casemark/modeling-mining-project-economics

Modeling Mining Project Economics

Builds mining project financial models with resource estimation, mine plan integration, and commodity price sensitivity analysis.

When To Use

• Evaluating a mining project at PEA, pre-feasibility, or bankable feasibility stage
• Modeling acquisition economics for an operating or development-stage mineral asset
• Running commodity price sensitivity on an existing mine plan
• Stress-testing capital structure or financing scenarios for a mining investment
• Comparing multiple deposit or project alternatives on a risk-adjusted basis

Inputs To Gather

• Resource/reserve statement — NI 43-101 or JORC-compliant technical report with measured, indicated, and inferred tonnages and grades
• Mine plan — annual production schedule (tonnes mined, strip ratio or development metres, processing throughput), mine life, and phasing
• Metallurgical recovery — process flow, expected recoveries by ore type, and concentrate specifications
• Capital cost estimates — initial capex (direct and indirect), sustaining capex schedule, closure/reclamation costs, and contingency percentages
• Operating cost breakdown — mining cost per tonne moved, processing cost per tonne milled, G&A, transport, and refining/treatment charges (TC/RC)
• Commodity price assumptions — spot, forward curve, broker consensus, and long-term real price deck; specify currency and inflation basis
• Fiscal regime — royalty structure (NSR, ad valorem, profit-based), corporate tax rate, depreciation/amortization rules, withholding taxes, and any stability agreements [VERIFY jurisdiction-specific rates and royalty formulas]
• Financing terms — debt quantum, interest rate, tenor, repayment profile, hedging commitments, stream/royalty obligations if applicable
• Discount rate inputs — risk-free rate, equity risk premium, country risk premium, beta, and any project-specific risk adjustments

Workflow

1. Structure the production model

   • Map annual mine plan into the model: ore tonnes, waste tonnes, strip ratio, mill feed, head grade, and recovery
   • Separate open-pit and underground if both methods apply
   • Apply grade-tonnage curves to test sensitivity around cut-off grade assumptions

2. Build the revenue module

   • Calculate payable metal production (recovered metal × payable percentage)
   • Deduct treatment charges, refining charges, and transport costs to arrive at net smelter return (NSR)
   • Link revenue to the commodity price deck; allow toggling between spot, consensus, and user-defined scenarios

3. Model operating costs

   • Structure costs as mining, processing, G&A, and selling/transport on a per-unit basis (cost per tonne mined, cost per tonne milled)
   • Escalate costs annually using relevant inflation indices (CPI, diesel, labour, power)
   • Calculate all-in sustaining cost (AISC) and all-in cost (AIC) per payable ounce/pound/tonne for benchmarking

4. Populate the capital schedule

   • Phase initial capex across the construction timeline; apply drawdown curves
   • Schedule sustaining capex, deferred stripping or development, and expansion capex
   • Include closure and rehabilitation provisions with timing assumptions

5. Apply the fiscal regime

   • Model royalty calculations specific to jurisdiction (NSR-based, profit-based, sliding scale) [VERIFY]
   • Build tax depreciation schedules (straight-line, declining balance, or units-of-production as applicable) [VERIFY]
   • Calculate taxable income, tax losses carried forward, and cash tax payable
   • Include any tax holidays, investment incentives, or stability agreement terms [VERIFY]

6. Construct the cash flow waterfall

   • Build pre-tax and after-tax free cash flow (FCF) from revenue through capex and taxes
   • Layer in debt service (drawdowns, interest, principal repayment) to derive levered FCF and equity cash flows
   • If streaming or royalty financing exists, model as a separate cash flow deduction

7. Calculate valuation metrics

   • NPV at multiple discount rates (typically 5%, 8%, 10% real)
   • IRR (project-level and equity-level)
   • Payback period (simple and discounted)
   • NPV/capex ratio as a capital efficiency indicator

8. Run sensitivity and scenario analysis

   • One-variable sensitivity: commodity price, grade, recovery, capex, opex, discount rate, FX rate
   • Two-variable tornado chart: price vs. grade, price vs. capex
   • Scenario analysis: base case, upside (higher price / higher grade), downside (lower price / cost overrun / delayed ramp-up)
   • Monte Carlo simulation inputs if probabilistic analysis is required (define distributions for key variables)

Output

• Executive summary — project NPV, IRR, payback, and AISC at base case with 2–3 key sensitivities highlighted
• Annual cash flow schedule — production, revenue, opex, capex, taxes, and FCF by year over the mine life
• Sensitivity tables — NPV and IRR across a matrix of commodity prices and discount rates
• Tornado chart — ranking of variables by impact on NPV
• Unit cost analysis — cash cost, AISC, and AIC benchmarked against industry peers
• Financing summary — debt coverage ratios (DSCR, LLCR) if project finance is modeled
• Assumption register — every input with source, date, and [VERIFY] flags for jurisdiction-dependent items

Quality Checks

• Confirm resource classification (measured/indicated vs. inferred) matches the study stage — do not include inferred resources in feasibility-level economics without flagging
• Reconcile total mine production in the model against the mine plan in the technical report (within ±2%)
• Verify that AISC calculation follows World Gold Council or equivalent industry standard methodology
• Cross-check tax and royalty calculations against published fiscal terms for the jurisdiction [VERIFY]
• Ensure discount rate assumptions are consistent with the project's risk profile and peer comparables
• Validate that the model balances: opening cash + sources = uses + closing cash in every period
• Test boundary conditions — zero price, zero grade, and maximum capex overrun should produce logical (negative) results, not errors
• Flag any circular references (e.g., tax ↔ interest ↔ debt sizing) and document the resolution method (iteration or hard-code break)