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• Overview

• Grading scheme / Labs and assignments

• Course syllabus

• Books

MinE 408: Mining Enterprise Economics

Course Information

MinE 408: Mining Enterprise Economics

•   Pre-requisites: –  ENGG 401 or 301: Fundamentals of Engineering Economic Evaluation

 –  STAT 235: Fundamentals of Probability, Statistics and Risk Analyses

• Lectures: Monday and Wednesday from 9:00 to 9:50 PM in NREF 2-080

• Seminar: Friday from 2:00 to 3:50 PM in NREF – 2-118

• Teaching Staff and Office Hours: – Instructor: Dr. Jeff Boisvert  jbb@ualberta.ca

 – Office Hours: ???

 – T.A.: Maksuda Lil lah lillah@ualberta.ca

 – Office Hours: TBA

 Description: Fundamentals of economic evaluation. Cost estimation,

commodity price modelling and revenue forecasts and taxation related

to mine development. Economic evaluation of mining ventures,

 profitability, risks and uncertainty analyses. Commodity markets and

mine management strategies.

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Course Resources

•   Course Textbook

 – None officially …

•   Notes:

 –  Online (hopefully) before class

•   Other References – Gentry, D.W. and T.J. O’Neil, 1984, Mine Investment Analysis; (c) SME, Littleton,

Colorado.

 – Runge, I., 1998. Mineral Economics and Strategy, SME, Littleton, Colorado.

 – Vogely, W.A. (Editor), 1985, Economics of the Mineral Industries, 4th Edition; (c) by

 AIMMPE Inc., New York.

 – Gocht, W.R. et al., 1988, International Mineral Economics; (c) by Springer-Verlag,

Berlin Heideberg.

 – Ostwald, P.F., 1974, Cost Estimating for Engineering and Management; (c) Prentice-

Hall, Englewood Cliffs, NJ.

 – Price Waterhouse, 1994, Canadian Mining Taxation; (c) Price Waterhouse, Toronto,

Ontario.

 – Rudenno V,The Mining Valuation Handbook. Wrightbooks, 2009, 539.

(good general/current book)

•   Software Packages

 – Decisioneering’s Crystal Ball (likely just Excel)

Grading

• Final grades will be established

on the following basis: – Assignments/Labs 40 %

 – Midterm Examination 25 %

 – Final Examination 35 %

• Some optional readings posted online.

• Guest lectures provide questions for

exams/assignments

• All examinations are closed book.

• Only non-programmable calculatorsallowed.

Descriptor Letter Grade Grade Point Value

Excellent

 A+ 4.0

 A 4.0

 A- 3.7

Good

B+ 3.3

B 3.0

B- 2.7

Satisfactory

C+ 2.3

C 2.0

C- 1.7

Poor

Minimal Pass

D+ 1.3

D 1.0

Failur e F or F(R) 0.0

Note: F(R) denotes eligibility of a student to apply for a

reexamination of a course.

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Key Dates (Flexible if you bring the issueto my attention before Jan 27)

Wednesday, February 15 Midterm Examination (in-class)

(SAME AS MinE 422)

February 21 - 25 Reading Week

 April 18 (tentatively) Final Examination

• All examinations are closed book.

• Only non-programmable calculators allowed.

University Policy

• “Policy about course outlines can be found in Section 23.4(2) of

the University Calendar.” (GFC 29 SEP 2003)”

• “The University of Alberta is committed to the highest standards

of academic integrity and honesty. Students are expected to be

familiar with these standards regarding academic honesty and

to uphold the policies of the University in this respect. Students

are particularly urged to familiarize themselves with the

provisions of the Code of Student Behavior (online at

www.ualberta.ca/secretariat/appeals.htm) and avoid any

behavior which could potentially result in suspicions of cheating,

plagiarism, misrepresentation of facts and/or participation in anoffence. Academic dishonesty is a serious offence and can

result in suspension or expulsion from the University.” (GFC 29

SEP 2003)”

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Plagiarism

• Cite correctly

• No excuses (including ignorance)

My Policy on Late Submissions

• Deadlines are hard.• All submissions are picked up Friday at noon

• What qualifies as late?

