18 Autumn in Colorado. Economic Evaluation and Sensitivity-Risk Analysis of Zarshuran Gold Mine...

18

Autumn in Colorado

Economic Evaluation and Sensitivity-Risk Analysis of Zarshuran Gold Mine ProjectEconomic Evaluation and Sensitivity-Risk Analysis of Zarshuran Gold Mine Project

Authors:Authors:

Kazem Oraee; University of Stirling, UK

Ahmad Sayadi; Tarbiat Modares University, Iran

Mahdi Tavassoli; Tarbiat Modares University, Iran

2011 SME Annual MeetingFeb. 27-Mar. 2, 2011, Denver, Colorado, US

Outline

2011 SME Annual Meeting, Feb. 27-Mar. 2, 2011, Denver, Colorado, US 3

Introduction Methodology Case Study Cost and Income Estimation Discounted Cash Flow (DCF) Analysis Sensitivity Analysis Risk Analysis Conclusions

Economic Evaluation of Mining Projects

Case StudyIntroduction Conclusion

Discounted Cash Flow- the most suitable method

Constraints

Uncertainty of internal data

Uncertainty of external data

Methodology Cost & Income Estimation DCF Sensitivity Analysis Risk Analysis


Risk Analysis of Mining Projects

Case StudyIntroduction ConclusionMethodology Cost & Income Estimation DCF Sensitivity Analysis Risk Analysis


Sensitivity Analysis

Scenario Analysis

Decision Tree

Root Sum of Squares (RSS)

Mont Carlo Method

Methodology



Develop an economic model by COMFAR software- DCF table construction. NPV, IRR and Payback are calculated


Finding the most effective parameters on variations of NPV

To determine the probability distribution of the most effective parameters

To perform the probability analysis of NPV with the help of Mont Carlo simulation by @Risk software

Zarshuran Gold Mine Project



The most important gold deposit in Iran

Discovered by: Anglo American Company in 1995

Owned by: IMIDRO, a state-owned company




Tonnage of inferred ore: 55 tons of Gold




The mine is in construction phase/ planning stage

Planned ore production:

750,000 tons/year

Ultimate stripping ratio: 13.6




Planned mill plant production:

3,060 kg of gold

1,270 kg of silver

Project’s lifetime: 18 years including 3 years as construction phase

Initial investment for the mine



Cost items $ Million Share (%)

Buildings 0.46 1.92

Infrastructure 0.55 2.25

Trucks 6.89 28.42

Loaders 4.13 17.04

Auxiliary machinery 3.14 12.96

Administration costs 0.50 2.07

Development costs 5.5 22.68

Other costs 1.06 4.37

Working capital 2.01 8.29

Total 24.25 100

Initial investment for the mill plant




Land 0.42 0.63

Infrastructure 4.16 6.21

Civil works 17.28 25.78

Equipment and machinery 33.51 51.00

Erection costs 3.67 5.48

Reclamation costs 0.21 0.32



Working capital 4.48 6.68

Total 67.04 100

Operating annual costs for the mine



Cost items $ Thousand Share (%)Drilling 50 0.58Blasting 330 4.13

Spare parts 540 6.65Maintenance 910 11.27Wear parts 300 3.76

Engineering and consultancy 50 0.59

Tires 1,300 16.12Ramp maintenance 10 0.17

Fuel 940 11.64Lubricants 770 9.61

Communication 4 0.05Labor 2,310 28.77

Royalties 100 1.23

Administration costs 50 0.66

Other costs 380 4.76Total 8,050 100

Operating annual costs for the mill plant




Consumable materials 10.6 59.19

Energy 3.5 19.55

Spare parts 0.97 5.4

Maintenance 0.72 4


Labor 1.22 6.81


Total 17.91 100

Annual income



Average gold price (2003-2009): 621.17 $/oz

0

200

400

600

800

1000

1200

200720052004 2006 200920082003

$/oz

2010

Annual income



Average silver price (2003-2009): 10.34 $/oz

0

4

8

12

16

20

200720052004 2006 200920082003

$/oz

2010

Annual income



Total Annual Income

=3,060 (kg/year) × 621.17 ($/oz) × 32.15 (oz/kg)

+1,270 (kg/year) × 10.34 ($/oz) × 32.15 (oz/kg)

=

$ 61.5 Million

Net Present Value of the Project



NPV = + $ 36.6 Million

Discount rate = % 15.4 (The average inflation rate for the last 7 years)

Net Present Value and Internal Rate of Return



IRR = 22.5%

($ Million)

Cumulative Value of the Project(Payback Period)



Year $ Million

1 - 45.45

2 - 79.69

3 - 109.64

4 - 74.06

5 - 38.48

6 - 2.90

7 32.67

8 52.53

9 88.11

Year $ Million

10 123.69

11 159.27

12 194.85

13 214.71

14 243.14

15 271.57

16 300.00

17 328.43

18 348.98

Cumulative Net Present Value of the Project (Discounted Payback Period)



Year $ Million

1 - 39.38

2 - 65.10

3 - 84.59

4 - 64.52

5 -47.14

6 - 32.07

7 - 19.02

8 - 12.71

9 - 2.90

Year $ Million

10 5.59

11 12.95

12 19.33

13 22.42

14 26.24

15 29.56

16 32.43

17 34.92

18 36.60



($ Million)

Cumulative Net Present Value of the Project (Discounted Payback Period)




DescriptionMinus

($ Million)Base Case($ Million)

Plus($ Million)

Gold and Silver Price ±10% 14.58 36.60 58.62

Operating Costs ± 10% 47.23 36.60 25.97

Purchase Price ± 10% 44.45 36.60 28.75

Discount Rate ± 10% 48.81 36.60 26.23




Therefore, instead of absolute numbers for most

effective parameters:

Gold Price, Silver Price and Discount Rate

probability distributions are used

Probability distribution of gold price($/oz Thousand)



Probability distribution of silver price($/oz)



Probability distribution of inflation rate



Results of Mont Carlo simulation



DescriptionNPV

($ Million)

Minimum -67.35

Maximum 16,253.96

Mean 49.65

Standard Deviation

122.40

Variance 141,259,016

Skewness 0.003

Mode -65.88

NPV = $ 49.65 Million

This is the most probable NPV and

not $ 36.6 Million

Sensitivity ranking by Mont Carlo Method



Description Correlation

Gold Price 0.91

Discount Rate - 0.37

Silver Price 0.01



NPV is most sensitive to Gold Price

Future price estimation:

Average price taken here to be 621.17 $/oz

World Bank forecasts that gold price will be 1,000 $/oz in

2020. This corresponds to growth in gold price of 5.4 % per year

Risk Analysis Based on Forecast Data



If total costs increase by less than 5.4 % per year,

NPV will increase

Therefore:

Risk Analysis Based on Forecast Data

Conclusion



Sensitivity Analysis showed that the selling price of

gold and silver; and discount rate are the most

important parameters. This is often the case in

mining projects.

Conclusion



The NPV and IRR of the project are calculated to be

+ $ 36.6 Million and %22.5 respectively. This is an

attractive project for most investors. Based on the

results of risk analysis, the average value for NPV is

+ $ 49.65 Million. We call this expected NPV.

Conclusion



Mont Carlo simulation also ranks the importance of

important parameters to be:

Gold Price

Discount Rate

Silver Price

Thank youfor your attention

18 Autumn in Colorado. Economic Evaluation and Sensitivity-Risk Analysis of Zarshuran Gold Mine...

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