MINE ECONOMICS AND

FINANCE
By: Reginald Ratilla

Board Exam Review 2020

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INTRODUCTION

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 ECONOMICS
What Is Economics?
Economics is a social science concerned with the production, distribution, and
consumption of goods and services. It studies how individuals, businesses,
governments, and nations make choices about how to allocate resources.

Economics can generally be broken down into macroeconomics, which

concentrates on the behavior of the economy as a whole, and microeconomics,
which focuses on individual people and businesses.

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 ECONOMICS
Microeconomics
focuses on how individual consumers and firm
make decisions; these individuals can be a single
person, a household, a business/organization or
a government agency.

Macroeconomics
studies an overall economy on both a national
and international level. Its focus can include a
distinct geographical region, a country, a
continent, or even the whole world. Topics
studied include foreign trade, government fiscal
and monetary policy, unemployment rates, the
level of inflation and interest rates, the growth of
total production output as reflected by changes in
the Gross Domestic Product (GDP), and
business cycles that result in expansions,
booms, recessions, and depressions.
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MACROECONOMICS

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 MACROECONOMICS
Topics under microeconomics
• foreign trade
• Gross Domestic Product (GDP) & Gross National Product (GNP)
• unemployment rates,
• the level of inflation and interest rates
• government fiscal and monetary policy
• business cycles that result in expansions, booms, recessions, and
depressions.

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 INTERNATIONAL TRADE
Trade is a basic economic concept involving the buying and selling of goods
and services, with compensation paid by a buyer to a seller, or the exchange of
goods or services between parties.

International trade allows countries to expand markets for both goods and
services that otherwise may not have been available to it. It is the reason why a
Filipino consumer can pick between a Chinese, Korean, or American phone. As
a result of international trade, the market contains greater competition and
therefore, more competitive prices, which brings a cheaper product home to the
consumer.

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 INTERNATIONAL TRADE
Trade broadly refers to transactions ranging in complexity from the exchange of
Pokemon cards between collectors to multinational policies setting protocols for
imports and exports between countries.
• Exports are goods and services that are produced in one country and sold
to buyers in another.
• Import is a good or service bought in one country that was produced in
another.

Balance of trade (BOT) is the difference between the value of a country's

imports and exports for a given period
• $1.5 trillion in exports - $1 trillion in imports = $500 billion trade surplus
• $1.0 trillion in exports - $1.5 trillion in imports = $500 billion trade deficit

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 INTERNATIONAL TRADE

Imports

Exports

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 GROSS DOMESTIC PRODUCT(GDP)
Gross domestic product (GDP) is the total
monetary or market value of all the finished
goods and services produced within a country's
borders in a specific time period. As a broad
measure of overall domestic production, it
functions as a comprehensive scorecard of a
given country’s economic health.

GDP = C + G + I + NX
C=consumption (consumer spending)
G=government spending
I=Investment (private domestic investment)
NX=net exports

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 GROSS NATIONAL PRODUCT(GDP)
Gross national product (GNP) is an estimate of total value of all the final
products and services turned out in a given period by the means of production
owned by a country's residents.

GNP is commonly calculated by taking the sum of personal consumption

expenditures, private domestic investment, government expenditure, net
exports and any income earned by residents from overseas investments, minus
income earned within the domestic economy by foreign residents. .

Remittances are not part of the GDP but are accounted for in the GNP.

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 EMPLOYMENT RATE
The unemployment rate is
the percent of the labor
force that is jobless. It is a
lagging indicator, meaning
that it generally rises or
falls in the wake of
changing economic
conditions, rather than
anticipating them. When
the economy is in poor
shape and jobs are scarce,
the unemployment rate can
be expected to rise. When
the economy is growing at
a healthy rate and jobs are
relatively plentiful, it can be
expected to fall.

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 INFLATION
Inflation is a quantitative measure of the rate at which the average price level of
a basket of selected goods and services in an economy increases over some
period of time.

It is the rise in the general level of prices where a unit of currency effectively
buys less than it did in prior periods. Often expressed as a percentage, inflation
thus indicates a decrease in the purchasing power of a nation’s currency.

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INFLATION

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 INFLATION
DEMAND PUSH COST-PUSH BUILT-IN

Sudden spike of
demand of face shield
Oil price hike Demand to
increase wage due
to rising living costs

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 INFLATION
The Consumer Price Index (CPI) is a measure that examines the weighted
average of prices of a basket of consumer goods and services, such as
transportation, food, and medical care. It is calculated by taking price changes
for each item in the predetermined basket of goods and averaging them.

