Question 2 of 5: Mining Project Financial Analysis and Feasibility

Question 2: Mining Project Financial Analysis and Feasibility (25 marks)

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.

Given.

Find. (a) gross/net value of ore per tonne; (b) NPV at 10%; (c) IRR and before-tax payback; (d) an investment recommendation — each for gold at $1,250, $1,300 and $1,350/oz.

Approach. Build a before-tax annual cash-flow timeline: Year 0 spends the $80.8 M capital plus the cost of mining (but not yet processing) the 265 kt of stockpiled ore; Years 1–7 earn revenue from that year's own Recovered Gold at the given price and pay the full blended $18.57/t Total Cash Cost on that year's own Ore Tons processed. Discount at 10% for NPV, solve the cash-flow polynomial for IRR, and track the undiscounted cumulative position for payback.

1. Year 0 cash outflow (common to all three price cases). $$CF_0 = -\left(80.8\times10^{6} + 265{,}000\times 11.75\right) = -\left(80.8\text{M} + 3.114\text{M}\right)$$ $$\boxed{CF_0 = -\$83{,}913{,}750}$$
2. Years 1–7 operating cost (price-independent). $OpCost_y = OreTons_y \times \$18.57/\text{t}$, e.g. Year 1: $2{,}038{,}000\times18.57=\$37{,}845{,}660$; Year 7: $513{,}000\times18.57=\$9{,}526{,}410$ (full seven-year schedule tabulated below).
3. Years 1–7 revenue and net cash flow, per gold price. $CF_y = RecoveredAu_y(\text{oz})\times P_{Au} - OpCost_y$. At $P_{Au}=\$1{,}250$/oz, Year 1: $CF_1 = 55{,}100\times1250 - 37{,}845{,}660 = +\$30{,}029{,}340$; the same pattern applied year-by-year and price-by-price gives the full seven-year cash-flow set used in steps 4–5.
4. Part (a) — gross and net value of ore per tonne (LoM average). Effective recovered grade $= 397{,}700/16{,}497{,}000 = 0.024107$ oz/t: $$v_{gross}=0.024107\times P_{Au}, \qquad v_{net}=v_{gross}-18.57$$ $$\boxed{P=\$1250:\ v_{gross}=\$30.13/\text{t},\ v_{net}=\$11.56/\text{t}}$$ $$\boxed{P=\$1300:\ v_{gross}=\$31.34/\text{t},\ v_{net}=\$12.77/\text{t}}$$ $$\boxed{P=\$1350:\ v_{gross}=\$32.55/\text{t},\ v_{net}=\$13.98/\text{t}}$$
5. Part (b) — Net Present Value at i = 10%. $$NPV = CF_0 + \sum_{y=1}^{7}\frac{CF_y}{(1.10)^y}$$ $$\boxed{P=\$1250:\ NPV \approx \$57.61\text{M}}\qquad \boxed{P=\$1300:\ NPV\approx\$71.85\text{M}}\qquad\boxed{P=\$1350:\ NPV\approx\$86.10\text{M}}$$
6. Part (c) — IRR and before-tax payback. Solving $CF_0+\sum CF_y/(1+r)^y=0$ for $r$, and tracking the undiscounted cumulative position year-by-year for payback: $$\boxed{P=\$1250:\ IRR=31.3\%,\ payback\approx2.34\ \text{yr}}$$ $$\boxed{P=\$1300:\ IRR=36.0\%,\ payback\approx2.14\ \text{yr}}$$ $$\boxed{P=\$1350:\ IRR=40.6\%,\ payback\approx1.97\ \text{yr}}$$
7. Part (d) — recommendation. At all three gold prices tested — spanning a plausible near-term trading range around the study's base case — the project clears the 10% hurdle by a wide margin (NPV $58–86 M against $83.9 M invested), IRR is 3–4× the discount rate, and undiscounted capital is recovered in under 2.5 years of production. The result is not price-sensitive at the margin: even the lowest tested price ($1,250) is strongly positive, so a modest downside move in gold would not flip the recommendation.

Recommendation. Proceed with the Gold Bar Mine investment — positive NPV, an IRR well above a typical 10–15% mining hurdle rate, and sub-2.5-year payback all hold across the full $1,250–$1,350/oz price range tested.