Economic Geology and Mining Economics

Example questions

1. Distinguish microeconomics from macroeconomics.

A.: Macroeconomics is a wider term. It focuses on registering global and political-economics’

important context. It covers the global issues of supply, the world market of mining products
and the price development of international raw materials sector (on the stock market). On the
other hand, microeconomics is more focused on companies’ activities (smaller scale). Therefore,
it comprises the business and/or administration economics of a mining company including
organization and planning, cost and profitability accounting and personal and asset
management.

2. What is the difference between economic geology and mining economics?

A.: Mining economics includes all the economic activities related to the extraction sector (more
specifically mining) of mineral raw materials from mineral occurrences. While referring to
mining economics it is usual to consider the factors of production (labor, means of production
and energy), cost accounting, profitability and investment calculation, risk and sensitivity
analysis, mine management, planning and organization. Economic geology is linked to the
deposit as a factor of production. It includes the definition of mineral occurrence and deposit,
the comprehension of mineral laws, prospection and exploration (and associated costs) and the
documentation of a deposit. Typically, the economic geology’s main function is to evaluate
mineral occurrences, so methods of prospection and exploration and data analysis are related
to this term. Furthermore, economic geology has an important role in the analysis of raw
material markets.

3. When is it possible to say that a mining project is stable and responsible?

A.: A mining project is stable when there is a perfect balance between the social, environmental
and economic aspects. Therefore, the lack or instability of one of these aspects can make a
mining project less competitive or not approved by the state and the local communities.

4. Define resource efficiency and give some of its advantages when increased.

A.: Resource efficiency can be regarded as the use of earth’s limited resources in a sustainable
manner. Therefore, the sustainable use of (scarce) resources does not compromise the needs of
future generations and it appeals for a decent standard of living on today’s generation. By
increasing the resources efficiency, companies start to have more chances to grow because it
brings major economic opportunities (find new markets and new investors), improves
productivity, lowers costs (through energy saving) and waste, and boosts competitiveness (due
to the higher resource efficiency). Mining companies can also have access to some funding
programs. It is important to mention that the EU has created measures/strategies to oblige
companies to follow a sustainable way.
5. How can you increase resource efficiency?

A.: Resource efficiency can be developed by the investment and development on new products
and services that help to decrease waste and raw material needs, improve the resource
management, change the consumption pattern, improve management methods and optimize
logistics.

6. What is the difference between an occurrence and a deposit?

A.: Occurrence is a wider term than deposit. The first can be characterized as an accumulation
of mineral raw materials either in a geological body (natural) or in a waste/stock pile (artificial)
and it does not imply any measurement in terms of resources. It can vary in shape and type of
geology (lens, stockwork, vein, disseminated), grade, location, quantity, etc. Therefore, the
genesis of the occurrence defines if it has a specific limit or boundary (compact) or not (cloudy
or disseminated). So, to develop a prospection campaign and further modelling the approach to
the occurrence should be different depending on its genesis. A deposit, on the other hand, is
defined as an occurrence capable of being economically viable when exploited (in the
foreseeable future) due to its position, quantity and quality. Therefore, the probability of mining
a deposit and generate profit is high.

7. Define the four phases of prospection and exploration.

A.: Prospection and exploration can be divided into four phases. The first one is reconnaissance
and consists of finding a promising area to develop further studies. Prospection, the second
phase, results in the definition of the occurrence limits and can lead to a first estimation of
reserves. The third phase is exploration. During the exploration it is possible to define clearer
limits for the occurrence and to do a preliminary estimation of reserves and resources. Lastly,
detailed exploration intends to define the deposit’s limits and to calculate the reserves and
resources accurately. To conclude, prospection aims to find new deposits or occurrences and
exploration intends to assess the deposit’s mineability.