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INFLATION

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 INTEREST RATES
The interest rate charged by banks is determined by a number of factors, such
as the state of the economy. A country's central bank sets the interest rate,
which each bank use to determine the annual percentage rate range they offer.
When the central bank sets interest rates at a high level, the cost of borrowing
rises. When the cost of borrowing is high, it discourages people from borrowing
and slows consumer demand. Also, interest rates tend to rise with inflation.

HIGH INTEREST RATE

• To combat inflation, banks may set higher reserve requirements,
tight money supply ensues, or there is greater demand for
credit. In a high-interest rate economy, people resort to saving
their money since they receive more from the savings rate.
Businesses also have limited access to capital funding through
debt, which leads to economic contraction.

LOW INTEREST RATE

• Economies are often stimulated during periods of low-interest
rates because borrowers have access to loans at inexpensive
rates. Since interest rates on savings are low, businesses and
individuals are more likely to spend and purchase

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FISCAL AND MONETARY POLICY
Monetary policy and fiscal policy refer to the two most widely recognized tools
used to influence a nation's economic activity

Monetary policy is primarily concerned with

the management of interest rates and the
total supply of money in circulation and is
generally carried out by central banks, such
as the U.S. Federal Reserve.
• The BSP has hiked interest rates for a total of
175 basis points this year, playing catch up with
the rapid climb of inflation.

Fiscal policy is a collective term for the

taxing and spending actions of governments.
In the United States, the national fiscal policy
is determined by the executive and legislative
branches of the government.
• e.g. Tax Reform for Acceleration and Inclusion
law TRAIN Law, eVAT, CITIRA
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 BUSINESS CYCLES
"Business cycles are a type of fluctuation found in the aggregate economic
activity of nations…a cycle consists of expansions occurring at about the same
time in many economic activities, followed by similarly general recessions…this
sequence of changes is recurrent but not periodic

Expansion is the phase of the business cycle where real GDP grows for two or
more consecutive quarters, moving from a trough to a peak. This is typically
accompanied by a rise in employment, consumer confidence, and equity
markets. Expansion is also referred to as an economic recovery.

Recession a period of temporary economic decline during which trade and

industrial activity are reduced, generally identified by a fall in GDP in two
successive quarters

A depression is a severe and prolonged downturn in economic activity. In

economics, a depression is commonly defined as an extreme recession that
lasts three or more years

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BUSINESS CYCLES

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BUSINESS CYCLES

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MICROECONOMICS

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 MICROECONOMICS
Microeconomics is the study of individuals, households and firms' behaviour in
decision making and allocation of scarce resources. It generally applies to
markets of goods and services and deals with individual and economic issues.
Law of Supply and Demand

Producer Consumer

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 LAW OF DEMAND
Law of Demand
The law of demand states that a higher price leads to a lower quantity demanded and
that a lower price leads to a higher quantity demanded.

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 LAW OF SUPPLY
Law of Supply
The law of supply states that a higher price leads to a higher quantity supplied
and that a lower price leads to a lower quantity supplied.

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 MARKET EQUILIBRIUM
Supply and demand curves intersect at the equilibrium price. This is the price at
which we would predict the market will operate.

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MARKET EQUILIBRIUM

Surplus drives the

price down

Shortage drives
the price up

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CHANGES IN EQUILIBRIUM PRICE

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CHANGES IN EQUILIBRIUM PRICE

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CHANGES IN EQUILIBRIUM PRICE

OIL CRASH DURING EXTREME LOCKDOWN

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CHANGES IN EQUILIBRIUM PRICE

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 CHANGES IN EQUILIBRIUM PRICE

HOUSING CRISIS DURING 2008

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FINANCE

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 FINANCIAL STATEMENTS
Financial statements are written records that convey the business activities and
the financial performance of a company. Financial statements are often audited
by government agencies, accountants, firms, etc. to ensure accuracy and for
tax, financing, or investing purposes.

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FINANCIAL STATEMENTS

- BALANCE SHEET-

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BALANCE SHEET
➢ TERMINOLOGIES
➢ ASSETS AND LIABILITIES
➢ OWNERS EQUITY

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 BALANCE SHEET
A balance sheet is a financial statement that reports a company's assets,
liabilities and shareholders' equity at a specific point in time.

The purpose of a balance sheet is to give interested parties an idea of the

company's financial position, in addition to displaying what the company owns
and owes.

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 BALANCE SHEET
Play video of Balance sheet

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 ASSETS AND LIABILITIES

Current Assets - A current asset is a company's cash

and its other assets that are expected to be converted
to cash within one year of the date appearing in the
heading of the company's balance sheet. Most liquid
assets

Liquidity is a company's ability to convert its assets to

cash in order to pay its liabilities when they are due.

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 ASSETS AND LIABILITIES
Fixed Assets (Noncurrent Assets) - A
noncurrent asset is an asset that is not
expected to turn to cash within one year of
date shown on a company's balance sheet.

