三人行矿业学院_MINECS_2003

MINERAL ECONOMICSPROJECT EVALUATIONFINANCIAL MODELLINGHANS DE RUITERDELFT, SEPTEMBER 2003TABLE OF CONTENTS1.INTRODUCTION (5)1.1GENERAL (5)1.2GOALS (5)1.3D ETAILED DESCRIPTION OF TOPICS (5)2.THE CASH FLOW (6)2.1I NTRODUCTION (6)2.2C ASH-IN (6)2.2.1Revenues (6)2.2.2Loan Capital (10)2.2.3Refund from participants (10)2.2.4Fees and rents for facilities provided to third parties (10)2.2.5Salvage Value (10)2.3C ASH-OUT (10)2.3.2Working capital (11)2.3.3Host Government Take (11)2.4N ON C ASH I TEM (13)2.5T HE C ASH S URPLUS (D EFICIT) (15)2.6T AX R EDUCTIONS (18)3.THE PRESENT VALUE CONCEPT (20)3.1I NTRODUCTION (20)3.2P RESENT V ALUE (20)3.2.1The Future Value (21)3.2.2The Present Value (21)3.2.3Discounting (21)3.2.4Reference Date (22)3.3N ET P RESENT V ALUE (22)3.3.1Leasing (25)3.4I NTERNAL R ATE OF R ETURN (25)4.PROFITABILITY INDICATORS (27)4.1I NTRODUCTION (27)4.2C ASH F LOW C RITERIA (27)4.3N ET P RESENT V ALUE AND I NTERNAL R ATE OF R ETURN (29)4.3.1Present Value Profile (29)4.3.2Internal Rate of Return (31)5.INFLATION (33)5.1I NTRODUCTION (33)5.2I NFLATION R ATE (33)5.2.1Price Index (33)5.2.2Inflator and Escalator (34)5.3M ONEY (35)5.3.1Estimate Date Money (EDM) (35)5.3.2Money of the Day (MOD) (36)5.3.3Real Term Money (RT) (36)5.3.4Present Value Money (37)5.4P ROCEDURE OF THE E CONOMIC E VALUATION (38)5.5E XCHANGE R ATE (40)6.SENSITIVITY ANALYSIS (41)6.1I NTRODUCTION (41)6.2S ENSITIVITY A NALYSIS (41)6.3S ENSITIVITY D IAGRAM (41)6.4P RICE S CENARIO (42)7.ORE RESERVE ESTIMATION (44)7.1D EFINITION OF ORE (44)7.2C LASSIFICATION OF RESERVES (44)7.2.1Mineral resource (44)7.2.2Inferred resource (44)7.2.3Indicated resource (44)7.2.4Measured resources (44)7.2.5Ore reserves (44)7.2.6Possible reserves (44)7.2.7Probable reserves (44)7.2.8Proven reserves (45)7.3RESERVE CALCULATION (45)7.3.1Volume calculation (45)7.3.2Specific gravity (45)7.3.3Calculation of grade (46)7.3.4Value component (46)7.3.5Cut off grade (46)7.4L OSS OF ORE AND DILUTION (46)7.5CAPACITY AND MINE LIFE (47)8.ORE TONNAGE AND GRADE (48)8.1D EFINITION OF ORE (48)8.2T ONNAGE AND GRADES OF THE MILL FEED (48)8.3T ONNAGE AND GRADES FOR THE FEED (48)8.4T ONNAGE AND GRADES FOR THE CONCENTRATE (49)9.VALUE OF CONCENTRATES AND FEED (50)9.1C ONCENTRATE PRICING (50)1. INTRODUCTION1.1 generalMineral economics may be defined as the application of economics to the study of all aspects of the mineral sector.Mineral economics applies economic theory, management principles, and decision making techniques as analytical tools to evaluate and optimise investment opportunities, operations, programs and particular projects.This part of the course will concentrate on the decision making techniques, using cash flows as the basis to calculate various profitability indicators, like Net Present Value and Internal Rate of Return. The material in this course outline is based on the Project Evaluation course which has been developed for the European Mining Course by drs. P.H. van der Kleijn.1.2 goalsThe final goal of the course is that the student will be able to evaluate projects and operations by calculating and comparing the economical parameters of these projects and operations.The student must first be able to calculate the cash-revenues using production and sales data, loan-capital and working-capital. Subsequently the cash-expenses must be calculated from operating & capital cost and tax information available. Depreciation and depletion, being non-cash costs, will have to be calculated using straight-line, decline balance and depletion methods.The student will be able to calculate the resulting cash surplus/deficit through the construction of a spreadsheet in Excel. The student will be able to calculate the present value of cash surplus/deficit over the life of the project.The student must be able to calculate the cash surplus/deficit in Estimate Date Money, Money of the Day, Real Terms Money and Present Value Money.The final goal is that the student will have to calculate the Internal Rate of Return and Net Present Value and has to carry out sensitivity analyses for at least three changing items of the cash-flow. Using the model in Excel the student should now be able to determine the most feasible option of the various alternative of the project(s) or operation(s)1.3 Detailed description of topicsAfter an introduction about the needs for economical analysis tools, the concept of cash flows and its various items is dealt with, including the difference between cash and non-cash items and tax matters. Subsequently the present value concept is introduced emphasising the influence on the profitability of the project. The next subjects are the definition and use of