Technical and Financial Evaluation of Mineral Projects

Introduction
There are many techniques for the successful technical and financial evaluation of mineral projects. In the minerals industry it is important to measure risk, uncertainty, the cost of capital as well as anticipated project performance. This article provides insight into this complex process of evaluation of mining and mineral projects.

Background
While the discovery of a new mineral deposit gives rise to excellent commercial opportunities, these have to be matched with suitable funding options.

For new mining companies with proven exploration assets, these include private placements, establishing strategic partnerships with large companies and Initial Public Offerings through the local and international securities exchanges. In order to capitalize on these financing options a reliable valuation technique will be required to confirm the extent and economic value of the deposit earmarked for mining.

Where advanced exploration has been conducted through mechanisms such as bulk sampling of the ore reserve and this process resulted in a classified of the deposit as an indicated resource, the techniques of discount cash flow modeling can be used to place a value on the project. In times of economic downturn care should be taken not to be too conservative with the commodity pricing model that is used.

Consideration should also be given for different financial models in case of projects that will be financed with the aid of different types of investors. These investors could include angel investors with a fixed or variable rate of guaranteed return, risk investors, technology partners and joint venture type investments. Each of these types of sources of funds would require different financial models to determine the potential financial success of the project.

For projects where it is anticipated to finance the project with loans with the expectation that payment of interest and the repayment of the capital would be financed through dividends payments care should be taken when designing the financial model to ensure that the model is realistic. The model should at least include a sensitivity analysis that identifies the critical factors and their influence on the successful financing of the project.

Objectives
The aim of the evaluation should be to establish the economic feasibility of the project given the known and anticipated variables that will impact the potential success of the project. Once this is known the evaluation team should develop a number of strategic approaches for each of the scenarios that is anticipated for the project. Care should be taken to ensure that the evaluation is objective and independent and is based on realistic assumptions.

The Evaluation
The tendency to over state the ore reserve or the expected extraction percentage is common mistakes that is made by inexperienced evaluation teams. The evaluation should cover all the underlying accountancy, financial and technical principles which apply to mineral projects, and must be integrated effectively in the financial model that is used.

Particular attention must be given to the correct inclusion of the key independent variables, such as grade and depth of deposit. The dependent variables, such as grade to tonnage relationships, and the way these influence the rate of mining, associated costs and optimization of the net present value of a project should be carefully included in the model.

The evaluation should include a comprehensive technical appraisal as well as a complete financial assessment. There are a number of different financial type models that should be interacted during the financial evaluation. These include discounted cash flow models as well as internal rate of return and the discounted payback period models.

Conclusion
The evaluation of mineral projects involves more than just establishing the project's expected revenues and profitability. It also involves an in depth investigation of the key variables that can affect a complex minerals project. The key success factor of minerals project evaluation is the successful integration of the technical complexities and their financial impact on the project.

It should be remembered that the evaluation of mineral projects, like most other project evaluations, are done to ensure that shareholder value and the role of gearing to maintain an efficient balance sheet is realistic and effective.

© 2009 Carl Marx