Liabilities - liability is a debt owed by a

company that requires the entity to give up
an economic benefit (cash, assets, etc.) to
settle past transactions or events
• Current liabilities are a company's short-
term financial obligations that are due
within one year or within a normal
operating cycle.
• Long-term liabilities are financial
obligations of a company that are due
more than one year in the future.
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 FINANCIAL RATIOS
SHORT TERM LIQUIDITY MEASURES (LIQUIDITY RATIOS)

Current Ratio (Working Capital Ratio) - The current ratio is a liquidity ratio
that measures a company's ability to pay short-term obligations or those due
within one year.

Quick Ratio (or Acid-Test Ratio)- The quick ratio indicates a company's
capacity to pay its current liabilities without needing to sell its inventory or get
additional financing.

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FINANCIAL RATIOS

Current Ratio > 1.0 is

acceptable or good

Quick Ratio > 1.0 is

acceptable or good

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 OWNERS EQUITY
Owners Equity - Equity, typically referred to as
shareholders' equity (or owners equity' for privately held
companies), represents the amount of money that would
be returned to a company’s shareholders if all of the
assets were liquidated and all of the company's debt was
paid off in the case of liquidation.

Shareholder equity can be either negative or positive.

• If positive, the company has enough assets to cover
its liabilities.

• If negative, the company's liabilities exceed its

assets; if prolonged, this is considered balance sheet
insolvency.

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 FINANCIAL RATIOS
LONG TERM LIQUIDITY MEASURES (SOLVENCY RATIOS)

Total Debt Ratio – The debt ratio measures the amount of leverage used by
a company in terms of total debt to total assets.

Debt to Equity Ratio – it reflects the ability of shareholder equity to cover all
outstanding debts in the event of a business downturn.

Interest Expense Ratio

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FINANCIAL RATIOS

Debt Ratio < 1.0 is

acceptable or good

D/E Ratio < 1.0 is

acceptable or good

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 FINANCIAL STATEMENTS

- INCOME STATEMENT-

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 INCOME STATEMENT
An income statement(also known as the profit and loss statement)provides
valuable insights into a company’s operations, the efficiency of its
management, under-performing sectors and its performance relative to industry
peers.

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 INCOME STATEMENT
• Play Video

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INCOME STATEMENT

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INCOME STATEMENT
➢ TERMINOLOGIES
➢ REVENUE OR SALES
➢ INCOME
➢ COST

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 Revenue
Revenue is the total amount of income generated by the sale of goods or
services related to the company's primary operations. Revenue, also known as
gross sales, is often referred to as the "top line" because it sits at the top of the
income statement.

Income
Income is money (or some equivalent value) that an individual or business
receives, usually in exchange for providing a good or service or through
investing capital.
• Operating income is an accounting figure that measures the amount of profit
realized from a business's operations, after deducting operating expenses
such as wages, depreciation and cost of goods sold (COGS)

• Non-operating income is the portion of an organization's income that is

derived from activities not related to its core business operations. It can
include items such as dividend income, profits or losses from investments,
as well as gains or losses incurred by foreign exchange and sale of an
asset.
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 Income
• EBIT (Earnings Before Interest and Taxes) is a company's net income
before income tax expense and interest expenses are deducted.
– EBIT is used to analyse the performance of a company's core
operations without the costs of the capital structure and tax expenses
impacting profit.
– EBIT is sometimes referred as operating income but there’s a key
difference between EBIT and operating income. EBIT includes non-
operating income, non-operating expenses, and other income.

• EBIT is helpful in analysing companies that are in capital-intensive

industries, meaning the companies have a significant amount of fixed
assets(financed by debt) on their balance sheets. For example, companies
in the mining industry are capital intensive
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 Income
• As a result, capital intensive industries have high-interest expenses due to a
large amount of debt on their balance sheets. However, the debt, if managed
properly, is necessary for the long-term growth of companies in the industry

• EBITDA(Earnings Before Interest, Taxes, Depreciation and Amortization)

is essentially net income (or earnings) with interest, taxes, depreciation, and
amortization added back. EBITDA can be used to analyze and compare
profitability among companies and industries, as it eliminates the effects of
financing and capital expenditures.