profitability indicators, like Net Present Value and Internal Rate of Return. Finally the effect of inflation and exchange rate fluctuations is introduced, as well as sensitivity analyses techniques.2. THE CASH FLOW2.1 IntroductionAny investments, either in a totally new project (mine, oil-field, plant) or part of it require the presentation of the financial results, which will aid the executives to take the best possible decision.In case banks are involved a so called bank-able project proposal is needed. This document is based on sound engineering studies and market surveys. The basis of all calculations is the cash flow which gives the year by year forecast of the flow of cash, either positive or negative. The cash flow will give an indication if a project is profitable and whether it is attractive enough to justify the investment and to plan the use of all the company's resources (reserves, financial, personnel). The ultimate strategy should be the optimisation of the firm's profits. Financial growth is needed to stay in business and be competitive.A cash flow covers the total life, or at least a major part of it. It consists of cash-ins being the sum of all the receipts of the venture mainly as a result of gross revenues of sales of products and cash outs being the sum of all the payments made on behalf of the venture. The forecast in- and out flows of money, that may vary from day to day, are presented, cumulated for a certain period of time usually a period of half a year or one year. The resulting cash flow per year can be either a cash-surplus or a cash-deficit (in case the cash-out is larger than the cash-in).The cash-out is subdivided into Technical costs and Government takes.A pre-production phase normally precedes the commencement of production. During this period money is invested and hence cash deficits are met. During the subsequent production period, there is income from sales and cash surpluses are to be realised. The cash surplus becomes available to the company for reinvestment in other new ventures or distribution amongst share holders in the form of dividends. The timing of distribution and utilisation of these cash flows, and often together with the raising of attracted capital from outside like equity-or loan capital, is the trade of the company's cash manager, subject to the judgement of the Board and closely watched by the share holders.In this chapter a discussion will be given of the various cash items. Some useful relations between the various terms will be given together with examples to illustrate the concepts. Costs which have been made before a decision has been taken are considered to be sunk costs and should not be taken into account.2.2 Cash-inThe cash-ins are the benefits to the project and include:- Revenue from sales of products- Loan capital- Royalties received on optioned property- Refund from participants- Fees and rents for facilities provided to third parties- Salvage value- Other investment income- Tax credits2.2.1 RevenuesThe major cash-in item is the company's share of the gross revenues from the sales of product: ore, concentrate, metal or services. The future revenues are calculated by multiplying the units produced and sold with the contract unit price, e.g. the gold price per ounce, or oil price per bbl, or gas price per m3.The revenue is subject to market situation and market price:Revenue = Net Smelter Return (%) ? market price ? tonnage ? grade ? recovery The NSR is subject to the smelter terms and is based on:- grade of concentrate- smelter losses- unit deduction- smelter costs- penalties for impurities- transportation- insuranceFor detailed NSR calculations see chapters 8 and 9The following example shows the Net Smelter Revenue calculations for a zinc contract:The revenues are subject to two forecasts:1. A production forecast is required in order to predict this item. The production forecastfor ore follows the planning, while the forecast for oil follows the various productionprofiles for the combined wells in the field. This forecast is in accordance with theproduction planning and in the case of gas in accordance as well with the projecteddemands of the clients.2. A market forecast is required of the market price of the commodities to be produced,often in the far future. In essence a price forecast reflects the expected situation ofsupply and demand that in the long term are uncertain because of the polemicalsituation in the world, OPEC and policies of other producing countries policies,because of economic- and monetary developments etc. Market prices are oftenquoted in US$ (Comex of New York) or Pound Sterling (LME of London), andtherefore revenues in