Page 293 - Introduction to Mineral Exploration

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

During construction which is attached to estimates of mineable
grade and tonnage, annual production rate,
It is probable that the greatest risk in project capital, and operating costs. While banks may
financing occurs during the construction phase. be prepared to accept the risk of commodity
This phase may legitimately take several years prices falling below those projected, they are
and during this time the loan is being used not prepared to accept technical risks. Of
and no revenue is being generated. Mine con- increasing importance to banks and project
struction is usually contracted out to major sponsors is the potential liability in the event
civil engineering companies and some form of inadvertent damage to the environment.
of completion guarantee from the managing Consequently, the manner in which a feasibil-
contractor is crucial. This is usually to com- ity study examines social and environmental
plete and commission the project in a specified issues is reviewed with great care.
time period and to make penalty payments
to provide funds if construction is not com-
pleted on time. Complications which can delay 11.9 SUMMARY
construction include an increase in capital
costs due to inflation or technological diffi- Cash flows in constant money are tested by
culties, delays in the delivery of plant and sensitivity analysis in the valuation and rank-
equipment, strikes, delays caused by abnormal ing of mineralisation, mineral properties, and
weather, financial failure of a major contractor, projects before mining companies proceed to
and poor management. developing a mine. A minimum acceptance rate
A delay in completion and subsequent opera- of return (the “hurdle” rate) is usually stated,
tion postpones the generation of the cash flow below which projects are not considered, e.g. a
from which loans and interest were to be repaid. 20% DCF ROR before tax and a 15% DCF ROR
It also creates a requirement for additional after tax. This usually means that the initial
money over and above that originally negoti- capital investment is returned in the first 4
ated in order to finance this delay period. years or so of mineral production. Few com-
Obviously the key factors are the quality of the panies consider inflation and even fewer con-
final project feasibility report and the reliabil- sider a quantitative assessment of risk (section
ity of the managing contractor.
11.6).
During production
11.10 FURTHER READING
Adverse factors during production include:
errors in the quantity and quality of ore reserve O’Hara (1980) and Mular (1982) provide much
estimation, technical failure of equipment, fall useful basic data on the evaluation of orebodies
in the price of the mineral product, foreign and the estimation of mining costs, but are
exchange fluctuations such as a currency de- now rather dated. A more relevant source is the
valuation, poor labor relations which provoke US Bureau of Mines Cost Estimating System
industrial strife, environmental difficulties, Handbook (1987), which provides a rigorous
and government interference in the running basis for cost estimating. Websites that provide
of the project of which the final condition is current information include that of Minecost
expropriation. Any of these events may cause (Minecost 2004), CRU International (CRU
delay in the repayment of the loan. In cases of 2004), Brook Hunt (Brook Hunt 2004), and
grave default the lenders have the ultimate Western Mining Engineering (Westernmine
right to take over the project and replace its 2004). A good system for order-of-magnitude
management. estimates is in Camm (1991) and Craig Smith
(1992). Two other articles of note are the de-
scription of the Palabora copper open pit in
General
South Africa (Crosson 1984), and the Neves
Banks, in reviewing a feasibility study, pay Corvo copper–zinc–lead–tin project in Portugal
particular attention to the degree of confidence (Bailey & Hodson 1991).