Mine Project Valuation Using Monte Carlo Analysis

This model and exercise were created by Alpay Sergi, Visiting Scholar, and Graham A. Davis
of Mines, Golden, CO 80401, May 2002. Email gdavis@mines.edu.

Problem Definition
A mining corporation is evaluating a small underground gold mining project containing an es
given in "Optimum Production Rate Selection" by Bruce Cavender, Mining Engineering, 1992

The property has been explored, but there is still some uncertainty over the total tons of ore
capital costs, mining costs, milling costs, working capital, production rates, gold prices, ore g
certain of these variables.

The problem is to value the project using traditional DCF analysis, but to take the valuation
Monte Carlo analysis is useful in this case because 1) the correlations between the uncertain
flows created by taxes and an uncertain mine life mean that the expected NPV value from a
exercise. In fact, the only way to estimate an expected value for this project is via Monte Ca

We do not model any decision variables in this problem. A natural extension would be to ha
for prices and costs, as in a real options model. This would prevent many of the highly nega
value to the project.

Real vs. Nominal Analysis

Mining industry practitioners typically perform real NPV analysis, projecting constant costs a
discounted by a real risk-adjusted discount rate. We have conformed with this practice here
calculated in nominal terms. That is, we calculate depreciation in nominal terms based on e
this reason, the sum of the depreciation and salvage values do not equal the initial capital co

Assumption Cell Distributions

The initial reserve level at economic cutoff is 8.3 million tons, lognormally distributed with a
with the ore production rate and year 2 ore grade and gold price. If reserves turn out to be
additional days of mining in year 6 and 7, up to a maximum of 355 days in each, after which
The expected ore production rate is 6,000 t/d, normally distributed with a standard deviation
mill capital cost, and negatively correlated with mine operating cost and mill operating cost.
unreasonable values. Uncertain production is resolved immediately upon starting up the min
2.
Mine capital cost and mill capital cost are triangularly distributed with means of $24,420,00
maximum costs are 115% of means. They are positively correlated.

Working capital is triangularly distributed with a mean of $12,000,000. Minimum costs are 9
positively correlated with mine operating cost and mill operating cost in year 2.

Average grade of the ore (mill feed) in any one year is normally distributed with a mean of 4
same year's mill recovery.

Mill recovery for each year is uniformly distributed between 93% and 97%. Each year's mill
recovery.

Gold price is lognormally distributed with a mean of 10.50 g/t and standard deviation of 10%
the mean value for year n+1 equal the random draw for year n.

Yearly mine operating costs are lognormally distributed, with a mean of $2.62/t and a stand
distributed, with a mean of $6.88/t and a standard deviation of 1/4 of the mean.

Results

The expected after-tax NPV based on a static analysis using expected values of the uncertain
IRR of 20%. The mean NPV from the Monte Carlo analysis is $23.405 million, showing that
 364225439.xls
PROPOSED GOLD MINE PROJECT

Technical and Financial Project Parameters

(Assumption Cells in Bright Green)

Technical Parameters Financial Parameters

Average Grade (g Au/ton) 4.05 Current Gold Price ($/g) 10.50
Cutoff Grade (g Au/ton) 0.65 Mine Operating Cost ($/t) 2.62
Reserve Level at Cutoff (million tons) 8.300 Mill Operating Cost ($/t) 6.88
Contained Value (kg Au) 33,615 Total Operating Cost ($/t) 9.50
Stripping Ratio 2.0 Mine Capital Cost ($ 000) 24,420
Ore Production Rate (t/d) 6,000 Mill Capital Cost ($ 000) 54,318
Mill Recovery 95% Total Capital Cost ($ 000) 78,738
Operating days/year 355 Working Capital ($ 000) 12,000
Mine Life (year) 6 Capitalized Exploration Cost ($ 000) 910
Depletion Allowance (%) 15%
Royalty (% Net Smelter Return) 5%
Income Tax Rate (%) 46%
Salvage Value (% of Capital Costs) 10%
Real Risk-adjusted Discount Rate (%) 10%
Inflation (%) 3%

