The importance of the economic exploitation plan in the decision making process in mining

Wendel Eduardo de Almeida, Adilson Curi, Carlos Enrique Arroyo Ortiz
Programa de Pós-Graduacáo em Engenharia Mineral
Departamento de Engenharia de Minas da Universidade Federal de Ouro Preto
carrovo@ufop.edu.br

In general, investors evalúate several investment alternatives including, obviously, the possibility of money investment in the banking system. The mineral resource industry is just one of the several options of investment available in the financial market. To select this option, especially for the mining investments, investors require ever more projects with proven financial security and developed by renowned companies. The financial return or potential of the project must be significant to justify the risks inherent to the mining activities. To facilitate the financial analyses of mine projects, in this study is proposed a methodology based on an economic analysis of the Brazilian gold Berimbau mine through an Economic Exploitation Plan - EEP- where a sensitivity analysis of the project cash flow was performed and variations in the ore price, investments (CAPEX - capital expenditure) and operating costs (OPEX - operating expense) were applied. An orthodox scenario with an ore price (gold) of USD 900.00/oz was considered. The results, specific aspects and socioeconomic benefits have confirmed the project's feasibility.

Keywords: economic analysis, mining, Economic Exploitation Plan.

Resumo

Em geral, os investidores avaliam varias alternativas de investimento, incluindo, obviamente, a possibilidade de investimento de dinheiro no sistema bancário. A industria mineral é apenas urna das varias opcóes de investimento disponíveis no mercado financeiro. Para selecionar essa opcao, especialmente para os investimentos em mineracáo, os investidores exigem cada vez mais projetos com comprovada seguranca financeira e desenvolvidos por empresas de renome. O retorno financeiro ou potencial do projeto deve ser significativo para justificar os riscos inerentes as atividades de mineracao. Para facilitar as análises financeiras dos projetos de mineracao, este estudo propóe urna metodologia baseada em uma análise económica da mina brasileira de ouro, mina Berimbau, por meio de um Plano de Aproveitamento Económico - PAE, onde foi realizada uma análise de sensibilidade do fluxo de caixa do projeto aplicando variacóes no preco de venda, nos investimentos (CAPEX -capital expenditure) e nos custos operacionais (OPEX - operating expense). Para tal, foi considerado um cenário conservador com o preco de venda do produto de 900,00 USD/oz. Os resultados, aspectos específicos e beneficios socioeconómicos confirmaram a viabilidade do projeto.

Palavras-chave: análise económica, mineracao, Plano de Aproveitamento Económico.

1. Introduction

2. Methodology

When describing the proposed methodology, the first step to evalúate the mineral deposit is to prepare the Economic Exploitation Plan. To do this, the following steps must be performed:

Review the datábase, including the drill holes and topographical maps. Other parameters of the ore body were naturally considered, such as location, shape of trie mineral deposit, tridimensional dimensions (depth, length and width), spatial location, scale of production and geotechnical parameters of the rock, among others.

•     Shape a representan ve block model for the Berimbau gold deposit. The preparation of this model consists in updating and removing the blocks already mined (only if the mine has already been operated in the past). The attributes related to the type of ore and materials are incorporated into the block model, aiming to calcúlate the economic valué of each block based on economic parameters, along with mine and processing recoveries. Geotechnical parameters and property boundaries are also incorporated into the model to control the expansión of the pits. This preparation is generally performed in specific mining software. Once the block model is prepared, the mine planning is developed, which consists of reserve estimation and long term mine sequencing, targeting to define "the best final geometry" (optimization) of the pit and the life of the mine (LOM). Optimization consists of a set of techniques that introduce analytical mathematical models in mine planning activities (Carmo&Curi,2001);

•     Mine scheduling defines the timeline for mining the ore, the waste amount and the waste disposal. Implementation of an operating production plan using the mining sequence established before.

