Costs
Costs related to mining are broadly
classified under the following heads.(which may change in importance
depending on the type of mine being considered and locational
factors.)
- Mining costs
- Processing costs
- Logistics costs
- Royalty – paid to the government or someone else
Mining,
processing and logistics costs are determined based on either first
principles (wherein we work out each individual component) or thumb
rule (broad average costs for the whole mine based on similar mines )
or a mix of both the methods. First principles based cost estimation
is generally considered to scientific but need not necessarily lead
to a better estimate as a number of explicit assumptions need to be
made for doing the same. Nevertheless, for a new large mine in a new
location should be worked out based on first principles. It is
critical that inputs from Experienced Mining and Procurement persons
are taken while using first principles.
When
using the thumb rule/historical costs estimates from another mine, it
is critical to make adjustments for the Strip ratio, amount of
blasting/ripping required, processing peculiarities (extra crushing
and differences in processing methods), haulage distances, pumping
requirements etc. Of these, haulage distance will change for sure
with all mines and has to be critically evaluated always. The
Processing and blastin/ripping is dependent on the material in the
mine.
The
amount of waste being mined in any mine is a cost which gets loaded
on to the Ore costs. The Strip ratio is used to model the amount of
Waste being mined each year. Ideally the waste to be mined should be
determined by the technical team for each year (or financial period
used in the financial model) and the cost of mining waste and
hauling waste should be worked out based on that. The Haulage
distance for waste will normally be different from the haulage
distance for Ore as they are taken to different locations and the
different densities of ore and waste.
As a
practice, as the mine is being developed, the mine development
expenses, pre-stripping expenses are considered to be a part of the
capital expenditure in a mine. For the purpose of the financial
evaluation, it is irrelevant as to whether they are capex or opex.
What is critical is capturing the cash flows correctly and the tax
implications of considering it as capex or opex. One cashflows are
correctly considered, one has to look at the Tax depreciation impact
of considering them as Operating or capital expenditure. The Tax laws
of the particular country need to be looked at while looking at the
tax impact.
Using
average strip ratio: A lot of miners tend to use Average strip ratio
over the life of mine for determining the cost of mining. As far as
DCF models are being considered, it is not preferable to use average
strip ratio over the life of mine as the strip ratios tend to vary
substantially over the life of mine and therefore the timing of the
cash flows related to waste removal will be inaccurate if average
strip ratios are used. Due to the time value of money, the timing of
cash flows will not average out. It is better to forecast the strip
ratios on a yearly basis.
Generally
logistics will always play a critical role in the cost estimates of
any mining operation. However depending on the mineral and processing
involved, the importance of Ore logistics, logistics of intermediates
(semiprocessed ore/Concentrate) or finished product.
For
iron ore, generally since FOB prices are considered, the shipping
logistics will not come into picture and only costs till loading on
the ship need to be considered. In case of other metals like Copper
etc, cost of moving finished product isn’t as critical as the cost
of moving concentrate (though depends on the mine location).
Peculiar
to the mining business is the concept of Royalty payment to the
government. In lieu of the right to mine minerals in the ground, the
govt of the region is paid a “royalty” by the mining company.
This is an unavoidable cost and must be considered in the financial
model. Generally royalty is easy to determine as it usually based on
simple formulas linked to marked price or as % of revenue. In India
for example, royalty of iron ore is 10 % Advalorem (i.e. Value of the
Ore at the mine gate …essentially Revenue – Logistics costs).
Base metals are generally linked as % of the LME price as those
commodities are heavily traded and London Metal exchange price is a
widely accepted benchmark. (infact most sales in these commodities
are a function of the LME prices )
In
addition to the royalty paid to the government. A “Royalty” is at
times paid to non-government parties. These are essentially a part of
compensation paid to a mine seller for purchasing a mine. This will
be in different form depending on the structure of the sale deal. It
can take various forms such as Net profit interest (% of profit), %
of sales, Price participation ( Fixed amount linked to the price of
the metal) etc
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