to the
mine, a distance of 137 kilometers;
6) Rebuilding and strengthening of the road from the mine to the railroad station, 27
kilometers away; and
7) Increased operating costs for the railroad company port authority, and in infra-
structure at Carnpania.
Two additional unquantifiable items are the cost of retraining and relocation of the
local workers at the end of the extraction operations and the potential impact of the pro-
ject on the environment.

SUMMARY
The purpose of the analysis was to demonstrate the application of several of the
unique aspects of exhaustible mineral and energy resources under real-life conditions.
Specifically, this dealt with the conversion of basic geological data to recoverable ore,
the determination of alternative rates and levels of extraction, the associated capital in-
vestments and operating costs, the estimation of expected revenues, and finally ⎯ the
maximization of Net Present Value (or DCF Rate of Return) over the life-time of the
operation. Also covered were objectives for the operating company and the social
goals, a socioeconomic analysis of several alternative mine designs, and an attempt to
bridge the gap between the interests of the company and those of the society, by rational
negotiations and some "give and take".

19
AN EXTENDED STUDY

Table 12 Rearrangement of Exploration Result (Rio Blanco Deposit)

(1) (2) (3) (4) (5) (6) (7) (8) (9)
Polygon Average Volume Volume- Extractabl Mining
Pit Grade Σ(7)
Area Thicknes Factor Assay e Ore Term
No. (m2) (m) (m3) (% Ni) Product (t) (t) (8)÷5M t
119 83,720 13.0 1,088,360 1.71 1,861,096 1,795,794 1,670,088 0.33
60 27,853 14.0 389,942 1.66 647,304 643,404 2,268,454 0.45
152 60,053 1.0 60,053 1.55 93,082 99,087 2,360,606 0.47
21 12,397 11.0 136,367 1.49 203,187 225,006 2,569,861 0.51
58 42,021 19.0 798,399 1.48 1,181,631 1,317,358 3,795,004 0.76
28 3,542 7.0 24,794 1.41 34,960 40,910 3,833,051 0.77
210 63,434 4.5 285,453 1.40 399,634 470,997 4,271,078 0.85
115 58,243 8.5 495,066 1.38 683,190 816,858 5,030,756 1.01
61 98,210 14.0 1,374,940 1.37 1,883,668 2,268,651 7,140,602 1.43
164 15,668 6.0 94,008 1.35 126,911 1,908,430 8,915,441 1.78
144 72,289 16.0 1,156,624 1.35 1,561,442 155,113 9,059,696 1.81
52 37,996 8.0 303,968 1.33 404,277 501,547 9,526,135 1.91
25 25,277 9.0 227,493 1.31 298,016 949,964 10,409,602 2.08
169 95,956 6.0 575,736 1.31 754,214 375,363 10,758,690 2.15
51 71,806 1.0 71,806 1.30 93,348 844,767 11,544,324 2.31
33 42,665 12.0 511,980 1.30 665,574 118,480 11,654,510 2.33
34 31,556 7.0 220,892 1.29 284,951 364,472 11,993,469 2.40
214 74,060 2.0 148,120 1.27 188,112 244,398 12,220,759 2.44
145 33,005 12.5 412,563 1.26 519,829 1,262,369 13,394,762 2.68
121 85,008 9.0 765,072 1.26 963,991 680,728 14,027,839 2.81
32 16,100 2.0 32,200 1.26 40,572 459,309 14,454,996 2.89
139 39,767 7.0 278,369 1.26 350,745 53,130 14,504,407 2.90
157 71,806 4.0 287,224 1.25 359,030 473,920 14,945,152 2.99
126 101,108 10.0 1,011,080 1.24 1,253,739 1,668,282 16,496,655 3.30
185 79,856 7.0 558,992 1.24 693,150 922,337 17,354,428 3.47
50 94,185 15.0 1,412,775 1.23 1,737,713 2,331,079 19,522,331 3.90
56 88,872 9.0 799,848 1.22 975,815 1,319,749 20,749,698 4.15
24 26,404 18.0 475,272 1.22 579,832 784,199 21,479,003 4.30
48 40,894 6.0 245,364 1.21 296,890 404,851 21,855,514 4.37
136 64,078 27.0 1,730,106 1.20 2,076,127 2,854,675 24,510,361 4.90
170 81,788 2.5 204,470 1.20 245,364 337,376 24,824,121 4.96
211 95,634 3.0 286,902 1.19 341,413 473,388 25,264,372 5.05
133 47,625 4.5 214,313 1.18 252,889 353,616 25,593,234 5.12
188 81,949 4.0 327,796 1.15 376,965 540,863 26,096,237 5.22
6 17,710 14.0 247,940 1.14 282,652 409,101 26,476,701 5.30
184 78,246 2.5 195,615 1.14 223,001 322,765 26,776,872 5.36
142 91,609 7.0 641,263 1.13 724,627 1,058,084 27,760,890 5.55
53 88,872 15.0 1,333,080 1.10 1,466,388 2,199,582 29,806,502 5.96
104 33,005 5.5 181,528 1.10 199,680 299,520 30,085,056 6.02
44 84,525 3.0 253,575 1.09 276,397 418,399 30,474,166 6.09
151 25,760 5.0 128,800 1.06 136,528 1,119,980 31,515,748 6.30
220 84,847 8.0 678,776 1.06 719,503 212,520 31,713,392 6.34
27 27,048 11.0 297,528 1.05 312,404 490,921 32,169,949 6.43
66 76,475 4.0 305,900 1.04 318,136 504,735 32,639,352 6.53
156 47,978 1.0 47,978 1.02 48,938 79,164 32,712,974 6.54
134 65,527 5.5 360,399 1.01 364,002 594,658 33,266,006 6.65
55 68,586 19.0 1,303,134 0.95 1,237,977 2,150,171 35,265,665 7.05