local currency are subject to the exchange rate as well.Prices can be viewed and plotted from:LME: /NYMEX: /exchanges/nymex_cs.htmlCOMEX: http://tocom.or.jp.souba/souba_e.htlmNBC: /modules/commerce/spotcommodity.asp The table at the following page shows an example of a production / revenue planning for a copper / zinc mine:PAGE RESERVED FOR CASH FLOW2.2.2 Loan CapitalA loan from an outside financier is also a cash-in item. Since the financing method is normally at the discretion of the shareholder a loan is not considered in the initial base case calculations. Loan capital is distinguished from equity venture capital by the obligation to redempt the loan over an agreed period of time, and to reward the lender by paying him periodical an interest. Guarantees are requested to obtain a loan.2.2.3 Refund from participantsIn case other companies e.g. a National Company participate later in the lifetime of the venture. The amount paid is to reimburse costs already occurred during exploration and construction.2.2.4 Fees and rents for facilities provided to third partiesIncome from facilities, like a pipeline, made available to third parties. Also fees received for custom milling or ore belong to this category.2.2.5 Salvage ValueReceipts from the sale of assets after the project is terminated. This income is subject to taxation. The future value of the assets however is often difficult to estimate, moreover tax deductible costs of demobilisation and abandonment have to be taken into consideration as well. Such cash transactions will take place far in the future. We advice not to bother about too many uncertain cash items because financial events late in the future have less influence on the decisions.2.3 Cash-outCash-out items are related to technical costs, Host Government take and costs for outside finance like interest on Bond and amortisation of loans.2.3.1.1T e c h n i c a l c o s tThe technical costs are expenditures directly related to the operation. Depending on their fiscal treatment, those costs are either capital expenditures (Capex) or operating expenditures (Opex).2.3.1.2C a p e xExpenditures for capital goods with a life of more than one year are capital expenditures. Costs of, production facilities, equipment, plant, pipelines and wells are examples of such like expenditures. The Capex is generally the dominant cash-out item in the pre-production period, early in the life of a project and is subject to depreciation in the following years. Replacement of equipment later in the project's life or additional expenditures for purpose of e.g. production acceleration are also considered as Capex. Costs for intangible services like the installation of equipment, acquiring leases, exploration etc. are sometimes capex, sometimes not, depending on the permission of writing off in the fiscal year of the expenditure.2.3.1.3O p e xOperating expenditures are costs for goods with a life of less than one year and directly related to the progress of the operation. These costs are tax deductible in the year of expenditure. We subdivide the Opex into Opex fixed and Opex variable. Typical costs of Opex fixed are insurance premiums, rentals, overhead for supervision, engineering and Head office, a part of the power costs, maintenance etc.; in general costs independent of the rate of production. The Opex variable are directly related to the rate of production, such as power costs, costs for separation and cleaning, transportation costs, partly the wages of daily paid personnel, etc. Interests paid are tax deductible in the year the payments aremade. Amortisation of a loan however is not tax deductible because the loan is used for payments that are already tax deductible2.3.2 Working capitalWorking capital refers to the short term need for cash to pay for running costs, inventories, securities etc. There is a need for these funds as soon as the operation starts, say a budget for covering the operating costs of the initial three months. After that we suppose sufficient cash has been generated by the operation and there is no need anymore for additional financing of working capital. This cash is permanently held in currency and in bank deposits during the lifetime of the operation. Towards the termination of the project there is an opposite situation the working capital is released from the project and is considered a cash-in.2.3.3 Host Government TakeThe government derives income by collecting taxes on the business profits and is by far the largest recipient of the profits. Both monetary policy and fiscal policy are important instruments to influence the economic activity in the country.Monetary influence by the availability of