•   Taking into account the mine scheduling and the operating production plan, the average haulage distances (AHD), which is essential for selecting and sizing the required fleet and consequently the mine infrastructure, can be calculated;

•    Based on the equipment fleet selected, the manpower is calculated (mine, beneficiation and administration);

]]> •    Using the data related to equipment, personnel and infrastructures, among others, the initial investment required for the implementation of the project is calculated;

• Based on an average gold price from 2004 to 2014 (see Figure 1), the general costs, the state and federal taxes in the Berimbau mine región, and the cash flow was calculated to obtain the Net Present Valué (NPV), the Internal Return Rate (IRR) and the Time of Return on Investment (Pay Back);

• Using all the available information, the Economic Exploitation Plan is finally prepared.

The steps for preparing the Economic Exploitation Plan depend on each Economic Exploitation Plan according to the mineral substance, the type of deposit and the amount of minerals, among other factors (Goldprice, November, 2022).

3. Case Study

The studies demonstrated thatthe Berimbau mine must be exploited using the open pit method. Based on the proposed Economic Exploitation Plan, the measured mineral reserves presented in the Table 1 were estimated. The main data for the open pit are:

Figure 1 - Price of gold in the period 2013-2022

]]> • General strip ratio: 9:1;

• Measured reserves: 8.8 Mt (86% ofthe mineral resources);

• Average grade: 1.26 g Au/t;

• Scale of production (first year): 240 ktpa;

• Scale of production (years 2-12): 800 ktpa.

Table 1 - Berimbau Mineral Reserves

Source: Almeida, 2015

The selected mining equipment was front-end excavators (capacity 2.7 m³) and trucks (capacity 26 tonnes). The initial investment (CAPEX) was estimated at USD 26.9 million. According to this investment, the operating cost (OPEX) was calculated.

After conclusión of the conceptual studies, the cash flow for the proposed project considering an ore price of USD 900.00/oz was determined. Table 2 presents the main results of the cash flow for the Berimbau mine and a useful period of 12 years.

Table 2 - Cash flow results for Berimbau Mine

Source: Almeida, 2015

In this analysis, an annual rate of 12% was used. Also, in defining the definition of this annual rate, the Weighted Average Cost of Capital - WACC (Investopedia, November 2014) estimated especially for the proposed project was considered. As a result, the Berimbau project has presented a NPV of USD 14.5 million and an IRR of 23%. A sensitivity analysis of the project cash flow was performed by applying a variación of three parameters: gold price, CAPEX and OPEX. Tables 3 ,4 and 5 and Figures 2, 3 and 4 show the results for the sensitivity analysis performed for the referred case study variations of -30%, -20%, -10%, +10%, +20% and +30% were adopted, considering the original valúes on the following parameters: ore prices, CAPEX and OPEX

Table 3 - Sensitivity analysis forthe ore price

Source: Almeida, 2015

Figure 2 - Sensitivity analysis graph for ore price
Source: Almeida, 2015

Table 3 and Figure 2 represent the sensitivity analysis of the price for predetermined valué (original valué) of USD 900.00/oz. It demonstrated that the project is viable until the price of 10% below the original valué.

Table 4- Sensitivity analysis for CAPEX

Source: Almeida, 2015

Figure 3 - Sensitivity analysis graph for CAPEX
Source: Almeida, 2015

Table 5 - Sensitivity analysis for OPEX

Source: Almeida, 2015

Figure 4- Sensitivity analysis graph for OPEX
Source: Almeida. 2015

Considering variations in the OPEX and keeping the ore price of USD 900.00/oz, (Table 5 and Figure 4) the sensitivity analysis showed that the project is feasible until the limit of 20% OPEX increase.

The proposed methodology was approved and the sensitivity analysis for the Brazilian gold Berimbau mine based on its Economic Exploitation Plan was effective. This resulted in a project approval even for an orthodox scenario with a gold price of USD 900.00/oz. Gold has been remarkably valorized in the last decade (see Figure 1) reaching the máximum valué of the history in 2022 (USD 1,600.00/oz.). At present, the gold sale price is approximately USD 1,300.00/oz, somewhat below in the valué of previous years. The case study presented some positive scenarios for the project, considering the general tendency of gold prices for the near future. These specific aspects combined with socioeconomic benefits indicate the economic viability of Berimbau mine.

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