8. What are the aims of mineral laws?

A.: Mineral laws/mining policies cover all the legal framework for exploration and exploitation.
Usually, their content is related to ownership (they define if the deposit belongs to the state, to
the land owner or to a company), to permits for prospection, exploration and mining (including
keeping the permits), to supervision (safety or rehabilitation of the mining site) by the mining
authority, to regulations for environment protection and subsidence warranty and to taxation,
fees and royalties. It is important to refer that regarding mining laws each country has their own
and they can differ in terms of the classification of raw material groups (reserves vs. resources)
and also in terms of mining permits and land ownership.
9. Define the different methods of prospection.

A.: The prospection methods can vary significantly. These methods are photo-geological,
geological, geophysical and geochemical. Firstly, the photo-geological methods rely on aircrafts
or satellites to gather information and images from the earth’s surface. Aerial photo and remote
sensing are examples of this method. The last example can provide information about the type
of geological material on the surface (clay minerals, carbonates, sulfides, etc.) having into
account the reflection and thermal properties of the surface materials. The geophysical
methods, one of the oldest ones, can be divided into several methods such as the magnetic one
(that measures the geomagnetic field and determines anomalies until a certain depth), gravity
(that measures the relative gravitational values and determines anomalies until a certain depth),
radiometric (measures radioactivity from gamma ray emissions with a spectrometer), seismic
(determines the thickness and depth of different strata and locates geological bodies such as
salt diapirs having into account the waves’ velocity of propagation in the ground), electric and
electro-magnetic methods (use resistivity and induced polarization to interpret underground
layers or irregular-shaped bodies), airborne and drill-hole. The last method of prospection is the
geochemical one. This consists of the chemical assaying of water, rocks, sediments, plats and air
to detect possible anomalies and therefore ore concentrations.

10. Define the different methods of exploration.

A.: The exploration methods can be split into different types, such as trenches or surface cuts,
where a soil or rock sample is removed for further analysis. These are normally done in waste
piles or surface deposits. Exploration drills such as core drilling and reverse circulation (RC)
drilling are widely used for exploration of deeper or more complex deposits. Core drilling enables
prospectors to know the geology of the occurrence and possible joints or faults and to determine
the rock strength. RC drilling is cheaper than core drilling, even though it does not conserve the
rock’s original shape and most of the mechanical properties. However, the velocity of sampling
is higher than in core drilling and this method also allows to do geochemical tests to samples.
Drilling, such as other exploration methods, also requires a continuous and coherent grid or
pattern to have representativeness of the samples and consequently of the results. So, the grid,
for example, can be like a net or follow an ore vein. It is important to refer that sometimes the
exploration work must be held during several years for the mining company to keep its mining
permits.

11. When is a deposit minable, partially minable or not minable?

A.: A deposit is economically minable when the revenues are greater than costs. When the
deposit is not minable but is expected to be minable soon (less than 10 years), or part of it has
not been evaluated yet, then the deposit is partially minable. If the revenues are less than costs
regardless the time considered, then the deposit is not minable.
12. How can you define minability? What influences it?

A.: The term minability depends on the costs of production and on the revenues acquired
through the selling of the product. It is clearly influenced by the deposit’s characteristics such as
quality (type of raw material/ mineral), that includes the price, quality parameters, accessory
minerals (can add or take value from the final product), yield of the deposit and processability;
geotechnical attractiveness such as location, shape, dip, strike, mining sequence and thickness
as this influences the mine layout and the amount of overburden removed; and quantity. This
last characteristic is evident since the bigger the deposit, for the same average cut-off grade, the
greater the revenues. It also defines the optimum size of the enterprise.

13. What is the origin of dilution and what does it depend on?

A.: Dilution depends on the mine planning – if the mining method in practice is not the most
adequate, then the stripping ratio can be higher; management and technology – if the “vein”
follows practically a straight line, then a bucket wider than the vein itself will increase the
amount of sterile material removed, therefore the dilution. Then, dilution influences the
minability of a deposit. The dilution’s origin is related to the inner structure of the deposit i.e. if
the deposit is irregular the dilution’s values tend to be higher than if the deposit is flat and with
a regular thickness; it is also related to the limit of the country rock, rock strength (if the rock is
too resistant, then it will be more difficult to remove undesirable chunks of sterile); to the mining
technique; and to the thickness of the deposit and care/ accuracy of the employees (mining and
logistics).

