Measuring The Economic Viability Of Resource Projects (A Western Surface Coal Project)

Measuring The Economic Viability Of Resource Projects (A Western Surface Coal Project) The bankers approach to the analysis of a new "green fields" mining project is similar but different from the approach that the pining company might take. The purpose of this paper shall be to discuss the techniques that are used by mining companies and bankers as they try to measure the economic viability of mining projects. The analysis of these new projects (by both the mining companies and the banker) is based on a projected revenue stream and not on historical earnings or past perfomance because these projects are start up situations with no history to look to. The starting point in the analysis of these projections is the choice of the assumptions to be used in preparing these projections. After the assumptions have been determined and the projections are prepared then the projections are submitted to various tests in order to determine whether the project measures up to previously agreed upon minimum standards. In order to illustrate the analytical procedures used in evaluating a mineral project the writer has constructed a hypothetical case involving the development of a western surface coal mine (Property). The basic data in connection with this hypothetical new project is described in the next section of this paper. After the Description of the Project is a section which shows the type of analysis that a mining company might prepare in order to approach a bank for a loan and the final section illustrates the type of analysis that a bank might prepare in evaluating this loan request. Description Of The Project or Basic Data In Connection With Undeveloped Western Surface Coal Property An independent mining/geological Consultant's report has been completed on the Property which confirms that the Property contains 175 million tons of economically recoverable coal subdivided into the following reserve categories in accordance with U.S. Bureau of Mines and U.S. Geological Survey definitions: Measured or Proven 90,000,000 Indicated or Probable 50,000,000 Inferred or Possible 35,000,000 The owners of the reserves have chosen to drill up those reserves that are nearest to the subcrop and have not spent as much time on those portions of the Property which are on the fringes of the deposit where the overburden is thicker because the stripping ratio and hence the operating costs and capital requirements are higher down dip. The proven reserves are based on an average thickness of 80 feet, of which a mining recovery of 90% is projected. The overburden thickness varies from 0' to 280' with an average thickness of 127'. The overburden consists mainly of scoria, sandstone, gravel, shale and silty clay. 134 holes were cored (and analysis done on five foot increments) in the measured reserve on the following spacing: 100 foot centers to define the burn line; 1,320 foot centers to define the early mining areas; 2,640 foot centers to identify the later mining areas.