Page 287 - Introduction to Mineral Exploration

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

project. What is the probability of finding and is not a single, unique value) but variables.
developing a series of such short life, high re- Consequently mineral valuation comprises a
turn mineral deposits? The long-term future of series of uncertain decisions and the risk of
the company may be better served by choosing these decisions being wrong can be assessed.
the mineral project with the lower DCF. Lastly,
there is the condition of selecting a series of 11.6.1 Risk analysis
small projects with high DCF. Small projects
often require the same management time and Qualitative assessment
attention as larger ones. With a finite amount
of time its effective use will tend towards large Adjustment of discount rates for NPV
projects with, perhaps, lower DCF rather than and DCF
a series of smaller schemes. A commonly used overall method of allowing
In summary, the objective of valuation is to for risk is to use an abnormally high discount
summarize and convey to management in a rate in the valuation:
single determinant a quantitative summary of
the value of a mineral deposit. Clearly there is Safe long term rate + risk premium rate
no single perfect method of assessing this and = risk rate
good management uses every available rel-
evant method and is aware of their inherent For instance if the accepted minimum valua-
weaknesses and strengths. In the final analysis tion rate is 15% DCF and there is a perceived
in the evaluation of mineral projects there is no risk, an added rate is included to bring this
substitute for sound managerial judgement. minimum to, say, 23%. This is the simplest
method of allowing for risk but also the least
satisfactory as the added rate is a matter of per-
11.6 RISK sonal judgement; its determination with any
degree of accuracy is impossible.
Risk pervades our entire life and the way we
act. It can be described in two ways – either Adjustment of costs
with qualitative expressions (it’s a sure thing, A danger here is that of overadjusting. Consider
we have a fair chance of discovery in the Upper a mineral valuation where as a safety factor it is
Palaeozoic, etc.) or in a quantitative sense us- decided to increase the best estimate of operat-
ing probability. A probability of 1.0 means that ing costs, to reduce ore grade and selling prices,
the event will occur while 0.0 means that it and apply a high discount rate as an additional
will never happen; negative probabilities do risk allowance. It will have to be a remarkable
not exist. A probability of 0.31 means that project to survive such treatment.
there are 31 chances in 100 that the event will A better approach is to calculate a base case
occur and 69 in 100 that it will not. What is an from the most accurate information available.
acceptable risk? Risk is very much a personal Risk factors are then added in a sensitivity
assessment. For instance many people would analysis (Box 11.3) by considering the variable
not work in an underground mine because it is components one at a time while all others are
seen as being dangerous, yet every day accept kept constant. In any evaluation certain com-
higher risks such as dying from fire in the home ponents have a greater effect upon the size of
or in a road accident (Rothschild 1978). the cash flow (and hence value) than others and
In the previous section four methods of the purpose of a sensitivity analysis is to
analyzing cash flows in the valuation of miner- identify them so that further investigations can
alisation were presented. The projected cash improve their reliability (i.e. make them less
flows were assumed to occur (i.e. probability = risky). Commonly grade is varied increment-
1.0) and they did not include quantitative state- ally, as are other components such as extrac-
ments of risk: they were treated as decisions tion cost, mineral recovery, etc.
under certainty. However the valuation of min- The most significant component is revenue
eralisation involves the introduction of many which is dependent upon the future sales price
factors (grade, tonnage, mining cost, transport of the product and this is the most difficult to
cost, etc.) which are not constants (i.e. there forecast. Capital and operating costs only move