14. Define cut-off grade and its types.

A.: Cut-off grade is the limit between mill or dump, which means that it is the grade that
distinguishes sterile from ore (what is mined and what is left behind and is not processed). This
term can be linked to several concepts such as quality (it can define the minimum percentage of
a mineral for it to be considered ore or the maximum grade of a contaminant in order to consider
it not minable), quantity (by the definition of the minimum volume – minimum reserves - of the
deposit in order for the company to be profitable), geotechnical attractiveness (minimum
thickness, maximum depth and stripping ratio) and location (maximum transport distance – the
greater the distance, the higher the grade needs to be in order to obtain the same profit). To
conclude, the term cut-off grade is dynamic because it depends on the mineral’s price (floatable
according to the stock market), depth of the orebody, stripping ratio or changing of revenues.
So as the exploitation develops in depth, the cut-off grade tends to be higher because of the
transportation costs to the mill.

15. Why is it important to have the knowledge about reserves and resources and its confidence
interval?

A.: The knowledge about reserves and resources and its respective confidence interval is
fundamental for the entire mining process, as for example, the mine planning design, evaluation
of the deposit and also risk analysis of the model and of the investment.
16. Give some examples of internal documentation considering reserves and resources.

A.: Internal documentation can be contained in reports, maps, calculations, drawings or plans,
samples and analysis. All this information is “internal” since it belongs to a certain mining
company. This documentation is valid and useful to help creating a model and can be stored in
a database.

17. Give some examples of external documentation considering reserves and resources.

A.: External documentation is generally created by governmental associations or other

companies not directly related to the exploitation itself. This documentation can be stored
either physically, virtually or both. Examples of official databases are the Geologische
Bundesanstalt Wien, Inspire, InvestRM or other international agencies.

18. Define the possible errors associated to documentation.

A.: Some steps can lead to errors associated to documentation. While collecting data, a deficient
data location (surveying), drill hole logging, sample collection, preparation and assaying or the
determination of density can contribute to errors in the documentation. Regarding database
management, some of the errors might occur while organizing data or managing data files.

19. Define some of the most important standards to classify reserves and resources
classification.

A.: There are several standards used in the classification of reserves and resources, such as the
JORC Code, PERC Code, UNFC-2009, SAMREC Code, CIMVAL Standard or the NAEN Code. Other
standards are regional and belong to a certain country, such as the Austrian code (ÖNORM G
1050) or the Slovenia Standard.

20. Define the three criteria used by the UNFC-2009 Classification.

A.: The United Nations Standard (UNFC-2009 Classification) uses three criteria to classify
resources and reserves such as economic and social viability, project feasibility, and geological
knowledge.

21. Define some of the reasons why the deposit might not be mined entirely (existence of
losses).

A.: Usually the deposit’s reserves aren’t mined totally, therefore there are losses associated to
the mining process. These losses can have several reasons such as economical ones
(reclassification of reserves and resources due to changes of economic conditions), safety (pillars
containing ore that can’t be mined in order to provide stability), environmental (land
management and planning and also Environmental Impact Assessments), geotechnical
(existence of faults and slides), technical-technological (related to the mining method), legal
(cancellation of a licence or the lack of permits) and quality (dilution control).
22. While reporting what important data should be considered?

A.: While reporting the information needs to be well identified (name, site and coordinates) and
could contain comments such as the data source and if there were some modifications in it. The
volumetry and tonnage of reserves and resources (and eventual changes) are also important. It
is also relevant to have a forecast and a reconciliation of data (comparison between the
production and model’s data).