money and the costs of credit. Fiscal influence by altering the tax rules and the new contract terms.In the very common tax structure the company has to pay a Royalty, based on the value of the recovered mineral resources, and one or more Taxes based on the Taxable Income, the income liable to tax levy. A government can create a favourable tax climate and increase the incentives to invest in new ventures by employing the tax rates, tax credits or tax holidays, or permitting accelerated depreciation.2.3.3.1R o y a l t yRoyalties are payments to parties which have interests in the mineral deposit which will be exploited. The parties could be government and/or private parties. In the first case the royalty is mostly a percentage of the gross revenue. Other possibilities are a fixed amount per unit produced (tonnes mined, kg. Metal, etc.) or a percentage of the gross revenues.It has to be paid from the first day of production onwards, irrespective of whether profit is made or not. The royalty is reducing the income before tax and therefore has the same influence on the Taxable Income as e.g. the operating expenses.2.3.3.2T a xThere are many tax systems, such as a federal and state tax, property tax, income tax, additional profit tax, dividend tax, value added tax and even an excise duty and many different kinds of levy's which have all in common that tax in general is a dominant cash-out item in the cash flow. The most important tax to take into consideration for the project financial appraisal is the Corporate Income Tax. Later we will see that exploration and producing companies in the Netherlands are subject to a State Profit Share Tax as well.Tax is calculated by multiplying the tax rate and the taxable income. Fiscal costs are deducted from the revenues before arriving at the taxable income.TAXABLE INCOME = REVENUES -FISCAL COSTSThe definition of fiscal costs is laid down in the fiscal oil legislation of the Host Country and is governed by i.e. the Income Tax Degree and the amended subsequent legislation. The taxation of Companies is administrated by the Commissioner of Internal Revenue Services through the Inspector of Taxes.Separate Income Tax Laws like a Minerals and Mining Tax or Petroleum Income Tax deal with income and costs related to this specific industries, Very often the taxation of mining operations is governed by the Minerals and Mining Law of a country and includes royalties and operating costs. These expenses are deductible for tax purposes if incurred in the fiscal year under consideration. Moreover there are deduction allowances like a depreciation of capitalised assets giving tax reductions. Tax is only to be paid when there is a fiscal profit. 2.3.3.3I n t e r e s tInterest payments on loans are not taken into account when the feasibility of the project is considered in the planning stage. It is part of the finance package. Financing will depend on the financial (corporate) situation of the owner(s).2.4 Non Cash ItemNon cash-items in the cash flow are deductions, on paper, to calculate the taxable income.2.4.1.1D e p r e c i a t i o nThe (fiscal) depreciation, used to calculate the taxable income is calculated according to the rules set by the tax legislation of the host country. It will therefore most probably differ from the "Book Depreciation", annually reported in the Balance Sheet and which is supposed to reflect the physical life of the assets involved. The depreciation is an allowance to recover the costs of assets, or capitalise historical expenses. The general formula for fiscal costs is: FISCAL COSTS = ROYALTY+OPEX+FISCAL DEPRECIATIONFor fiscal purposes it is very important to consider the fiscal position of the company in the Host Country.If the company has already a large taxable income and hence is tax paying it is possible to offset costs and depreciable allowances of a new project against the existing income of other projects. In this way a tax reduction can be achieved. Such tax reductions should be regarded as part of the cash flow of the new project under consideration, in the form of a negative tax payment for the relevant years.Vice versa exploration e.g. is fiscal less attractive if the company is a 'new comer' in the host country. In that case depreciation can only commence at the time of production start up. In general 'fiscal losses' have to be carried forward to later years when they can be absorbed against future profits. The number of years carrying forward is allowed is subject to the fiscal legislation of the Host Country.Three basic depreciation procedures are encountered in the various fiscal legislation's.i. Straight Line Method. The assets are depreciated in