Outline

Mining used to be a business primarily focused on the technical aspects of getting valuable ore out of the ground and extracting the minerals in a metallurgically efficient way.  Without denying the importance of these skills, a narrow focus on technical issues is no longer sufficient to guarantee success, even in the richest orebodies.

Skill in economics is an essential partner to technical skill in every step of the mining process.  The economic way of thinking starts from before the first drill-hole is put in the ground.  It includes not just the most economic way of mining, but also the most economic way of going about assessing mining projects.  It directs mining strategy, and takes notice of the forces of world progress equally with the forces governing individual human action.

The scope of this book includes what is meant by a cost-effective mining scheme.  It includes the economics of information, and the procedures for rational evaluation of mining projects under uncertainty.  It re-examines the definition of “ore” from an economic perspective.  In particular, it specifically considers the economic influence of scheduling on ore reserves.

Discounted cash flow techniques—the most widely used evaluation technique for investment decision-making—are addressed in detail.  Although this technique has been known and used in the mineral industry for decades, the widespread use of spreadsheets has been a feature of DCF evaluations only since the mid-1980s.  The assumption of the use of spreadsheets is a significant point of differentiation in this text from previous mining-focused economic texts.  It means that more meaningful examples can be included.  Formulae developed to overcome previous computational difficulties have been omitted.  Further, examples in the text are available in spreadsheet format.  The application of DCF techniques in an operating mine environment is given expanded coverage and examples are drawn from real-life studies. 

The differences between economic decision-making—a forward-looking task—and the reporting of results via accounting methods—an historical or backward-looking activity—are reviewed.  Nevertheless, it is not the intent in this book to provide a comprehensive coverage of general economics or corporate finance principles.  (The book is intended as a stand-alone text in mining economics and strategy; however, for corporate finance issues of a generalised nature, a text such as Brealey and Myers [2003] is highly recommended).  This book gives extensive coverage to capital and to decision-making procedures associated with capital investments in a risk environment.  Comprehensive case studies for capital investment in an operating mine are included.

Many traditional approaches to mine valuation overlook important strategic elements, leading to results that frequently fall short of expectations.  If, for instance, one mine plan can accommodate change more easily than another plan, but at some cost, how can the value be understood?  Many of these elements are definable in advance; the difficulty is in finding the mechanism to incorporate them into decisions.  The theory of decision-making under uncertainty is briefly examined, and the applicability of this theory to understanding the risk/return trade-off is highlighted.

Comprehensive examples investigate “value” from a risk reduction perspective and from an “expected return on investment” perspective.  A case study using probabilistic analysis derives analytically tractable results for valuing equity participation in a major mining project under conditions of uncertain offtake.

A theme in the book is that many mining projects that fail to achieve expectations do so because of their inability to adapt to change.  This problem can be partially addressed through greater predictability in future conditions.  It can also be addressed through mining schemes that can sustain returns over a greater range of foreseeable future conditions.

In the context of making investments, assets can be differentiated into components reflecting their contribution to profitability, adaptability, and risk reduction.  This book sets out a new technique allowing calculation of capital that is at risk from capital that is not at risk.  The use of this technique is a precursor to mine design aimed at less sensitivity to the changes that are outside mine operators’ control.  The technique promises significant advance in the way that investments are made and capital is valued in the industry.

Whilst the book starts from and largely maintains a technical perspective, it also recognizes that the institutional environment within which the industry operates has a significant influence on the success or otherwise of mining ventures.  The book finishes with an overview of mining strategy, with a strong emphasis on knowledge effects.  It suggests that, in mining at least, imperfections on knowledge play a significant role in determining mining strategy and are also a significant contributor to less-than-perfect decision-making evidenced throughout the mining world.  It draws upon current trends in strategy in the wider business environment, applying them to the mining industry.  It sets out some promising future directions for mining strategy and potential for added value through enhanced decision-making in the industry.