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Income Alcatraz Corp.
Income Statements
($ in millions)

2011
Sales/Revenue $ 10,500.00
Cost of goods sold $ 5,500.00
Direct Labor $ 500.00
Direct Material $ 1,000.00
Gross Margin/Profit $ 5,000.00

Operating Expenses
Administrative Expenses $ 500.00
Marketing Expenses $ 600.00
Depreciation & Amortization $ 400.00
$ 1,500.00

Operating Income $ 3,500.00

Non-operating Income/Expenses
Dividend income $ 550.00
Sale of Asset $ 1,200.00
Loss from lawsuit $ (1,000.00)
$ 750.00

Earnings Before Interest and Taxes (EBIT) $ 4,250.00

Interest expense $ 300.00
Taxable income $ 3,950.00
Taxes (30%) $ 1,185.00
Net income $ 2,765.00

Earnings Before Interest, Taxes, Depreciation

4,650.00
and Amortization (EBITDA)
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 Income
• Taxable Income is the amount of a person’s gross income that the
government deems subject to taxes.

• Net income is calculated by taking revenues and subtracting the costs of

doing business, such as depreciation, interest, taxes, and other expenses.
The bottom line, or net income, describes how efficient a company is with its
spending and managing its operating costs.

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FYI:CITIRA BILL

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FYI:CITIRA BILL to CREATE BILL

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FYI: TRAIN LAW

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 Cost
Direct Cost is a price that can be directly tied to the production of specific
goods or services. A direct cost can be traced to the cost object, which can be a
service or product.
• Direct labor
• Direct materials
• Fuel
• Rent of the production plant or machine
• Salary of the supervisors

Indirect Cost extend beyond the expenses you incur creating a product to
include the costs involved with maintaining and running a company. The
materials and supplies needed for a company's day-to-day operations are
examples of indirect costs. While these items contribute to the company as a
whole, they are not assigned to the creation of any one service.
• Depreciation and amortization
• Marketing Expenses
• Administrative expenses

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 Cost
Variable costs are costs that vary as production of a product or service
increases or decreases. Unlike direct costs, variable costs depend on the
company’s production volume. When a company’s production output level
increases, variable costs increase. Conversely, variable costs fall as the
production output level decreases.
• Direct labor
• Direct materials

Fixed Cost is a cost that does not change with an increase or decrease in the
amount of goods or services produced or sold. Fixed costs are expenses that
have to be paid by a company, independent of any specific business activities.
• Rent of the production plant or machine
• Salary of the supervisors
• Depreciation and amortization

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 Cost
XYZ Explosives Company

Manufacturing Plant Head Office

Direct Cost Indirect Cost

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 Cost
Manufacturing Plant Head Office

DIRECT COST INDIRECT COST

VARIABLE COST FIXED COST VARIABLE COST FIXED COST

Ammonium Nitrate ANFO Plant Office Rentals

back office support
(contractual)
Diesel Equipment Salary of Managers

Sacks

Labor

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 Cost
Cost of goods sold (COGS) includes all of the costs and expenses directly
related to the production of goods.
Example in the production of ANFO
• Ammonium nitrate
• Diesel
• Sack
• Direct labor (workers)

Overhead Cost refers to the ongoing costs to operate a business but excludes
the direct costs associated with creating a product or service. Overhead can be
fixed (rent) or variable (electricity).

• Overhead costs, often referred to as overhead or operating expenses, refer

to those expenses associated with running a business that can’t be linked to
creating or producing a product or service. They are the expenses the
business incurs to stay in business, regardless of its success level.

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 Expense: Amortization and Depreciation
Are two methods of calculating the value for business assets over time. A
business will calculate these expense amounts in order to use them as a tax
deduction and reduce their tax liability.

Amortization is the practice of spreading an intangible asset's cost over that

asset's useful life.
• Patents and trademarks
• Franchise agreements
• Proprietary processes, such as copyrights

Depreciation is the expensing of a fixed asset(tangible asset) over its useful

life. Fixed assets are tangible assets, meaning they are physical assets that
can be touched.
• Buildings
• Equipment
• Land
• Machinery

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Cost: Amortization and Depreciation
Since tangible assets might have some value at the end of their life,
depreciation is calculated by subtracting the asset's salvage value or resale
value from its original cost. The difference is depreciated evenly over the years
of the expected life of the asset. In other words, the depreciated amount
expensed in each year is a tax deduction for the company until the useful life of
the asset has expired.

• Salvage Value or Resale Value is the estimated book value of an asset

after depreciation is complete, based on what a company expects to receive
in exchange for the asset at the end of its useful life.

• Scrap value is the worth of a physical asset's individual components when

the asset itself is deemed no longer usable.

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Expense: Amortization and Depreciation
Depreciation
is a term used to spread the cost of an asset across several years for taxation
purposes. This will reduce the annual taxation costs levied against the project
until the end of the depreciation schedule. Depreciation is typically calculated
straight-line, which means that a fixed percent value is used annually to
determine the depreciation claim.

In order to find the value of a depreciation claim using the straight-line method,
first determine the scrap value of the asset at the end of the project's life. The
value of the asset may reach zero (or become negative), in which case a
separate analysis may be conducted to determine whether or not it is worth it to
replace the asset.