23. Define reconciliation.

A.: Reconciliation is the comparison between the mined tons and the tons that are reported
technically within a certain volume. So, if there is a difference between these two values, the
model needs to be updated to be more accurate and reliable. Reconciliation also takes place
during the mining project by comparing the values from the technical report and the mining
activity. A model can be accurate, underestimate the real volume, and overestimate it.
Therefore when a model is reconcealed, the reserves may decrease, increase or remain the
same.

24. Define mineral depletion allowance.

A.: Mineral depletion allowance can be compared to a machine’s depreciation. While possessing
a certain equipment, it loses value. The same happens with a mineral deposit. Therefore, after
extracting a certain volume of ore from the deposit, it becomes less valuable due to the mineral
depletion allowance (the ore volume decreases). Hence, mineral depletion allowance allows
companies to reduce the income tax by depleting the basis for tax purposes. It can be calculated
by depletion basis divided by the reserve tonnage and translates the financial loss after a mined
tonnage.

25. What are the trends in terms of labor?

A.: Nowadays, labor costs have an increasing trend, the market is becoming globalized,
employees want to have more career options, a good working atmosphere and a work-life-
balance; new skills and flexibility are favorable requirements and also new laws, and regulations
are trying to protect the employees.

26. Define the influencing factors of labor.

A.: There are three influencing factors of labor: personal, internal and external factors. The first
one is related with skills (qualification, motivation, capability and health), the second one
comprises strain/ load (work order and work flow, physical strains at work, mental load at work,
work environment and working time) and the third one is related with laws and regulations
(labor law, safety regulations, social insurance and laws), the employer (rights and duties) and
the employee (rights and duties).
27. What are the rights and duties of an employer and of an employee?

A.: The employer, as being responsible for a company has several rights such as to order and to
instruct his subordinates (employees), to control them and to dismiss them. He has also duties
such as the payment of wages and salaries (including taxes and social insurance), caring for the
employees and giving a report of the time employees have been working for the company. Now
as for the employee, on the one hand, he has the right to earn money, to be equally treated and
for safety and health efforts of the employer. On the other hand, his duties are to work, to follow
the instructions given and to care for the company (not to share confidential information nor to
damage equipment intentionally).

28. What is the key information to a cost-minimized personnel demand?

A.: To get an optimal operation in terms of personnel, it is necessary to know where to allocate
the workers, how many workers are required, what is their level of qualification/ experience,
when are they necessary and for how long.

29. Distinguish the two types of wear and characterize their differences.

A.: Equipment wear can be either physical or related to obsolescence. The first one is related to
the use of the equipment and the time that has passed since its acquisition. Regarding
obsolescence, this term considers the advance of science (when there is a new model on the
market, the current machines lose value), market change (an oversupply of machines can
decrease the value of the acquired equipment), legal influences (established regulations that
limit the amount of carbon dioxide emissions and these can hinder the equipment of being
used/sold) and also depletion of reserves.

30. Define maintenance and its different types.

A.: Maintenance considers all the time that the machines are at the workshop, where they can
be maintained (their as-is state is conserved) or a certain original capability is restored (brake
fix). This maintenance can be divided into planned and unplanned. Planned maintenance
considers service duties (preserve the machine’s state, like adding fuel), inspection (assessment
of the machine’s as-is state like checking the hydraulic hoses or the oil level) and preventive
maintenance (building wear plates that conserve the equipment). Now, unplanned equipment
repair happens when the equipment breaks down and some pieces need to be restored or
repaired.

31. Distinguish between availability and utilization.

A.: Availability of the equipment is the potential time when these elements can work. Utilization
is the actual equipment’s use of time by doing a certain task that it is assigned to.
32. What are the steps of procurement?

A.: Generally, the procurement of heavy machinery equipment follows some standard steps.
These are the following: preparation of a list of specifications (capacity, power, etc.), check if the
company group can provide the necessary equipment, confirm if other business units inside the
company group need the same or a similar equipment, search for possible suppliers and ask for
offers (and try the possibility of having a demonstration), analyze the different offers and start
negotiations (price, quality, etc.), then sign the contract and agree on delivery options and finally
transport the equipment to the mining site.