 – Nothing … HARD deadlines

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Participation

• How to listen to a technical talk…

 –  Pad of paper • Notes

• Ideas

• Questions

 –  3 questions that you came up with throughou t the lecture• Include guest speakers name

• Include the date

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Major Topics

• DCF

• MCS

• Real Options

•  Assessing costs

• Questions on logistics …

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• Mining Economics

• Valuation vs. Evaluation

MIN E 408: Mining Enterprise Economics

Fundamentals

What Is Mining Enterprise Economics?

• Financial aspects of the mining business:

 – Microscopic: operation specific activity, e.g. equipment, production,

processing costs vs. revenue generated from commodity

 – Macroscopic: overall industry-related activity, such as market structure,

commodity markets, organizational structure

• What is unique about mining industry?

1. Capital intensity

 – Major investment occur early in project life

 – Inflationary economics

 – Cost of equity and borrowed capital is real – Opportunity costs exists for investments

 – Investors must postpone their pleasures

2. Long pre-production periods

• Long and expensive exploration and development time

3. High risk

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Capital Investment in Canada

http://www.energy.alberta.ca/OilSands/791.asphttp://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic21inve.html

Mining Venture Risk

Types o f Risk

• Commodity market risks

• Geological risks

• Development/operating risks

• Financial risks

• Environmental risks

• Engineering risks

• Technological risks

• Political risks

• Risks due to force majeure

• Risks due to social upheaval

Consequences of Risk

• Windfall profits

• Unexpected growth in company

• Huge losses in capital & revenues

• Over/under-estimation of reserves

• Wrong investment choices

• Wrong timing of investments

• Liability of company assets

• Over/under-estimation of value

• Complete project failure

• Bankruptcies in critical situations

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Valuation vs. Evaluation

• Valuation – placing a dollar or other currency value on the worth of a mining

project as a whole.

 – value of a mining project refers to a measure of the desirability of

ownership of that property.

• Evaluation

 – assessment of the relative economic viability of the mining

project or investment opportunity.

 – estimates of project ore reserves, mining rates, revenues, costs,

expected returns and associated risks, etc., as well as the dollar

worth (valuation) are made for each project or investmentopportunity.

Reasons for Valuation

• Project Acquisitions

• Corporate Taxation

• Financing Requirement

• Regulatory Requirement

• Liabilities Preclusion

• Negotiating Tool

• Basis Of Decision

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1. COST APPROACH

2. MARKET (COMPARATIVE SALES) APPROACH

3. EARNINGS APPROACH

• Cost Approach

 –  Asset Value = The Cost Of Exactly Re-producing That Asset

 – Used In Evaluating Commercial Buildings

 – Less Applicable In Mining Property Evaluation

 Approaches to Mine Valuation

• Market approach

 – Concept assumes open market conditions

 – Supply & demand determine asset price

 – Not applicable in mining because there are few sales ofunique mining properties

• Earnings Approach

 – Stream of income from an asset >= its value

 – Asset value is sum of the discounted net future earnings tothe present time

 – Widely used in the mining industry

 – Used in mining venture evaluation

 Approaches to Mine Valuation

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Mine Evaluation Procedure

• Tonnage and grade of estimated ore reserve are important variables in

determining optimum mine size

• Mine size affects production costs, as economies of scale are often

enjoyed with larger production rates

• The level of production costs for the project as a whole determines

what material can be mined at a profit (cutoff grade) and therefore

determines the magnitude of the ore reserve

• Each time a variable changes, the analyst

must assess the impact of this change on

all other project variables and on the

subsequent financial and economic results• This iterative procedure must be repeated

until the most economical design is achieved 

Review Of Main Points

• Nature of the mining industry is unique.

 – Capital intensity

 – Long pre-production periods

 – High risk

• Industry sensitivities:

 – Global economy

 – Environment / Social / Political pressures

• Valuation Approaches

 – Cost Approach

 – Market (or Capital Market) Approach

 – Earnings Approach• Evaluation Approach

 – Important iterative procedure