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 Expense: Amortization and Depreciation
The book value of an asset is an item's value after accounting for depreciation.
The figure is used for tax purposes, rather than for determining how much
someone could charge for the sale of an item.

Book Value

No. of Years

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 Expense: Amortization and Depreciation
SAMPLE PROBLEM:
What is the book value of a fixed asset, originally purchased at 20 million
pesos, being depreciated on a straight-line basis at 10% per annum at the end
of the 3rd year?

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 Expense: Depletion
Depletion is an accrual accounting technique used to allocate the cost of
extracting natural resources such as timber, minerals, and oil from the earth.

Like depreciation and amortization, depletion is a non-cash expense that

lowers the cost value of an asset incrementally through scheduled charges to
income. Where depletion differs is that it refers to the gradual exhaustion of
natural resource reserves, as opposed to the wearing out of depreciable assets
or aging life of intangibles.

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Expense: Depletion

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 INCOME STATEMENT
The Bottom Line
An income statement provides valuable insights into various aspects of a
business. It includes a company’s operations, the efficiency of its management,
the possible leaky areas that may be eroding profits, and whether the company
is performing in line with industry peers.

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FINANCIAL STATEMENTS

- CASH FLOW STATEMENT-

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 CASH FLOW STATEMENT
Cash flow statement shows how changes in balance sheet accounts and
income affect cash and cash equivalents, and breaks the analysis down to
operating, investing, and financing activities.
Essentially, the cash flow
statement is concerned with the
flow of cash in and out of the
business.

As an analytical tool, the

statement of cash flows is useful
in determining the short-term
viability of a company,
particularly its ability to pay bills.

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 CASH FLOW STATEMENT
• Play Video

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 CASH FLOW STATEMENT
Cash flow from operating activities
(CFO) indicates the amount of money a company brings in from its ongoing,
regular business activities, such as manufacturing and selling goods or
providing a service to customers. It is the first section depicted on a company's
cash flow statement.

Cash Flow from Operating Activities = Funds from Operations + Changes in Working Capital

where, Funds from Operations = (Net Income + Depreciation & Amortization + Deferred
Taxes & Investment Tax credit + Other Funds)

Working capital represents the difference between a firm’s current assets and
current liabilities. Working capital, also called net working capital, is the amount
of money a company has available to pay its short-term expenses.

The difference between the working capital for two given reporting periods is
called the change in working capital.
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CASH FLOW STATEMENT

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 CASH FLOW STATEMENT
Cash Flows From Investing
This is the second section of the cash flow statement looks at cash flows from
investing (CFI) and is the result of investment gains and losses. This section
also includes cash spent on property, plant, and equipment. This section is
where analysts look to find changes in capital expenditures (capex).

When capex increases, it generally means there is a reduction in cash flow. But
that's not always a bad thing, as it may indicate that a company is making
investment into its future operations. Companies with high capex tend to be
those that are growing.

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 CASH FLOW STATEMENT
Cash From Financing Activities
Cash from financing activities includes the sources of cash from investors or
banks, as well as the uses of cash paid to shareholders. Payment of dividends,
payments for stock repurchases, and the repayment of debt principal (loans)
are included in this category.

Changes in cash from financing are "cash in" when capital is raised, and they're
"cash out" when dividends are paid. Thus, if a company issues a bond to the
public, the company receives cash financing; however, when interest is paid to
bondholders, the company is reducing its cash.

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 CASH FLOW STATEMENT
Equity Financing vs. Debt Financing
To raise capital for business needs, companies primarily have two types of
financing as an option: equity financing and debt financing. Most companies
use a combination of debt and equity financing, but there are some distinct
advantages to both. Principal among them is that
• Equity financing carries no repayment obligation and provides extra working
capital that can be used to grow a business.
• Debt financing on the other hand does not require giving up a portion of
ownership.

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 CASH FLOW STATEMENT
Debt Financing happens when a company raises money by selling debt
instruments to investors.

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 CASH FLOW STATEMENT
Equity financing is the process of raising capital through the sale of shares.
Companies raise money because they might have a short-term need to pay
bills or they might have a long-term goal and require funds to invest in their
growth. By selling shares, they sell ownership in their company in return for
cash, like stock financing.

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CASH FLOW STATEMENT
STOCKS VS BONDS

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 CASH FLOW STATEMENT
Free Cash Flow (FCF) represents the amount of cash generated by a
business, after accounting for reinvestment in non-current capital assets by the
company.

Free cash flow (FCF) represents the cash available for the company to repay
creditors or pay dividends and interest to investors.