33. What are the different sources of energy in mining?

A.: In mining, the energy used can come from electricity, compressed air, steam, heat or cooling,
fuel, or water.

34. Define goodwill.

A.: Goodwill is the difference between the value paid to purchase a company and its fair market
value (value of the net assets) which includes assets (inventory, cash, accounts receivable, etc.)
and liabilities (reduce the value).

35. How to calculate a cash flow?

A.: A cash flow is calculated by adding up all cashable inflows (from the EBIT) and deducting all
payable outflows. This result corresponds to the funds remaining or cash flow.

36. Describe the different financial ratios.

A.: There are four different financial ratios: liquidity, leverage, profitability and activity. Liquidity
ratios measure the adequacy of the company’s cash resources to meet its near-term cash
obligations. Leverage ratios measure the ability of a company to satisfy its longer-term debt and
investment obligations. Profitability ratios measure the income of the company relative to its
revenues and invested capital. Lastly, activity ratios evaluate the output generated by the
company’s assets.

37. What are the types of investment?

A.: Investments can be made in real objects/assets such as an excavator or a plant; they can be
financial investments (purchase of a share) or in immaterial assets as, for example, research and
development or software products.
38. Define the two investment principles.

A.: The two investment principles are the minimization and the maximization one. The
minimization principle follows the objective of getting a certain output with the minimum input
and the maximization principle intends to reach the maximum output with a certain input.

39. What does the net present Value (NPV) consist in?

A.: The NPV consists in discounting the present value of all forecasted cash flows from the
investment over a period of time which corresponds to the project life period at a
predetermined discount rate and then comparing the cumulative sum of the discounted cash
flows to the initial investment.

40. When should the equivalent annual cost be used?

A.: The equivalent annual cost should be used to assess a truck’s optimal economical life, having
into account operating costs and salvage values over time; to assess whether or not leasing is
more economical than buying the asset and whether the increase of maintenance would
economically change the useful life of the equipment or not.

41. When is the profitability calculation used?

A.: The profitability calculation is used to evaluate a project (assessing mining techniques, mining
sequences or the capacity of a mining site from an economical point of view – dynamic
evaluation), a deposit (the minability of an entire deposit or some parts of it – it can be dynamic
or static) and to study the acquisition or liquidation of businesses (it can be a dynamic calculation
and used also to assess the corporation).

42. What are the two types of cost models for mining?

A.: In mining a cost model can be deterministic or probabilistic. The first is usually based on
statistics of several different mining projects and after some adjustments it becomes possible to
estimate costs. It is also possible to obtain information from literature, software or operations
with similar characteristics. An example of this type of model is the O’Hara Cost Estimator. The
second model, the probabilistic one, is based on econometric techniques and artificial
intelligence heuristics (neural networks or genetic algorithms).
43. What values can be estimated and what are the variables to be considered while using the
O’Hara cost estimator?

A.: The O’Hara Cost Estimator is used in cost estimation (for preliminary feasibility studies or
detailed feasibility studies) and to assess mining conditions affecting costs. This model can
estimate costs, having into account the extraction rate (p.e. daily production), some adjustment
factors and a factor to update price and costs, and can also estimate the amount of each
equipment or manpower in a certain operation, considering the extraction rate and some
constants.

44. What are the reasons for investment in projects?

A.: Investment projects in mining have several purposes such as the growth opportunity (p. e.
increasing the mining area and hence revenues), cost reduction opportunity (for example the
purchase of new equipment that consumes less fuel and hence reduces costs) and the meeting
of legal requirements (that might be related to emission standards) or health and safety
standards. Furthermore, investments can be associated to an enterprise or an investment
program.

45. What is included in feasibility studies?

A.: Feasibility studies include engineering and design. They also comprise a target analysis, a
political and fiscal analysis and profitability/financial/market analysis (using dynamic methods
such as the Net Present Value, Internal Rate of Return, Return on Investment or the O’Hara Cost
Method).