Year 1 2 3 4 5 6 7 TOTAL

PRODUCTION
Operating days/year 0 249 355 355 355 70 0 1,383
Waste (t/day) 0 12,000 12,000 12,000 12,000 12,000 12,000
Ore (t/day) 0 6,000 6,000 6,000 6,000 6,000 6,000
Waste Prestripping (000 t) 3,579 2,982 4,260 4,260 4,260 838 0 20,179
Ore milled (000 t) 0 1,491 2,130 2,130 2,130 419 0 8,300
Ore grade (g/t) 0 4.05 4.05 4.05 4.05 4.05 4.05
Mill recovery (%) 0 95% 95% 95% 95% 95% 95%
Gold recovered (000 g) 0 5,737 8,195 8,195 8,195 1,612 0 31,934
Remaining recoverable gold (000 g) 31,934 26,198 18,002 9,807 1,612 0 0
REVENUE
Gold price ($/g) 10.50 10.50 10.50 10.50 10.50 10.50
Gross income ($ 000) 0 60,235 86,049 86,049 86,049 16,927 0 335,310
OPERATING COSTS
Mine Operating Cost ($/t) 2.62 2.62 2.62 2.62 2.62 2.62
Total Mining Cost ($ 000) 0 11,719 16,742 16,742 16,742 3,293 0 65,238
Mill Operating Cost ($/t) 6.88 6.88 6.88 6.88 6.88 6.88
Total Milling Cost ($ 000) 0 10,258 14,654 14,654 14,654 2,883 0 57,104
Total Operating Cost ($ 000) 0 21,977 31,396 31,396 31,396 6,176 0 122,342
DEPRECIATION
Var. Dep. Year 1 (DB-SL) ($ 000) 16,732 12,183 8,871 6,460 5,857 5,687 0 55,790
Var. Dep. Year 2 (DB-SL) ($ 000) 0 3,650 2,480 1,686 1,283 1,245 0 10,344
Var. Dep. Year 4 (DB-SL) ($ 000) 0 0 0 2,151 1,044 608 0 3,803
Cumulative Depreciation ($ 000) 16,732 15,833 11,352 10,296 8,184 7,540 0 69,937
DEPLETION
Adjusted Cost Basis ($ 000) 910 910 0 0 0 0 0 1,820
Cost Depletion Allow. ($ 000) 0 163 0 0 0 0 0 163
Percentage Depl. Allowance ($ 000) 0 7,782 11,118 11,118 11,118 2,187 0 43,322
50% Taxable Income Limit ($ 000) 0 7,036 15,685 16,212 17,268 432 0 56,633
Depletion Taken ($ 000) 0 7,036 11,118 11,118 11,118 432 0 40,820
Cumulative Depletion ($ 000) 0 7,036 18,153 29,271 40,389 40,820 0 135,669
TAX
Gross Revenue ($ 000) 0 60,235 86,049 86,049 86,049 16,927 0 335,310
Less: Refinery Charges ($ 000) 0 5,622 8,031 8,031 8,031 1,580 0 31,296
Net Smelter Return ($ 000) 0 54,613 78,018 78,018 78,018 15,347 0 304,014
Less: Royalty Payment ($ 000) 0 2,731 3,901 3,901 3,901 767 0 15,201
Net Revenue ($ 000) 0 51,882 74,117 74,117 74,117 14,580 0 288,813
Add: Salvage Value ($ 000) 0 0 0 0 0 8,268 0 8,268
Less: Operating Costs ($ 000) 0 21,977 31,396 31,396 31,396 6,176 0 122,342
Less: Development Expen. ($ 000) 6,564 0 0 0 0 0 0 6,564
Less: Depreciation ($ 000) 16,732 15,833 11,352 10,296 8,184 7,540 0 69,937
Less: Amortization ($ 000) 563 563 563 563 563 563 0 3,376
Less: Depletion ($ 000) 0 7,036 11,118 11,118 11,118 432 0 40,820
Taxable Income ($ 000) -23,858 6,473 19,689 20,744 22,857 8,137 0 54,042
Less: Tax ($ 000) -10,975 2,978 9,057 9,542 10,514 3,743 0 24,859
CAPITAL INVESTMENT
Mine/Mill Capital ($ 000) 66,927 11,811 0 3,937 0 0 0 82,675
Working Capital ($ 000) 12,000 0 0 0 0 -12,000 0 0
Total Capex Cash Flow ($ 000) 78,927 11,811 0 3,937 0 -12,000 0 82,675
CASH FLOW
Net Income After Tax ($ 000) -12,883 3,496 10,632 11,202 12,343 4,394 0 29,183
Add: Depreciation ($ 000) 16,732 15,833 11,352 10,296 8,184 7,540 0 69,937
Add: Depletion ($ 000) 0 7,036 11,118 11,118 11,118 432 0 40,820
Add: Amortization ($ 000) 563 563 563 563 563 563 0
Less: Capital Cost ($ 000) 68,896 11,811 0 3,937 0 0 0 84,644
Less: Working Capital ($ 000) 12,000 0 0 0 0 -12,000 0 0
Net Cash Flow ($ 000) -76,486 14,554 33,101 28,679 31,644 24,366 0 55,859
Cumulative Cash Flow ($ 000) -76,486 -61,932 -28,831 -152 31,493 55,859 0
NPV @ 10% ($ 000) 22,391
IRR 20%
Payback Period CCF-Negative CCF-Negative CCF-Negative CCF-Negative 4.00 CCF-Positive

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