Mining & Metallurgical Economics

(MINE 402)

Spring 2022

Prof. Dr. Hussin A. M. Ahmed 1

Course description

General introduction: Minerals contributions to economic development-

Economic minerals, resources, reserves, new supplies, research demands,
consumption, recycling and depletion - Ore reserve estimation and grades;
mineral sales prices projection and NSR -Concept of time value of money,
interest rate, inflation, and cost indices - Estimating cost of mine development
and ore production operation, and smelter schedule - Cash flow construction,
time diagram, tax structure, and project viability- Spreadsheet computer
applications- Introduction to sensitivity and statistical analysis and review initial
feasibility reports.

2
COURSE CONTENT
1. Course Introduction
2. Introduction to Engineering Economics
3. Common Methods of Project Evaluation
4. Mineral Resource and Ore Reserve
5. Commodity Price Forecasting
6. Capital & Operation Costs
7. Depreciation & Taxation
8. Inflation and exchange rate
 1 Assess purpose of mining economics, Minerals needs, contributions

2 Interpret concept: mineral resources, ore reserves, SA potential deposits

Course Learning Outcomes

3 Appraise ore values, market prices, environment and preservation.

4 Assess ore grade, cut off recovery, metal recovery, concentrate grade
(C.L.O.)

5 Compare interest rate, inflation, mine indices, time value of money

6 Compute, interpret cost estimation, capacity factor, nature of mining

7 List components of mine development, operating, stages of mining project

8 Construct cash flow over project life, tax structure, Decision making tools

9 Analyze valuation, marketing options, constraints, sensitivity analysis

 References

Economic Evaluations in Exploration. Springer Berlin Heidelberg; 2008; Available

from: http://dx.doi.org/10.1007/978-3-540-73559-5

Ian L. Runge, “Mining Economic and Strategy,” Society for Mining, Metallurgy, and
Exploration, SME, Colorado, USA, 1998

* Instructor notes
 Assessment tools

Tests (10+10) & Mid Exam

Quizzes (15)
- Individual (10)

Project (Report & PPT)

Final Exam
(15)
(40)

Log in to the system download course calendar and Let us have a tour to
completely understand it. Mentioned dates and activities cannot be changed
 General Definitions

Economics: The study of how people allocate their limited resources to satisfy their unlimited
wants
Microeconomics: The study of decision making undertaken by individuals (or households)
and by firms such as : • Individual markets • individual Wages • individual Prices •
individual Pollution
Macroeconomics: The study of the performance, structure, behavior, and decision-making of
an economy as a whole, rather than individual markets a whole such as
• Inflation • Taxes • Unemployment
Macroeconomics studies the performance of national or global economies and the interaction
of certain entities at the these level.
Deflation: A decrease in the general price level, that is, in the nominal cost of goods and
services.
Inflation: An increase in the general level of prices or in the cost of living.
Day 4 7
 Microeconomics Versus Macroeconomics

Economics Production Prices Income Employment

Microeconomics Production/Output in Price of Individual Income and Wealth Distribution of Employment

individual industry or goods and services Wages in the auto by in Individual Industries
business industry and Businesses
How much steel ? Price of gasoline Minimum wages Jobs in the steel/ Aluminum
How many cars? Price of flat rent Salaries / phosphate industry
How many offices? Price of ore Poverty within the Number of employers in a
commodity firm firm
Macroeconomics National Production / Aggregate Price level National Income Overall Employment level in
Output the country
Consumer prices Total salaries in the
Total industrial output Producer prices country No of jobs in all sectors
Gross Domestic product Rate of inflation Total income of the Unemployment rate
How many offices? /deflation country

Day 4 8
Mining or Mineral economics is the study of the business and
economic aspects of natural resource extraction and use. Mineral
economics involves studying topics in economic and financial
analysis that are developed to meet the special needs of the natural
resource industries.
All participants in the industry use mineral economics, including
national and local governments, corporations, banks and financial
companies, and consulting firms.

Day 4 9
 Introduction to Engineering Economics
Engineering Economics deals with the concepts and techniques of analysis
useful in evaluating the worth of systems, products, and services in relation to
their costs

10
Basic Concepts
• Types of interests
• Interest Rate and Time value of money
• Cash flow
• Equivalence technique and project evaluation

Time Value of
Types of Cash flow
Money parameters
Interests

Project Evaluation

11
Types of Interest

1. Simple Interest
Interest paid (earned) on only the original
amount, or principal, borrowed (lent).
2. Compound Interest
Interest paid (earned) on any previous interest
earned, as well as on the principal borrowed
(lent).

12
1. Simple Interest

Formula SI = P (r)(n)
SI: Simple Interest Value
P: Value today (t=0)
r: Interest Rate per Period
n: Number of Time Periods

13
Example on Simple Interest:
Car loan
• The bank lend you today $10,000 to buy a car (the principal)

• The bank ask you for simple interest rate = 5% per year

• You payoff the money to the bank after 5 years (end of the term)

• How much interest you will end up paying five years from now ??

• Solution:
• The yearly interest = 10,000 *5/100=$500

• The interest for the whole time period = 5*500 = $2500

14
Simple Interest Future Value (FV)
• In the previous example, What is the Future Value (FV)? (i.e.
How much you will end up paying 5 years from now?
F = P + P *r*n
F = P (1 + rn)
= 10,000(1+0.05*5)
= $12500

• Future Value is the value at some future time of a present amount of

money, or a series of payments, evaluated at a given interest rate.
15
Simple Interest Present Value (PV)
• In the previous example, What is the Present Value (PV)?

