Anderson 2018 MPCourse Cost Analysis

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Mineral Processing Short Course Cost Analysis
Presentation · July 2018

DOI: 10.13140/RG.2.2.18339.35365
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Corby Anderson
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Mineral Processing Short Course
Dr. Corby G. Anderson

Harrison Western Professor
cganders@mines.edu
Hill Hall Room 270
T 303 273 3580
Cost Analysis
Financial Perception of Metallurgy
Capital Cost Estimate Learning Outcomes
1. Engineering Studies
2. Start Up Times Considerations
3. Major Equipment Cost Estimation
4. Cost Indices
5. Six Tenths Rule
6. O’Hara’s Estimations
7. Lang Factors
8. Factored Capital Cost Estimates
9. Cost Estimate Error Bars
Engineering Studies
Engineering Design Criteria

Flow Sheet for Engineering Design

Engineering Estimates
Operating Cost Estimates
Capital Cost Estimates
Economy of Scale Concept

Economic Sensitivity
$600
$500
$400
NPV (MILLIONS) ‐ CND$
$300
$200
$100
$‐
$(100)
$(200)
$(300)
‐30% ‐20% ‐10% 0% 10% 20% 30%
Copper Price $(257,560,371) $(114,602,746) $16,957,524 $144,997,907 $272,070,211 $390,266,658 $520,903,086
Capital $244,808,840 $208,118,673 $178,493,556 $144,997,907 $112,257,473 $75,567,306 $42,396,640
Operating Cost $412,912,444 $320,240,945 $232,484,203 $144,997,907 $55,573,657 $(35,799,706) $(131,425,783)
Molybdenum Price $123,869,133 $130,912,058 $137,954,982 $144,997,907 $152,040,832 $159,083,757 $162,697,713
Copper Grade $(257,246,730) $(114,394,602) $17,057,621 $144,997,907 $271,973,802 $390,076,818 $520,618,326
Ramp Up Times
Monte Carlo Sensitivity Analysis
Monte Carlo Sensitivity Analysis
Capital Cost Estimation

Capital Cost Estimation
Just remember – it’s the numbers that count. And I’ll tell you the
best kind: Fresh numbers given to you over the phone
from far away, those are the best.
Cost Indexes
Cost Indexes
Cost Indexes
Cost Using Exponential Parameters
Capital Cost Estimates
Ramp Up Times
O’Hara Quick Capital Cost Estimates
Equipment Cost Estimates
Equipment Cost Estimates
Updating Capital Cost Estimates
The Six Tenths Rule and Cost Indices
Capital Cost Estimates - Lang Factors
Capital Cost Estimates - Lang Factors
Factored Capital Cost Estimates
Factored Capital Cost Estimates
Operating Cost Estimation

Operating Costs
Operating Cost Estimate Learning Outcomes
1. Concept of Economy of Scale In Operating Cost

2. Fixed Operating Costs
3. Variable Operating Costs
4. Direct (Cash) Operating Costs
5. Indirect (Overhead) Operating Costs
6. Divisor Utilized In Operating Costs
7. C1, C2, C3 & AISC Operating Costs
8. Typical Operating Cost Items
9. Operating Cost Estimate
Operating Costs – What Are These ?
Operating Costs
Operating Costs
Be Careful !
A). Must define the operating cost divisor!
B). Must define what level of costs are
included; C1, C2, C3 or AISC.
C). Must define fixed versus variable
costs.
D. Must define direct versus indirect
costs.
Operating Costs
Always be careful of the

divisor you use in
Operating Cost Estimates.
Cost based upon per unit of what ?

Per unit treated ? Or …..
Per unit recovered ?
Operating Costs
Operating Costs
Always be careful of the

costs you choose to include in
Operating Cost Estimates.
C1 Costs - Net Direct Cash Costs

C2 Costs – Production Costs
C3 Costs – Full Allocated Costs
AISC – All In Sustaining Costs
Operating Costs
Operating Costs
Be careful to define if
you are using Cash Costs such as C1,
C2, C3 or AISC (All In Sustaining
Cost) Operating Costs.
The problem with C1, C2 and C3 cash costs is that they are
open to interpretation and many companies adjust the
definitions to show themselves in a more favorable "light",
if it results in them attracting investment relative to a
competitor or producing rival.
C1 Operating Cost Estimation
Net Direct Cash Cost (C1) represents the cash cost incurred at
each processing stage, from mining through to recoverable
metal delivered to market, less net by-product credits (if any).
The M1 Margin is defined as metal price received minus C1.
Direct Cash Costs cover:

- Mining, ore freight and milling costs.
- Ore purchase and freight costs from third parties in the case of custom
smelters or mills.
- Mine-site administration and general expenses.
- Concentrate freight, smelting and smelter general and administrative costs.
- Matte freight, refining and refinery general
and administrative costs.
- Marketing costs (freight and selling).
Production Cost (C2) is the sum
of net direct cash costs (C1) and
depreciation, depletion and
amortization.
The M2 margin is defined as

metal price received minus C2.
Fully Allocated Cost (C3) is the sum of the production cost (C2) plus
indirect costs and net interest charges. The M3 margin is defined as
metal price received minus C3.
Indirect Costs are the cash costs for:
-The portion of corporate and divisional overhead costs attributable

to the operation.
- Research and exploration attributable to the operation.
-Royalties and "front-end" taxes (excluding income and profit-related
taxes).
-Extraordinary costs i.e. those incurred as a result of strikes,
unexpected shutdowns etc.
-Interest charges include all interest paid, both directly attributable
to the operation and any corporate allocation (net of any interest
received) on short-term loans, long-term loans,
corporate bonds, bank overdrafts etc.
Nickel C1, C2 and C3 Cost
All In Sustaining Operating Costs
Overheads, non-site costs etc. – they should be in as they are par
of running the business.
Do not include royalties, native title payments, marketing
costs, exploration and development
Do not include off-site costs such as freight, TCRCs and
penalties for impurities or grade
Sustaining Capital – they should be in, sustaining capital is

not like initial Capex. It is either a variable cost i.e. depends
on production, that arises in occasional chunks instead of
regularly, or period/fixed cost that turn up every several
years rather than regularly. The facts that accountants call it
‘capital’ is distracting
All In Sustaining Operating Costs
Cost of capital – that is debatable.
There is general issue that spending CAPEX to reduce
OPEX decisions are being sawed towards too
much CAPEX if we only report or measure
REVENUE – OPEX.
Cost of Exploration – that is debatable

it is to do with a desire to be in business in the future, not
todays operation.– it is Opex in large chunks.
Gold C1 And Total Operating Cost
Typical Operating Cost Estimation

Wages And Salaries
Power Costs
Reagent and Consumable Costs
Direct Operating Cost Estimate
Quick Cost Estimation

Rules Of Thumb
Quick Cost Estimation

Cost = Ktx
Operating Costs
Economy of Scale in Metallurgy
More Throughput Has A Low Unit Cost
Economic Analysis Learning Outcomes
- Money Has Value Over Time !

- Future Money Has Less Value Than Present
Money.
- Net Present Value
- Future Value
- Discount Factor
- Profitability Index
- Payback Period
- Break Even
- Internal Rate of Return
Introduction
As we have addressed the fundamental concepts associated

with engineering economics and cash flows, is now time to
convert these estimates into measures of desirability as a tool
for investment decisions.
Remember : Money has value over time !!
We will study and use the following criteria:

– Present & Future Value
– Annual Value
– Benefit / Cost Ratio
– Payback period
– Internal Rate of Return
– Variations of IRR
Present Value
The Present value or present worth method of
evaluating projects is a widely used technique.
The Present Value represents an amount of money
at time zero representing the discounted cash
flows for the project.
PV
T=0 +/- Cash Flows

Net Present Value (NPV)
The Net Present Value of an investment it is simply
the difference between cash outflows and cash
inflows on a present value basis.
In this context, the discount rate equals the
minimum rate of return for the investment
Where:
NPV = ∑ Present Value (Cash Benefits) - ∑ Present Value (Cash
Costs)
Future Value
The future value method evaluates a
project based upon the basis of how much
money will be accumulated at some future
point in time. This is just the reverse of the
present value concept.
FV
T=0 +/- Cash Flows
Excel Discount Factor Tables

http://www.vertex42.com/ExcelArticle
s/discount-factors.html
Engineering Design
Financial On Line Calculator
http://www.money-zine.com/calculators/investment-
calculators/net-present-value-calculator/
Annual Value
Sometimes it is more convenient to
evaluate a project in terms of its annual
value or cost. For example, it may be
easier to evaluate specific components of
an investment or individual pieces of
equipment based upon their annual costs
as the data may be more readily available
for analysis.
Benefit/Cost Ratio – Profitability Index
The benefit/cost ratio is also called the
Profitability Index and is defined as the
ratio of the sum of the present value of
future benefits to the sum of the present
value of the future capital expenditures
and costs. This can be the NPV divided by
the Initial Investment Cost, typicall the
Capital Investment.
Payback Period
This is one of the most common evaluation criteria used by

