Estimating Revenues

Who steals our gold and silver, and copper, zinc and lead? Who takes the joy all out of life and strikes our high hopes dead? Who never wrote a schedule that to anyone else was clear? The sulphur-belching, miner-welching, smelter engineer. -Anonymous From "The Engineer," Engineering & Mining Journal, Apr. 13, 1918 INTRODUCTION A striking characteristic of publications devoted to the principles of engineering economy and investment analysis is that the revenue side of the equation is generally either ignored entirely or addressed only in a superficial manner. This is understandable to a degree in the general case because methods of revenue estimation are highly dependent upon the specific type of project under consideration and the nature of the market served. An important contributing factor, however, is that developing estimates of future sales prices for most products is a risky activity which is less amenable to credible quantitative modeling than other topics in investment analysis. The specific subset of capital intensive investments addressed in this book- mining projects-is particularly sensitive to projections of mineral prices, many of which are notoriously volatile. Furthermore, the unique nature of mineral markets, prices, and product specifications occupies a major role in mineral project evaluation. Even here, however, authors have tended to offer little assistance to the reader in estimating project revenues. For example, the most popular mining engineering textbook for four decades, Elements of Mining (Lewis and Clark, 1967), contains the following advice on estimating future mineral prices (pp. 359-360): "Since the life of the mine will extend over a number of years the future price of mineral products must be estimated in order to calculate the probable profit to be realized. Current prices may be used, but it is preferable to take the average price for the past 25 to 35 years as it covers definite business cycles. Some engineers believe that a mine should make a small profit if its highest-grade ore is marketed at the minimum price during the past 35 years. Business