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 CASH FLOW STATEMENT
The Bottom Line
A cash flow statement is a valuable measure of strength, profitability, and the
long-term future outlook for a company. The CFS can help determine whether a
company has enough liquidity or cash to pay its expenses. A company can use
a cash flow statement to predict future cash flow, which helps with matters of
budgeting.

For investors, the cash flow statement reflects a company's financial health
since typically the more cash that's available for business operations, the
better. However, this is not a hard and fast rule. Sometimes, a negative cash
flow results from a company's growth strategy in the form of expanding its
operations.

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MINE ECONOMICS

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 MINE ECONOMICS
A critical issue relevant to a mining operation is project economics. It is not restricted to
the scope of a mining operation and may be used to determine whether such actions
such as replacing equipment or lining a shaft to save on operating costs is viable.

Project economics considers the Net Present Value (NPV) of an operation as a

benchmark for determining the value of an asset to the project. In order to calculate the
benefit of project economics, the project manager must know the operating cost, the
availability, the capital cost, the UCC (Undepreciated Capital Cost), the method of
depreciation, the scrap value (or salvage value) and the expected life of each asset
involved.

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 CASH FLOW
A calculation of cash flow will determine whether the value of your project is greater than
the cost of the resources which have been consumed. A cash flow can be found over any
period, but is often calculated every six months, annually or over the life of a project.
Since taxes are deducted annually in most countries, cash flows are often calculated
annually when determining the NPV of the project.

The project is determined to be commercial, or financially attractive if the Value terms

(such as Revenue or Avoided Costs) are found to be greater than the Consumption costs
(such as capital costs, operating costs, taxes, etc.) in which case the project is financially
viable, or:

CASH FLOW = REVENUE - COST

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 REVENUE
Revenue is the income generated by a company through its business activities.
Revenues encompass all sources of income for the company. The main source of
revenues in mining operations is through the sale of goods. The goods sold by
companies are typically ore to a mill or concentrate to a refinery.

Copper Concentrate Nickel ore

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 REVENUE
Revenue can also be generated using alternate methods such as sale of assets,
investments and royalties.
• Assets such as equipment and properties can be strategically sold by a company to
generate revenue.

• Companies can also generate some revenue through stock and bond holdings in
financial markets.

• Royalties are a percentage of revenues from an external party; they are a payment to
the company for use of its property, patents or resources.

In mining projects, revenues often cannot be generated early in the mine life. This is
because the deposit cannot be reached without first developing access and
infrastructure. However, emphasis is placed on generating revenues early in the mine life.
This is to ensure that the company is able to handle its liabilities, has cash-on-hand and
does not become insolvent.

Solvency - Solvency is the ability of a company to meet its long-term debts and financial
obligations. Solvency can be an important measure of financial health, since its one way
of demonstrating a company’s ability to manage its operations into the foreseeable future.

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 REVENUE
XYZ MINING COMPANY

Total Revenue
2022 2023 2024 2025 2026
Ore Milled MT/Yr 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000

Au Grade g/t 1.2 1.2 1.2 1.2 1.2

Au %R % 89% 89% 89% 89% 89%
Au oz 41,204 41,204 41,204 41,204 41,204

AU price $/oz 1,342 1,342 1,342 1,342 1,342

Revenue $ 55,296,220 $ 55,296,220 $ 55,296,220 $ 55,296,220 $ 55,296,220

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 COSTS
Mining operations can be some of the most expensive projects in the industrial
world and thus costs play an extremely important role in making decisions and
testing feasibility. Within an operation, the costs can usually be grouped into
two categories, Capital Expenditures(CAPEX) and Operating
Expenditures(OPEX).

Capital expenditures
Capital Expenditures or CAPEX encompass all costs that are incurred through
a one-time purchase of sorts. CAPEX usually has a constant price, even if this
cost is spread out over the life of the project.

In mining operations, any physical or durable already-produced fixed assets fall

under CAPEX. These expenditures can be identified the low frequency of cost
incursion and frequency of purchase. Most CAPEX are long term assets that
are purchased usually once (sometimes a few times throughout project life) and
generally incur costs only at the time of purchase.

In general, any equipment, property, industrial building or assets with a useful

life beyond the taxable year are considered CAPEX.
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 COSTS
Operating expenditures
Operating Expenditures or OPEX are the counterpart to CAPEX. OPEX
encompass all costs that are associated with production or maintaining capital.
These expenses therefore can be expected to differ greatly over the life of a
project. Unlike CAPEX, OPEX can be identified by the relatively high frequency
of purchase and cost incursion. These costs are usually incurred every year, if
not multiple times throughout the year and their magnitude can depend on
production output and capital use. In general, any fees, wages, depletable
goods, maintenance or assets with a short useful life are considered OPEX.

