24-MMP-A4 Mine Valuation and Mineral Resource Estimation · May 2016
Nivaar worked solution (AI-drafted; not reviewed by a licensed engineer)
EGBC National Exam — Mining and Mineral Processing Engineering, 09-Mmp-A4 Mine Valuation and Mineral Resource Estimation, 2016-May. 3 hours duration; one handwritten 8.5×11 in reference sheet permitted (not an open-book exam); only approved Sharp or Casio calculators allowed. Question 1 is compulsory (40 marks, parts 1.1–1.6); candidates then select THREE of the six optional Questions 2–7 (20 marks each) to complete the paper.
Reference texts: Isaaks & Srivastava, An Introduction to Applied Geostatistics (variogram modelling, kriging estimators, volume–variance relations); Hustrulid, Kuchta & Martin, Open Pit Mine Planning and Design (mine valuation, NPV and cut-off grade methodology, mineable reserves); Gentry & O'Neil, Mine Investment Analysis (Canadian mining taxation, inflation and financing effects on DCF yield, smelter/refining contract terms, net smelter return); SME Mining Engineering Handbook, 3rd ed. (mineral exploration/evaluation stages, ore reserve classification, ore deposit models); CIM Best Practice Guidelines and NI 43-101 (Canadian Securities Administrators).
Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.
Depreciation. The systematic write-off of the cost of tangible, wasting fixed assets – mining equipment, mill/plant, buildings, tailings infrastructure – over their useful economic life. In Canada this is claimed for tax purposes as Capital Cost Allowance (CCA) using CRA-prescribed declining-balance classes (e.g. Class 41/41.1/53 for most mining/processing assets), subject to the half-year rule in the year of acquisition; it is a non-cash accounting charge that nonetheless directly reduces taxable income and hence directly increases after-tax cash flow through the tax shield it creates (CCA × tax rate), even though no cash actually leaves the project when it is recorded.
Depletion. The write-off of the cost of the wasting MINERAL RESOURCE itself (the ore reserve), as distinct from the physical plant that extracts it – in Canada, cost depletion recovers the acquisition/exploration/development cost pools (Canadian Exploration Expense, CEE, and Canadian Development Expense, CDE) as the resource is mined, typically via a units-of-production method (cost pool × tonnes mined this year / total remaining reserve tonnes). Percentage depletion (a fixed % of net revenue, as appears in the Q2.4 cash-flow table below) is a US-style alternative not generally available under current Canadian tax law but is retained in some legacy cash-flow templates for comparison; it too is a non-cash charge whose only cash effect is via the tax shield.
Amortization. The write-off of the cost of INTANGIBLE capital – mine development/pre-production stripping, feasibility and permitting costs, deferred financing costs, and (in some jurisdictions) certain exploration/development expenditures once capitalized – typically on a straight-line or units-of-production basis over the asset's useful life or the mine's remaining reserve life. Like depreciation and depletion it is a non-cash book charge whose cash-flow effect operates purely through the tax shield.
Common thread and distinction. All three are non-cash allocations of a PAST cash outlay to the periods that benefit from it, and all three affect actual project cash flow only indirectly, by reducing taxable income and hence cash taxes paid; they differ only in WHICH asset class each recovers – tangible plant (depreciation), the mineral resource (depletion), or intangible/development capital (amortization).
