Page 289 - Introduction to Mineral Exploration

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

Opcost Differential tion. This is because, if the components which
form the cash flow are inflated at the inflation
General
rate and the resultant flow is then deflated for
Inflation (%) Revenue inflation DCF and NPV calculations at the same rate,
this will produce a flow identical with that pro-
duced by ignoring inflation altogether.
Opinions differ on the treatment of inflation
in mineral project evaluation but a safe method
is to use it as a type of sensitivity analysis
0 1 2 3 4 5 6 on the base case. Separate specific cost and
Years revenue items, which correlate well with pub-
lished cost indices, can be used over a limited
FIG. 11.8 Differential inflation. Revenue is period of, say, 4 years ahead, and thus account
increasing at a slower rate than general inflation, can be taken of differential inflation over this
while the reverse is true with mine operating costs period. Beyond this, separate predictions are
(opcost). There is a positive differential inflation unrealistic and it is advisable to use only a
with the former and negative with the latter.
single, uniform rate for the complete cash flow
for the remainder of the project duration. The
base case cash flow prediction is in constant
in the cash flow is an important factor. While money whilst the inflation model will be in
inflation may be assumed always to be a posi- current money.
tive factor, escalation can be either positive or In most projects the greater part of the
negative as the particular component moves at finance to build a mine is obtained from banks.
a rate either faster or slower than the measure Banks test the ability of a project cash flow
of general inflation (Fig. 11.8). to repay these loans, and related interest pay-
ments, by applying their own estimates of
future inflation rates to the company base case.
11.7.1 Constant and current money
Many mineral companies then prefer to pre-
Cash flows may be calculated in either con- pare cash flows for their base case, and sensitiv-
stant or current money terms. Constant money ity analysis, in constant money terms and leave
is assumed to have the same purchasing power the preparations of inflated flows in current
throughout the valuation period and thus one money to the loan-making banks (Gentry 1988).
year’s money may be compared directly with
that of any other. This is the basis on which
DCF and NPV are calculated, as above and in 11.8 MINERAL PROJECT FINANCE
Boxes 11.1–11.3.
In current money the figures used in calcula- The development of mineralisation into a pro-
tions are adjusted for the anticipated rate of in- ducing mine requires a skilful combination
flation each year and are, in essence, the figures of financial and technical expertise (Box 11.4).
which are expected to be entered into the books For the purpose of this section assume that a
of account for that year and represent the net feasibility study (section 11.4.4) has been com-
available profit or loss. Money from different pleted and the company concerned intends to
years is not directly comparable and DCF and proceed with the development of the defined
NPV derived from this type of cash flow are mineralisation.
misleading.
If the rate of inflation is the same for capital
and operating costs, and revenue (i.e. there is 11.8.1 Financing of mineral projects
no escalation), and there are no tax or other
financial complications (which is seldom, if Traditional financing
ever, the case), the DCF yield may be correctly Generally finance to develop mineral projects
estimated by completing the calculation in (Institution of Mining & Metallurgy 1987) is
constant money terms, without regard to infla- obtained from three sources (Potts 1985).