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 COSTS
XYZ MINING COMPANY

Unit Operating Cost

Mining $/ton 1.71
Processing $/ton 8.06
Transporting $/ton 0.1
General and Admin $/ton 2.17
Tonnage
Mill Feed ton 1,200,000

Total Operating Cost

2022 2023 2024 2025 2026
Mining $ 2,052,000 2,052,000 2,052,000 2,052,000 2,052,000
Processing $ 9,672,000 9,672,000 9,672,000 9,672,000 9,672,000
Transporting $ 120,000 120,000 120,000 120,000 120,000
General and Admin $ 2,604,000 2,604,000 2,604,000 2,604,000 2,604,000
$ 14,448,000 $ 14,448,000 $ 14,448,000 $ 14,448,000 $ 14,448,000

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 CASH FLOW
A calculation of cash flow will determine whether the value of your project is greater than
the cost of the resources which have been consumed. A cash flow can be found over any
period, but is often calculated every six months, annually or over the life of a project.
Since taxes are deducted annually in most countries, cash flows are often calculated
annually when determining the NPV of the project.

The project is determined to be commercial, or financially attractive if the Value terms

(such as Revenue or Avoided Costs) are found to be greater than the Consumption costs
(such as capital costs, operating costs, taxes, etc.) in which case the project is financially
viable.

CASH FLOW = REVENUE - COST

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 PRESENT VALUE
Present value (PV) is the current value of a future sum of money or stream of
cash flows given a specified rate of return. Future cash flows are discounted at
the discount rate, and the higher the discount rate, the lower the present value
of the future cash flows. Determining the appropriate discount rate is the key to
properly valuing future cash flows, whether they be earnings or debt
obligations.

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 DISCOUNT RATE
Discount rate is used in cash flow analysis to adjust future streams of revenue
and account for a variety of economic factors. Some of these factors include
the time value of money, the uncertainty of future cash flows, and other factors
associated with the specifics of the project being analyzed. By choosing an
appropriate discount rate, a better idea of the viability, feasibility and profitability
of the project can be obtained and more informed investment decisions can be
made. The discount rate is one of the main parameters that must be selected in
order to calculate the NPV of a project.

In this context of DCF analysis, the discount rate refers to the interest rate used
to determine the present value. For example, $100 invested today in a savings
scheme that offers a 10% interest rate will grow to $110. In other words, $110
(future value) when discounted by the rate of 10% is worth $100 (present
value) as of today. If one knows —or can reasonably predict—all such future
cash flows (like the future value of $110), then, using a particular discount rate,
the present value of such an investment can be obtained.

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 DISCOUNT RATE
OPTION TO INVEST IN CORPORATE BONDS
with a guaranteed simple interest of 10%

2021 2022 2023 2024 2025 2026

Investment $ 85,000,000.00 $ 85,000,000.00 $ 85,000,000.00 $ 85,000,000.00 $ 85,000,000.00 $ 85,000,000.00
Interest 10% 10% 10% 10% 10%

Total $0 $ 8,500,000 $ 8,500,000 $ 8,500,000 $ 8,500,000 $ 8,500,000

Discount Rate 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

Discounted Cash Flow $ 8,212,560 $ 7,934,841 $ 7,666,513 $ 7,407,259 $ 7,156,772

Present Value $ 38,377,945

Note: The discount rate is based on the projected inflation rate

Now I can have the interest from investing corporate bond plus the projected
inflation rate as my discount rate.

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 TIME VALUE OF MONEY
The time value of money (TVM) is the concept that
money in the present is worth more than the same
amount in the future due to inflation and to earnings
from alternative investments that could be made during
the intervening time. In other words, a dollar earned in
the future won’t be worth as much as one earned in the
present. The discount rate element of the NPV formula
is a way to account for this.

Play Video

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MINE ECONOMIC EVALUATION
OF XYZ MINING COMPANY

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 MINE ECONOMIC EVALUATION
Different businesses use different valuation methods to either accept or reject
capital budgeting projects. Although the net present value (NPV) method is the
most favourable one among analysts, the internal rate of return (IRR) and
payback period (PB) methods are often used as well under certain
circumstances. Managers can have the most confidence in their analysis when
all three approaches indicate the same course of action.

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 NET PRESENT VALUE
NPV applies to a series of cash flows occurring at different times. The present value of a
cash flow depends on the interval of time between now and the cash flow. It also
depends on the discount rate. NPV accounts for the time value of money. It provides a
method for evaluating and comparing capital projects or financial products with cash
flows spread over time, as in loans, investments, payouts from insurance contracts plus
many other applications.

