Lecture Objectives and Expected

Outcome
The objectives of this lecture are:
• To discuss the factors affecting and to show how to
estimate revenue.
• To discuss the factors affecting and to show how to
estimate capital costs.
• To discuss the factors affecting and to show how to
estimate operating costs.

At the end of the lecture, the student is expected to:

• Know the sources of information for estimating revenue and
cost.
• Be able to estimate revenue, capital and operating costs.
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Lecture 1: Overview of Mineral Project Evaluation Slide 1
 Estimation of Revenue
Annual mine revenue (R) may be estimated as:

 1  L T 
R  G r P 
 1  D  
where
T = Tonnage of ore produced per year (t/yr);
G = Mill head grade (g/t);
r = Mill recovery (in decimal);
P = Unit price of processed ore ($/g),
L = Ore loss (in decimal); and
D = Ore dilution (in decimal).

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Lecture 1: Overview of Mineral Project Evaluation Slide 2
 Estimation of Revenue cont’d
The tonnage of ore to be produced yearly by a new mine,
for example, is not easy to estimate. One approach is to
estimate the total mineable reserves (M million tonnes)
and to estimate the life of the mine using Taylor's
empirical rule as:
1

L  6.5(M) (1  0.2) yrs

4

The recommended annual ore production (T) can then be

estimated as:
M (t)
T
L (yr)

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Lecture 1: Overview of Mineral Project Evaluation Slide 3
 Mineral Markets
• Commodity Exchange

• Purchased Contracts

• Smelter Contracts

• Administered Prices

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Lecture 1: Overview of Mineral Project Evaluation Slide 4
 Projecting Mineral Prices

• Naive methods;

• Economic modeling;

• Rational pricing; and

• Supply and demand scheduling.

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Lecture 1: Overview of Mineral Project Evaluation Slide 5
 Capital Cost Estimates
(working and fixed capital cost)
Working capital represents the amount of money beyond fixed
capital needed to begin the operation and meet subsequent
obligations during start-up. The cost items typically associated
with working capital are:

• Inventories
(i) raw materials
(ii) spare parts
(iii) supplies
(iv) material-in-process
(v) finished products
• Account receivable
• Account payable
• Cash on hand (payroll, utilities, etc.)
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Lecture 1: Overview of Mineral Project Evaluation Slide 6
 Working Capital cont’d
Working capital may be estimated by one of several
techniques.

 10-20% of the fixed capital investment.

 1-3 month estimate of costs associated with the foregoing

cost items.

 Working capital for the mining operation itself is often

determined as a portion of the annual operating cost:

Operating Cost tonnes Y months

Working Capital   
tonne year 12 months

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Lecture 1: Overview of Mineral Project Evaluation Slide 7
 Fixed Capital Cost
Fixed costs are usually categorized into one of
the following major headings:
• Land Acquisition
• Development
• Preproduction Development (eg., overburden removal)
• Environmental Studies and Permitting
• Mining Equipment (all), Building, Facilities
• Milling Equipment (all), Buildings, Facilities
• Supporting Facilities (road, railroads, power lines, shops, etc.)
• Design and Engineering Expenses
• Contingency
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Lecture 1: Overview of Mineral Project Evaluation Slide 8
 Estimation Methods
• Conference Method
• Unit Cost Method
• Turnover Ratio Method
• Exponential Capacity-Adjustment (scaling method)
• Cost Ratio Method
• Component Cost Ratio Method
• Module Method
• Detailed Estimates
• Contingency and Engineering Fee
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Lecture 1: Overview of Mineral Project Evaluation Slide 9
 Operating Cost Estimates
Direct Operating Costs
(1) Labour:
o direct operating
o operating supervision
o direct maintenance
o maintenance supervision and
o payroll burden on foregoing labour.
(2) Materials:
o maintenance, repair materials;
o processing materials;
o raw materials;
o Consumables ( fuel, oil, water, power, etc,)
(3) Royalties
(4) Development (production area)
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Lecture 1: Overview of Mineral Project Evaluation Slide 10
 Operating Cost Estimates
Indirect Operating Costs
(1) Labour:
o administrative,
o safety,
o technical,
o service (clerical, accounting, general office),
o shop and repair facilities, and
o payroll burden on the foregoing.
(2) Insurance (property, liability).
(3) Depreciation
(4) Interest
(5) Taxes
(6) Reclamation
(7) Travels meetings and donations.
(8) Office supplies, upkeep, utilities.
(9) Public relations
(10) Development (general mine)
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Lecture 1: Overview of Mineral Project Evaluation Slide 11
 Operating Cost Estimates
General Expenses
(1) Marketing/sales:
o sales persons,
o marketing analysis team,
o supervision,
o travel/entertainment, and
o payroll burden on labour
(2) Administrative
o corporate officers and staff,
o general accounting and auditing
o central engineering /geology,
o legal staff,
o research and development,
o public relations,
o financial staff,
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Lecture 1: Overview of Mineral Project Evaluation Slide 12
 Estimation Methods
• Similar Project Method
• Cost-Capacity Relationship Method
• Component Cost Method
• Detailed Cost Breakdown Method
• Cost Indices
• Systems Approach
• MAS Approach
• O’Hara Approach

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Lecture 1: Overview of Mineral Project Evaluation Slide 13