Economic Valuation of Mineral Resources: An In-Depth Approach to Estimating Economic Potential

Introduction

Valuing mineral resources is a critical step for investors, mining companies, and other stakeholders to understand the economic potential of a deposit. Mineral resources valuation goes beyond just estimating the quantity of minerals in the ground; it considers economic, market, technical, and environmental factors to determine whether a mining project is financially viable. In this blog, we’ll explore the various steps and methods used in mineral resources valuation, highlighting what makes this process both complex and rewarding.

Why Mineral Resources Valuation Matters

The value of a mineral resource helps to determine if a project is worth investing in, planning, and developing. A thorough valuation helps in:

• Securing funding from investors or financial institutions.
• Assessing the feasibility of mining operations.
• Making informed decisions about project timing and scalability.
• Identifying risks and potential return on investment.

Given that mining projects are capital-intensive and involve high risks, a comprehensive valuation is essential for success.

Key Steps in Mineral Resource Valuation

1. Discovery and Exploration

The valuation process begins with geological surveys, sampling, and drilling. This initial exploration provides estimates of the deposit’s tonnage, grade, and mineral distribution, forming the basis for the resource model.

2. 3D Block Model Construction

A 3D block model divides the deposit into smaller blocks, each containing specific data about tonnage, grade, and location. This model enables precise planning of extraction sequences and allows for economic evaluation on a block-by-block basis.

3. Commodity Market Research and Price Prediction

To value the resource effectively, an analysis of the commodity market is necessary. This involves:

• Examining supply and demand trends for the mineral.
• Forecasting price movements based on global economic conditions and trends.
• Accounting for input costs like labor and energy, which affect the profitability of the resource.

4. Estimating CAPEX and OPEX

Accurate estimates of Capital Expenditure (CAPEX) and Operating Expenditure (OPEX) are fundamental to evaluating project viability. CAPEX includes infrastructure, equipment, and setup costs, while OPEX covers ongoing operational expenses. Together, they influence the overall cost structure and financial feasibility of the project.

5. Determining Economic Block Value and Cutoff Grade

The economic block value represents the net revenue expected from each block after extraction costs, processing costs, and commodity prices are considered. The cutoff grade — the minimum grade at which mining a block is economically viable — is calculated at this stage. Blocks below this cutoff are typically excluded from mine plans to optimize profitability.

6. Setting Mine Life and Production Rates

The project’s mine life and production rates must be determined. These factors affect cash flow and long-term project sustainability:

• Mine life is set based on optimal extraction duration.
• Production rates are established to balance output with operational costs.

7. Mine Scheduling Using the MIP Model

At this stage, a Mixed Integer Programming (MIP) model is used to develop an optimized mine schedule. The MIP model:

• Determines the sequence and timing of block extraction.
• Assigns each block to a destination (e.g., processing plant, stockpile).
• Ensures that production constraints are met, such as grade and capacity limits.

MIP Model for Mine Scheduling for an Open Cast Mine (Surface Mine)

8. Predicting Cash Flow

With a mine schedule in place, cash flow can be projected based on anticipated production, costs, and revenues. The cash flow forecast incorporates:

• Expected revenues from selling processed minerals.
• Projected operating and capital expenditures.

9. Calculating NPV and IRR

With the cash flows projected, financial metrics such as Net Present Value (NPV) and Internal Rate of Return (IRR) are calculated. These metrics provide insight into the project’s profitability, guiding decisions on investment and project continuation.

10. Scenario Analysis and Risk Assessment

To manage uncertainty, scenario analysis examines how different factors (like price fluctuations, cost changes, or delays) might impact the project. Value at Risk (VaR) models can quantify financial risks, helping stakeholders gauge potential losses under adverse conditions.