20
Table 13a
(1) (5) (7) (8) (9) (10) (11)
Extractabl Mining Concentr Concentr
Pit Grade Σ(7) 1 2
e Ore Term ation ate
No. (% Ni) (t) (t) (8)÷5M t (-) (t) 338,855 294,270
119 1.71 1,795,794 1,670,088 0.33 13.44 124,230 124,230
60 1.66 643,404 2,268,454 0.45 13.85 43,208 43,208
152 1.55 99,087 2,360,606 0.47 14.83 6,213 6,213
21 1.49 225,006 2,569,861 0.51 15.43 13,563 13,563
58 1.48 1,317,358 3,795,004 0.76 15.53 78,875 78,875
28 1.41 40,910 3,833,051 0.77 16.30 2,334 2,334
210 1.40 470,997 4,271,078 0.85 16.42 26,676 26,676
115 1.38 816,858 5,030,756 1.01 16.66 45,603 43,757 1,846
61 1.37 2,268,651 7,140,602 1.43 16.78 125,736 125,736
164 1.35 1,908,430 8,915,441 1.78 17.03 104,227 104,227
144 1.35 155,113 9,059,696 1.81 17.03 8,471 8,471
52 1.33 501,547 9,526,135 1.91 17.28 26,986 26,986
25 1.31 949,964 10,409,602 2.08 17.55 50,344 27,003
169 1.31 375,363 10,758,690 2.15 17.55 19,893
51 1.30 844,767 11,544,324 2.31 17.68 44,428
33 1.30 118,480 11,654,510 2.33 17.68 6,231
34 1.29 364,472 11,993,469 2.40 17.82 19,021
214 1.27 244,398 12,220,759 2.44 18.10 12,557
145 1.26 1,262,369 13,394,762 2.68 18.24 64,347
121 1.26 680,728 14,027,839 2.81 18.24 34,699
32 1.26 459,309 14,454,996 2.89 18.24 23,412
139 1.26 53,130 14,504,407 2.90 18.24 2,708
157 1.25 473,920 14,945,152 2.99 18.39 23,966
126 1.24 1,668,282 16,496,655 3.30 18.54 83,688
185 1.24 922,337 17,354,428 3.47 18.54 46,268
50 1.23 2,331,079 19,522,331 3.90 18.69 115,994
56 1.22 1,319,749 20,749,698 4.15 18.84 65,136
24 1.22 784,199 21,479,003 4.30 18.84 38,704
48 1.21 404,851 21,855,514 4.37 19.00 19,818
136 1.20 2,854,675 24,510,361 4.90 19.16 138,583
170 1.20 337,376 24,824,121 4.96 19.16 16,378
211 1.19 473,388 25,264,372 5.05 19.32 22,790
133 1.18 353,616 25,593,234 5.12 19.48 16,881
188 1.15 540,863 26,096,237 5.22 19.99 25,163
6 1.14 409,101 26,476,701 5.30 20.17 18,867
184 1.14 322,765 26,776,872 5.36 20.17 14,885
142 1.13 1,058,084 27,760,890 5.55 20.34 48,369
53 1.10 2,199,582 29,806,502 5.96 20.90 97,882
104 1.10 299,520 30,085,056 6.02 20.90 13,329
44 1.09 418,399 30,474,166 6.09 21.09 18,450
151 1.06 1,119,980 31,515,748 6.30 21.69 48,027
220 1.06 212,520 31,713,392 6.34 21.69 9,113
27 1.05 490,921 32,169,949 6.43 21.89 20,853
66 1.04 504,735 32,639,352 6.53 22.10 21,236
156 1.02 79,164 32,712,974 6.54 22.54 3,267
134 1.01 594,658 33,266,006 6.65 22.76 24,297
55 0.95 2,150,171 35,265,665 7.05 24.20 82,636