engineering and resource companies.
The Payback Period is simply the number of years required for

the cash income from a project to return the initial cash
investment in the project.
The investment decision criteria for this technique suggests

that if the calculated payback is less than some maximum
value acceptable to the company, the proposal is accepted.
The following example illustrates five investment proposals

having identical capital investment requirements but differing
expected annual cash flows and lives.
Payback Period
Break Even
The break-even point (BEP) or break-
even level represents the sales amount—in
either unit (quantity) or revenue (sales)
terms—that is required to cover total costs,
consisting of both fixed and variable costs to
the company. Total profit at the break-
even point is zero. This is another of the
most common evaluation criteria used by
engineering and resource companies.
Break Even
Investment Rate of Return
In mineral evaluation, any reference to rate of return
normally refers to the discounted cash flow return on
investment (DCF-ROI) or the discounted cash flow rate of
return (DCF-ROR)
These terms are special versions of the more generic term,

Internal Rate of Return (IRR) or sometimes called marginal
efficiency of capital
Besides NPV, is probably the most common evaluation

technique used in the minerals industry
Internal Rate of Return
 Internal Rate of Return refers to the interest rate that
the investor will receive on the investment principal
 IRR is defined as that interest rate (r) which equates

the sum of the present value of cash inflows with the sum
of the present value of cash outflows for a project. This is
the same as defining the IRR as that rate which satisfies
each of the following expressions:
NPV = 0 for r
∑ PV cash inflows - ∑ PV cash outflows = 0
∑ PV cash inflows = ∑ PV cash outflows
In general, the calculation procedure involves a trial-and-error solution

unless the annual cash flows subsequent to the investment take the form
of an annuity. The following examples illustrate the calculation procedures
for determining the internal rate of return.
Analysis
The acceptance or rejection of a project based on the

IRR criterion is made by comparing the calculated rate with
the required rate of return, or cutoff rate established by the
firm. If the IRR exceeds the required rate the project should
be accepted; if not, it should be rejected.
If the required rate of return is the return investors

expect the organization to earn on new projects, then
accepting a project with an IRR greater than the required
rate should result in an increase of the firms value.
Analysis
There are several reasons for the widespread popularity of

the IRR as an evaluation criterion:
– Perhaps the primary advantage offered by the

technique is that it provides a single figure which
can be used as a measure of project value.
– Furthermore, IRR is expressed as a percentage

value. Most managers and engineers prefer to
think of economic decisions in terms of
percentages as compared with absolute values
provided by present, future, and annual value
calculations.
Analysis
Another advantage offered by the IRR method is related
to the calculation procedure itself:
As its name suggests, the IRR is determined
internally for each project and is a function of the
magnitude and timing of the cash flows.
Some evaluators find this superior to selecting a
rate prior to calculation of the criterion, such as in
the profitability index and the present, future, and
annual value determinations. In other words, the
IRR eliminates the need to have an external
interest rate supplied for calculation purposes.
Selecting a Discount Rate
“There is nothing so disastrous as a rational investment
policy in an irrational world” John Maynard Keynes
We have discussed the time value of money and illustrated several

examples of its use. In all cases an interest rate or “discount rate”
is used to bring the future cash flows to the present (NPV - Net
Present Value)
The selection of the appropriate discount rate has been the source
of considerable debate and much disagreement.
In most companies, the selection of the discount rate is

determined by the accounting department or the board of directors
and the engineer just uses the number provided to him, but short
of just being provided with a rate, what is the correct or
appropriate rate to use?
What is the impact of the discount rate used on
the NPV of the investment?
Cash Cash Cash Cash Cash Cash
Flow Yr 0 Flow Yr 1 Flow Yr 2 Flow Yr 3 Flow Yr 4 Flow Yr 5
-500 -500 +750 +600 +800 +1000
Discount Rate NPV
2% 1,941
6% 1,581
10% 1,283
15% 981
20% 739
IRR 47.82% 0
What is in the Discount Rate?
According to practice, the discount rate has to
cover the following items:
– Opportunity Costs
– Transaction Costs
– Compensate for Risk
– Cover anticipated Inflation
Some of these items can be accounted for in

other financial analysis methods and do not
have to be address in the discount rate itself.
Financial Cost of Capital
The financial cost of capital is based on the
assumption that financing is unlimited and the
company can always pay off loans or buy stock
back.
So the financial cost of capital rate of return is