equal amounts over anumber of years, e.g. 20% of the value of the assetannually, during 5 years. The number of years variesfrom item to item in line with the valid tax rules. In thisway expenditures of all assets are fully recovered bydepreciationE x a m p l e:ii. Decline Balance Method The depreciation Rate is a fixed percentage during thefiscal life of the asset. The depreciation is calculatedannual by multiplying the Rate with the remainingBalance of non depreciated assets. In this system thedepreciation being accelerated compared with thestraight line method because a greater rate is allowed.But not all assets are fully recovered.E x a m p l e:iii. Depletion Method In this method the annual depreciation is equal to theratio of the annual production to the reserves at thebeginning of the years times the non-depreciatedassets, either at the beginning or the end of the year.The method is known as well as the U n i t o fP r o d u c t i o n M e t h o d. Full recovery of theassets takes place only if the total of the reserves isrecovered. This method can lead to complications asand when total recoverable reserves change duringthe lifetime of the project.E x a m p l e:iv. Accelerated Method Immediately from the start, the capital expenditures tothe maximum of the operating profit for each year,until no balance is left. In this system normally allassets are fully recovered.Example:Since depreciation determines taxable income, a high early depreciation will lead to lower tax burdens in the early years of a project and hence will improve the early cash flow of a project 2.5 The Cash Surplus (Deficit)The planning process is an integral part of the financial appraisal. All the relevant data and budgeting figures are assembled in the following cash flow arrangement. The presented cash flow is a 'base case' one, i.e. a case not reckoned with economic indicators like inflation, escalation, exchange rate etc. or financial leverage, lease etc. Cash-in and cash-out transaction are indicated by + or -. Non cash items, accounting terms, by *.The cash surpluses cumulated till the final year are called the Ultimate Cash Surplus (UCasSur)E x a m p l e o f a c o p p e r/z i n c m i n:All figures in Million $PAGE RESERVED FOR CASH FLOWProduction According to the production profile prepared by the reservoirengineers(+) Revenues Annual (recovered) production x unit price(-) Royalty Revenues x royalty %(*) Net Revenues Revenues-royalty(-) Opex fixed A constant amount during the full production period(-) Opex variable Annual production costs / unit(*) Opex Total Opex fixed + opex variable(-) Interest N/A.(*) Operating Profit Net Revenues - opex - total interest(*) Depreciation Depreciation according to depletion. If operatingprofit<=depreciation, then depreciation = operating profit. Ifoperating profit(loss)<=0, then depreciation = 0 Profit before Tax Operating profit-depreciation(-) Tax Corporation tax=profit b. tax ? tax rate. If profit(loss) b.tax<=0, then tax=0(*) Profit after Tax Profit b.tax - tax.(-) Capex According to field development and production planning. (±) Salvage Value N/A.(+) Loan N/A.(-) Amortisation N/A.(±) Working Capital 3/12 ? total opex (-) in first year of production. Idem (+) inlast production year.(*) Cash-in Revenues + (loan + salvage value) + working capital in lastproduction year(*) Cash-out Royalty + opex total + tax + capex + (amortisation) +working capital in first production year.(*) Cash Surplus (Deficit) Cash-in - cash-outThere is a relationship between the Cash Surplus (Deficit), CASSUR and often referred to as 'Cash Flow', and the Profit after Tax. The cash surplus is defined as:CASSUR = CASH-IN - CASH-OUT= REVENUES-ROYALTY-OPEX-TAX-CAPEXProfit after Tax is defined as:PROFIT a. TAX = REVENUES - ROYALTY - OPEX - DEPRECIATION -TAXSubtracting these two equations yields the relation between the cash surplus, cash flow, and the Profit a. Tax:CASSUR = PROFIT a. TAX + DEPRECIATION - CAPEXIn other words, cash is taken from the operating profit and set a side before remitting tax. After the tax payment the remaining cash is replenished.From these relation it is seen that the CASSUR is largely influenced by the depreciation. If the capex exceeds the depreciation not all the assets are capitalised and the cassur is less then if the expenditures would have been fully recovered by the depreciation method.2.6 Tax ReductionsFrom the equation:TAXABLE INCOME = REVENUES - FISCAL COSTSfollows that the taxable income decreases if the fiscal costs increase. For a royalty/tax system, the tax is defined as:(1) TAX = REVENUES ? TAX RATE,before the deduction of fiscal costs.