In theory, an NPV is “good” if it is greater than zero. After all, the NPV calculation already
takes into account factors such as the investor’s cost of capital, opportunity cost, and risk
tolerance through the discount rate. And the future cashflows of the project, together with
the time value of money, are also captured. Therefore, even an NPV of $1 should
theoretically qualify as “good”.

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 NET PRESENT VALUE
XYZ MINING COMPANY

INVESTMENT ANALYSIS
2021 2022 2023 2024 2025 2026
Revenue $ - $ 55,296,220 $ 55,296,220 $ 55,296,220 $ 55,296,220 $ 55,296,220
Operating Cost $ - $ 14,448,000 $ 14,448,000 $ 14,448,000 $ 14,448,000 $ 14,448,000
Free Cash Flow (Undiscounted) $ - $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220

Discount Rate 13.50% 13.50% 13.50% 13.50% 13.50% 13.50%

Discounted Free Cash Flow $ - $ 35,989,621.51 $ 31,708,917.63 $ 27,937,372.36 $ 24,614,424.99 $ 21,686,718.05

Total Present Value $ 141,937,054.54

Capital Cost -$85,000,000
Net Present Value $ 56,937,054.54

NPV>0 Therefore, accept the project

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 INTERNAL RATE OF RETURN(IRR)
Internal Rate of Return
The internal rate of return (or expected return on a project) is the discount rate that would
result in a net present value of zero. Since the NPV of a project is inversely correlated
with the discount rate—if the discount rate increases then future cash flows become
more uncertain and thus become worth less in value—the benchmark for IRR
calculations is the actual rate used by the firm to discount after-tax cash flows.

An IRR which is higher than the discount rates suggests that the capital project is a
profitable endeavour and vice versa.

Decision Rule:
IRR> Discount rate = Accept Project
IRR<Discount rate = Reject Project

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 INTERNAL RATE OF RETURN(IRR)
INVESTMENT ANALYSIS
2021 2022 2023 2024 2025 2026
Revenue $ - $ 55,296,220 $ 55,296,220 $ 55,296,220 $ 55,296,220 $ 55,296,220
Operating Cost $ - $ 14,448,000 $ 14,448,000 $ 14,448,000 $ 14,448,000 $ 14,448,000
Free Cash Flow (Undiscounted) $ - $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220

Discount Rate 13.50% 13.50% 13.50% 13.50% 13.50% 13.50%

Discounted Free Cash Flow $ - $ 35,989,621.51 $ 31,708,917.63 $ 27,937,372.36 $ 24,614,424.99 $ 21,686,718.05

Total Present Value $ 141,937,054.54

Capital Cost -$85,000,000
Net Present Value $ 56,937,054.54

2021 2022 2023 2024 2025 2026

Capital Cost -$ 85,000,000
Free Cash Flow (Undiscounted) $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220
Internal Rate of Return 38.69%

IRR > Discount rate

38.59% > 13.5% Therefore, accept the project

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 INTERNAL RATE OF RETURN(IRR)
Internal Rate of Return
The internal rate of return (or expected return on a project) is the discount rate that would
result in a net present value of zero. Since the NPV of a project is inversely correlated
with the discount rate—if the discount rate increases then future cash flows become
more uncertain and thus become worth less in value—the benchmark for IRR
calculations is the actual rate used by the firm to discount after-tax cash flows.

An IRR which is higher than the discount rates suggests that the capital project is a
profitable endeavour and vice versa.

Decision Rule:
IRR> Discount rate = Accept Project
IRR<Discount rate = Reject Project

Internal rate of return (IRR) is also known as discounted cash-flow rate of return
(DCFROR) or simply rate of return (ROR).

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 PAY BACK PERIOD
Payback Period
The payback period calculates the length of time required to recoup the original
investment. For example, if a capital budgeting project requires an initial cash outlay of
$1 million, the PB reveals how many years are required for the cash inflows to equate to
the one million dollar outflow. A short PB period is preferred as it indicates that the project
would "pay for itself" within a smaller time frame.

2021 2022 2023 2024 2025 2026

Capital Cost -$ 85,000,000
Free Cash Flow (Undiscounted) $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220 $ 40,848,220
-$ 85,000,000 -$ 44,151,780 -$ 3,303,559 $ 37,544,661
Pay Back Period 2.08

One drawback in using the PB metric to determine capital budgeting decisions is that
payback period does not account for the time value of money (TVM).

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 REVENUE: SENSITIVITY ANALYSIS
A sensitivity analysis determines how different values of an independent variable affect a
particular dependent variable under a given set of assumptions. In other words,
sensitivity analyses study how various sources of uncertainty in a mathematical model
contribute to the model's overall uncertainty. This technique is used within specific
boundaries that depend on one or more input variables.

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END OF PRESENTATION

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