the average cost of debt after tax (remember
interest is tax deductible) and the cost of equity
(what the share holders desired return is using
the capital asset pricing model CAPM)
Marginal Weighted Average Cost of Capital
The cost of capital is the minimum rate of return

that a firm needs to earn on new investments to
maintain the existing value of it’s shares of
common stock.
To determine the cost of capital a weighted

average of all sources of capital must be
evaluated. The weighted average should include
a mix of debt and equity on an after tax basis.
Hurdle Rate
The hurdle rate is a common term used by
companies as an expression of their rate of
return used for financial analysis.
This is generally a higher number than the FCC

rate as they add an imposed “economic hurdle”
for the project to overcome.
This helps companies express that a project that

just achieves a FCC rate of return does not add
real value to the company.
Opportunity Cost of Capital
The opportunity cost of capital is the most

common method of establishing the investor’s
minimum rate of return.
This is based upon the expected returns that the

company will generate in the next 1 to 15 years.
It is the average return that investors expect to

make over the next few years expressed as a
compound interest.
Summary
Cost Estimate Learning Outcomes
1. Engineering Studies
2. Start Up Times Considerations
3. Major Equipment Cost Estimation
4. Cost Indices
5. Six Tenths Rule
6. O’Hara’s Estimations
7. Lang Factors
8. Factored Capital Cost Estimates
9. Cost Estimate Error Bars
Operating Cost Estimate Learning Outcomes
1. Concept of Economy of Scale In Operating Cost

2. Fixed Operating Costs
3. Variable Operating Costs
4. Direct (Cash) Operating Costs
5. Indirect (Overhead) Operating Costs
6. Divisor Utilized In Operating Costs
7. C1, C2, C3 & AISC Operating Costs
8. Typical Operating Cost Items
9. Operating Cost Estimate
Economic Analysis Learning Outcomes
- Money Has Value Over Time !

- Future Money Has Less Value Than Present
Money.
- Net Present Value
- Future Value
- Discount Factor
- Profitability Index
- Payback Period
- Break Even
- Internal Rate of Return
Questions ?
Thank you
for your attendance, participation and
attention !
Enjoy this short course and make it profitable !.

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Dr. Corby G. Anderson

Harrison Western Professor
cganders@mines.edu
Hill Hall Room 270
T 303 273 3580

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See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Mineral Processing Short Course Cost Analysis

Presentation · July 2018

Beneficiation of Critical Materials View project

Treatment of Precious Metals From Copper Bearing Tailings View project

The user has requested enhancement of the downloaded file.

Dr. Corby G. Anderson

Capital Cost Estimate Learning Outcomes

Engineering Design Criteria

Flow Sheet for Engineering Design

Economy of Scale Concept

Capital Cost Estimation

Operating Cost Estimation

Operating Cost Estimate Learning Outcomes

1. Concept of Economy of Scale In Operating Cost

Always be careful of the

Cost based upon per unit of what ?

Always be careful of the

C1 Costs - Net Direct Cash Costs

Direct Cash Costs cover:

The M2 margin is defined as

Indirect Costs are the cash costs for:

-The portion of corporate and divisional overhead costs attributable

Sustaining Capital – they should be in, sustaining capital is

Cost of Exploration – that is debatable

Typical Operating Cost Estimation

Quick Cost Estimation

Quick Cost Estimation

- Money Has Value Over Time !

As we have addressed the fundamental concepts associated

Remember : Money has value over time !!

We will study and use the following criteria:

T=0 +/- Cash Flows

Excel Discount Factor Tables

This is one of the most common evaluation criteria used by

The Payback Period is simply the number of years required for

The investment decision criteria for this technique suggests

The following example illustrates five investment proposals

These terms are special versions of the more generic term,

Besides NPV, is probably the most common evaluation

 IRR is defined as that interest rate (r) which equates

∑ PV cash inflows - ∑ PV cash outflows = 0

∑ PV cash inflows = ∑ PV cash outflows

In general, the calculation procedure involves a trial-and-error solution

The acceptance or rejection of a project based on the

If the required rate of return is the return investors

There are several reasons for the widespread popularity of

– Perhaps the primary advantage offered by the

– Furthermore, IRR is expressed as a percentage

We have discussed the time value of money and illustrated several

In most companies, the selection of the discount rate is

Discount Rate NPV

Some of these items can be accounted for in

So the financial cost of capital rate of return is

The cost of capital is the minimum rate of return

To determine the cost of capital a weighted

This is generally a higher number than the FCC

This helps companies express that a project that

The opportunity cost of capital is the most

This is based upon the expected returns that the

It is the average return that investors expect to

Cost Estimate Learning Outcomes