Page 283 - Introduction to Mineral Exploration

266 B. SCOTT & M.K.G. WHATELEY

choice has to be made between two or more initial capital investment from the project cash
alternatives based on some tangible measure- flow. In Box 11.2 the projects are ranked in
ment of economic value or return. There are order of least time of payback: B, D, C, and A.
four main techniques, discussed below, all of The method serves as a preliminary screening
which are based on the annual cash flow for the process but it is inadequate as a selection crite-
project in question. rion for it fails to consider earnings after pay-
back and does not take into account the time
value of money (section 11.5.3). It is useful in
11.5.1 Payback
areas of political instability where the recovery
This is a simple method which ranks mineral of the initial investment within a short period
projects in order of their value by the number of time is particularly important and here
of years of production required to recover the project B would take precedence.

BOX 11.2 Mineral project evaluation and selection criteria.

Mineralisation at four similar prospects has been investigated and an order of magnitude feasibility
study has been completed on each. At each location it is thought that a mine can be constructed in one
year. Production commences in year 1. Which, if any, are worth retaining? Cash flow values are in
arbitrary units.

Year

A B C D
Initial investment (CAPEX) −1 (3100) (2225) (2350) (2100)
Operating margin
1 500 2000 150 1100
2 500 1000 450 900
3 1000 500 1000 1150
4 2000 500 3400 950
Payback (years) 3.6 1.2 3.2 2.1
Operating margin / CAPEX 1.3 1.8 2.1 1.9
NPV at 15% discount −560 +835 +656 +780
DCF ROR 11% 40% 21% 30%

The value of the mineralisation at prospect A does not reach the minimum DCF return of 15% and is
discarded. The remaining three meet this requirement and can be ranked in value:

Criteria Most favorable Middle Least favorable

Payback B D C
Operating margin / CAPEX C D B
NPV B D C
DCF ROR B D C

The mineralisation at prospect B has the greatest value although it is not the lowest cost to develop, but
it has the great virtue of generating a large cash flow at the beginning of the project. Prospect A, the least
favorable, has the largest CAPEX and a low cash flow in years 1 and 2. At a discount rate of 15% the
mineralisation at prospect B is worth 835 units, C is worth 656 units, and D 780 units. On the basis of
this study prospect B is the one to be retained.