(2) TAX = (REVENUES-FISCAL COSTS) ? TAX RATE,after the deduction.The Tax Reduction obtained by deductions is the difference between (1) and (2):And the Net Fiscal Costs are fiscal costs minus the tax reduction:Tax Reduction = Fiscal Costs ? Tax RateNet Fiscal Costs = Fiscal Costs ? (1-Tax Rate)Hence these equations are valid for all deductible costs, e.g. royalty, capex, operating costs, interest, not however amortisation, working capital or tax itself.The net revenues are that part of the revenues, that remain after the royalty and the tax has been paid, i.e.:NET REVENUES = REVENUE (1 - ROYALTY RATE) ? (1 - TAX RATE)The total depreciation does not necessarily be equal to the total capex. In that case we write net capex equals capex minus the tax reduction due to depreciation:NET CAPEX = CAPEX-DEPRECIATION ? TAX RATEThe following expression is valid for the cash surplus:CASSUR = (REVENU ? (1 - ROYALTY RATE) - OPEX - DEPRECIATION) ?(1 - TAX RATE) + DEPRECIATIONor simplifiedCASSUR = (REVENU - (1 - ROYALTY RATE) - OPEX) ? (1-TAX RATE) +TAX RATE ? DEPRECIATIONE x a m p l e:The following data has been forecast for a particular year of a new project:Annual production 10 M TonUnit price $ 15/ tonCapex $ 55 millionOpex $ 10 millionRoyalty rate 20 %Tax rate 75 %Depreciation $ 40 millionWe will show in the next section a quick financial appraisal and analyse the sensitivity of this project to varying input data.M $ M $Net Revenues 10 Million ? 15 ? (1-0.20) ? (1-0.75) 30.0 Net Capex 55 - 40 ? 0.75 25.0Net Opex 10 ? (1-0.75) 2.5Net Technical Costs 27.5 Cash Surplus 2.5 One can see immediately that a reduction in the production rate of 10% will reduce the cash surplus by Million $ 3.0 and turning the operation into a loss. The break-even price per unit will be 27.5 / 30 ? 15 = 13.75 that is a decrease of 8.3% only. The opex will break-even after a doubling of these costs. This approach can help to get a feeling for the project in an initial stage of planning.3. THE PRESENT VALUE CONCEPT3.1 IntroductionCompanies invest in a variety of real assets. These include tangible assets, such as plant, machinery, installation or property like land and buildings, mineral rights. There are also intangible assets such as turn key or management contracts, research, patents, advertising, investments in knowledge and human resources, etc. The object of the investment decisions is to find real assets which are worth more than they cost.A cash flow has been generated for a new project along the lines of the preceding chapter. Most likely it will follow the conventional pattern of showing cash deficits during the initial investment, pre-production, period, followed by cash surpluses during the production period. If one decides to proceed with the project, the decision is made to invest money in the short term with the expectation to receive income in the long term. The cumulated income should not only recover the earlier invested capital but should also provide the investor with a reward for his investment. The corporation has set the goals and formulated a policy and strategy to achieve this reward.If the decision is made not to proceed with the project but to invest the money in an other project or outside the company in an 'alternative investment opportunity', it would earn a certain guaranteed rate of return on the investment. Is the decision to proceed with the project, the project should yield a higher return than the best alternative low risk investment opportunity. The aspect is sometimes called the 'costs of capital'.To invest in a risky project, a project should not only match the best alternative low risk investment opportunity, but should yield additional profits to compensate for the risk. The process by which the profitability of a project can be determined is known as 'discounting' and is explained in the remainder of this chapter.3.2 Present ValueA sum of money deposited in a bank account will yield interest after a certain period of time. Provided the interest is not withdrawn from the bank account the sum will grow with the time. The money of today is worth more than the money tomorrow, because the money today can be invested to start earning interest immediately. This is a basic principle of finance.One hundred guilders deposited in a bank account at an interest rate of 10 % per year will be worth after one year:Compound Interest100 ? 1.10 = 110 after one year.110 ? 1.10 = 121 after two years121 ? 1.10 = 133.10 after three years= 259.37 after ten yearsThis concept is called ‘compound interest’; accumulating interest on principal and interest, and increasing the future value of the bank account.. In general terms the concept of compound interest can be written as follows:。