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Table 13b
(1) Term
Pit 1 2 3 4 5 6 7 8
No. 338,855 294,270 277,561 268,341 262,374 244,992 220,971 10,979
119 124,230
60 43,208
152 6,213
21 13,563
58 78,875
28 2,334
210 26,676
115 43,757 1,846
61 125,736
164 104,227
144 8,471
52 26,986
25 27,003 23,341
169 19,893
51 44,428
33 6,231
34 19,021
214 12,557
145 64,347
121 34,699
32 23,412
139 2,708
157 23,966
126 2,958 80,730
185 46,268
50 115,994
56 25,350 39,786
24 38,704
48 19,818
136 138,583
170 16,378
211 9,104 13,685
133 16,881
188 25,163
6 18,867
184 14,885
142 48,369
53 97,882
104 9,259 4,070
44 18,450
151 48,027
220 9,113
27 20,853
66 21,236
156 3,267
134 24,297
55 71,657 10,979

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Table 15
Level Level
I II III I II III
Annual
NPV ($) @ 15% IRR (%)
Mining Rate
3.0 -2,967,231 -3,262,784 -3,544,835 6.49% 3.09% 4.68%
3.5 -591,953 603,927 -2,332,469 13.95% 16.41% 8.03%
4.0 796,880 127,694 -3,370,870 17.16% 15.28% 5.09%
4.5 1,612,326 427,077 -2,962,624 18.95% 15.98% 5.43%
5.0 2,329,927 813,171 2,722,955 20.81% 16.99% 21.13%
5.5 -504,571 -2,020,875 1,316,732 14.67% 10.09% 17.82%
6.0 -1,379,369 -1,958,823 -530,706 12.81% 3.04% 13.88%
6.5 -3,521,934 1,858,084 -691,640 7.71% 18.34% 13.52%
7.0 1,493,863 -514,672 -3,030,100 18.29% 14.07% 8.47%
7.5 -265,181 -2,272,356 -5,043,631 15.39% 10.86% 3.97%

23
Table 14
Annual Mine Life
Production (yrs) IRR
(106 t/y)
5.0 7.05 20.81%
Year
0 1 2 3 4 5 6 7 7.05
Concentrate
(t/y) 0 338,855 294,270 277,561 268,341 262,374 244,992 220,971 10,979
fob Price
($/t) 132.85 135.40 135.40 135.40 135.40 137.75 137.75 140.00
Total
(1) Revenues ($/y) 0 45,016,896 39,844,209 37,581,712 36,333,424 35,525,441 33,747,639 30,438,713 1,537,004
Royalty
(2)=(1)*12.5% 12.5% 0 5,627,112 4,980,526 4,697,714 4,541,678 4,440,680 4,218,455 3,804,839 192,126
Working
(3)=(1)-(2) Interest ($/y) 0 39,389,784 34,863,683 32,883,998 31,791,746 31,084,760 29,529,184 26,633,874 1,344,879
Mining Cost
($/t) 0 10,641,975 10,641,975 10,641,975 10,641,975 10,641,975 10,641,975 10,641,975 565,440
Milling Cost
($/t) 0 18,637,029 16,184,871 15,265,836 14,758,776 14,430,570 13,474,557 12,153,388 603,823
Total Cost
(4) ($/y) 0 29,279,004 26,826,846 25,907,811 25,400,751 25,072,545 24,116,532 22,795,363 1,169,263
Total
(5) Depreciation ($/y) 0 2,695,200 2,695,200 2,695,200 2,695,200 2,695,200 2,695,200 2,695,200 143,204
Balance 1
(6)=(3)-(4)-(5) ($/y) 0 7,415,580 5,341,637 4,280,987 3,695,794 3,317,015 2,717,452 1,143,310 32,412
(7)=(3)*15% Deplet.
or (6)*50% Allowance ($/y) 0 3,707,790 2,670,818 2,140,493 1,847,897 1,658,507 1,358,726 571,655 16,206
Taxable
(8)=(6)-(7) Income ($/y) 0 3,707,790 2,670,818 2,140,493 1,847,897 1,658,507 1,358,726 571,655 16,206
Tax Liability
(9)=(8)*50% ($/y) 0 1,853,895 1,335,409 1,070,247 923,949 829,254 679,363 285,828 8,103
After Tax
(10)=(8)-(9) Profits ($/y) 0 1,853,895 1,335,409 1,070,247 923,949 829,254 679,363 285,828 8,103
Noncash
(11)=(5)+(7) Add. ($/y) 0 6,402,990 5,366,019 4,835,694 4,543,098 4,353,708 4,053,927 3,266,856 159,410
Capital
(12) Investment ($/y) 18,606,000 0 0 0 0 14,074,000 0 0 0
Salvage
(13) Value ($/y) 0 0 0 0 0 2,814,800 0 0 4,219,720
(14)=(10)+(11 Annual Cash
)-(12)+(13) Flow ($/y) -18,606,000 8,256,885 6,701,428 5,905,940 5,467,046 -6,076,239 4,733,290 3,552,683 4,387,233
Discount
Factor 15.0% 1.000 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.373
NPV
(103 $/y) -18,606,000 7,179,900 5,067,242 3,883,252 3,125,801 -3,020,964 2,046,332 1,335,585 1,637,121
Cumulative
NPV (103 $/y) -18,606,000 -11,426,100 -6,358,857 -2,475,606 650,196 -2,370,769 -324,437 1,011,148 2,648,269

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