46. What are the stages of the UNIDO analysis?

A.: The UNIDO analysis is divided in five stages. The first one considers the net present value
method (it starts with a standard profitability calculation). This is followed by the inclusion of
shadow prices. The third stage includes savings. Then, the income distribution among
contemporaries is considered. Lastly, the social-economic benefits are analyzed.

47. Define the main reasons for uncertainty in all methods of investment calculation.

A.: All methods make several assumptions that may vary in time or have a certain degree of
imprecision. Hence, there is an uncertainty related to sales figures, price of products, exchange
rates, investment costs and the deposit modelling (reserves and resources and quality
distribution). To predict the profitability of an investment it is therefore recommended the
realization of a sensitivity and scenario analysis.
48. Define a risk, its sources and consequence types in the mining sector.

A.: A risk is an event or condition that has a level of uncertainty and when it occurs, the
achievement of one or more objectives will be affected either positively or negatively. In the
mining sector, risks are associated with the ore grade, reserve tonnages, operating costs or
product prices. The consequences affect the NPV of a project and can be economic or non-
economic ones. The economic consequences are the change in revenues, operating costs,
production volumes, capital expenditure or schedule, while the non-economic consequences
are related to safety, health impact, environmental impact, community impact, compliance
penalties or the company’s reputation.

49. Define the different risk identification techniques.

A.: There are several risk identification techniques like questionnaires or workshops, the Delphi
method, a SWOT analysis, value driver tree, FMEA (Failure Mode & Effect Analysis), Six Sigma or
the fish bone diagram.

50. Regarding the risk management strategies, define them.

A.: When a risk is detected (identified and classified), some measures can be taken, such as its
measurement, course of action, monitoring, and acceptance or protection from the risk (it may
imply mitigation). It is important to mention that some risks are beyond the control level
(exchange rates or commodity prices).

51. Define the different measures to reduce risks.

A.: There are several measures to reduce risks, such as the increase in geological knowledge
(though it increases the investment costs, reducing the NPV); the existence of a clear and
organized data basis; the definition of clear contracts (licensing procedure that prevents, for
example, misinterpretation of the product’s specifications); defining standards; long term
service and customer contracts and choosing the adequate financial models (p.e. for budgeting).
The measures can also be taken by the state, such as funding, tax regulations or royalties’
reduction.

52. Define production sharing agreements.

A.: Production sharing agreements are contracts realized between the host country’s
governement and the investor. These contracts split the rights on exploration and mining
permits, parts of the production and the profit or loss of the operation and hence the risks of
the investment can be balanced. It is important to mention that other companies or
stakeholders may be involved.
53. Define a sensitivity analysis and distinguish between global and local sensitivity analysis.

A.: A sensitivity analysis promotes the understanding of the effects undergone in the project by
changes in variables. In a mining project, it may be considered variations on the commodity
price, energy costs, average grade or amount of reserves. This analysis is divided into global and
local. The first one identifies the input parameter that has the greatest influence on the output
(in a certain target value such as operating costs or the NPV), whereas the second one (local
sensitivity analysis) identifies the range of deviation for each input parameter and considers
target values to accept the project.

54. What is the usual approach of a risk and sensitivity analysis?

A.: First, it is important to formulate the target value as a function of input parameters (p.e. the
NPV as a function of the commodity’s price, amount of reserves, etc.); then a target value is set
and one of the inputs is changed. Lastly, the absolute and relative changes in the target value
should be logged. This process should provide valuable information and give suggestions for
further investigation to try to reduce the risk of the project.

55. Define condition simulation and its applications.

A.: Condition simulation can provide information such as a minimum, maximum and average
grade and the respective reserves, for a given cut-off grade. This method is used to provide
confidence limits for the estimation of resources and reserves grades or tonnage, to determine
the optimal bench height, for stockpile planning, to determine sampling densities, open pit
grade control or in mine planning scenarios.