The Present Value is simply the 10,000 SR you originally borrowed.

That is the value today!

• Present Value is the current value of a future amount of money,

or a series of payments, evaluated at a given interest rate.

16
 2. Compound Interest
• More commonly used.

• In compound interest the interest at one time step is added to the current
value which is then used to compute the value at the next time step.

• Effectively, interest is being earned on interest.

Interest
Interest
Interest

$ $ $ $
17
Compound Interest Formula

Present and future values

𝒏
F = 𝑷(𝟏 + 𝒓) 𝒐𝒓 P = 𝑭(𝟏 + 𝒓)−𝒏
F = future value
P = present value

r = period interest rate, expressed as a decimal

n = number of periods

• Can also be calculated using factors and Excel.

18
Examples
• Example 1: If $500 were deposited in a bank savings account, how
much would be in the account three years hence if the bank paid 6%
interest compounded annually?
Solution:
• Given P = 500, i = 6%, n = 3,
F = $595.91

• Example 2: If you wished to have $800 in a savings account at the

end of four years, and 5% interest we paid annually, how much
should you put into the savings account ?
Solution:
• Given n = 4, F = $800, i = 5%, P = ?
P = $658.16

19
Solved Examples for F and P in compound interest
Find F Find P
P r, % n F F r, % n P
6,259.00 6.46 9.00 10,994.69 227,695.00 5.54 5.00 173,887.37
38,995.00 10.15 12.00 124,400.73
238,556.00 5.54 9.00 146,837.35
6,729.00 5.54 5.00 8,811.22
193,719.00 7.38 5.00 135,692.31
6,166.00 6.46 12.00 13,068.96
221,366.00 9.23 3.00 169,857.65
36,861.00 2.77 10.00 48,442.96
98,173.00 9.23 11.00 37,173.27
27,638.00 2.77 8.00 34,390.42
200,275.00 9.23 9.00 90,479.32
10,544.00 3.69 6.00 13,104.69
208,252.00 10.15 12.00 65,279.25

F = 𝑷(𝟏 + 𝒓)𝒏 P = 𝑭(𝟏 + 𝒓)−𝒏

Day 4 20
 Annuities
An Annuity represents a series of equal payments (or receipts)
occurring over a specified number of equidistant periods.

• Ordinary Annuity: Payments or receipts occur at the end of each

period.
• Annuity Due: Payments or receipts occur at the beginning of each
period.

21
Ordinary Annuity

Where:
1+𝑟 𝑛 −1 • F = Future value of the ordinary annuity
F =A
𝑟
• P = Present value of the ordinary annuity
• A = Annuity Payments
1− 1+𝑟 −𝑛
P =A • r = Interest rate
𝑟
• n = Number of payment

22
 Example of Ordinary Annuity

A mining company is making a series of five $10000 payments at the

end of each year for a particular investment.

(Use an interest rate of 5%)

What is the future value & the present value of this annuity?

23
Solution (to find the Future value)
1+0.05 5 −1
F = 1000* = $5525.64
0.05

24
 Solution (to find the Present value)
Method 1: Ordinary Annuity formula
1− 1+0.05 −5
P = 1000 = $4329.48
0.05

Method 2: Using basics

25
Annuity Due
1+𝑟 𝑛 −1 Where:
F=A x (1 + r)
𝑟
• F = Future Value of the annuity due
• P = Present value of the annuity due
−𝑛 • A = Payments
1− 1+𝑟
P=A x (1+r) • r= Interest rate
𝑟

• n = Number of payment

26
 Example of Annuity due
Imagine that you are making a series of five $1000 payments
at the beginning of each year for a particular investment. (Use
an interest rate of 5%)

What is the future value & the present value of this annuity?

27
 Solution (to find the Future value)
Method 1: Annuity due formula
1+0.05 5 −1
F = 1000 (1+0.05) = $5801.91
0.05

Method 2: Using basics

28
Solution (to find the Present value)
1− 1+0.05 −5
PV = 1000 (1 + 0.05) = $4545.95
0.05

29
Solved examples annuities
Ordinary Annuity (Find F and P for the given ordinary
annuities) Annuity Due (Find F and P for the given annuity dues)
A r, % n F P
A r, % n F P
4
11,767 4.62 50,431.44 42,096.16 11
9,244 4.62 134,698.02 81,959.51
4
17,397 9.23 79,828.98 56,078.04 6
9,726 7.38 75,426.41 49,202.03
3
13,909 3.69 43,285.66 38,826.97 9
5,412 7.38 70,718.26 37,258.12
6
9,603 7.38 69,354.19 45,241.01 3
15,283 5.54 51,119.29 43,484.41
4
12,011 8.31 54,371.35 39,508.99 7
6,077 10.15 63,798.64 32,427.98
12 117,842.87
16,648 9.23 339,943.31 3
6,921 8.31 24,408.96 19,210.72
4
11,797 10.15 54,870.85 37,273.80 12 148,827.95
17,805 7.38 349,756.10
5
11,620 4.62 63,722.24 50,841.40 12
8,172 3.69 125,081.06 80,974.65

30
Discrete compounding

Assume a $10,000 investment earns an annual interest of 12%.

Calculate the ending value of the investment when the interest
is compounded at different intervals i.e.
- annually, semiannually, quarterly, monthly, daily, each hour,
each minute, each second and continuously.

Day 4 31
 Discrete compounding
*(at one year)
P, $ n, years r, % F i Effective
(end - start ) /
10,000 1.0 12.00 ?? start *
m I, % F
Anually 1.0 12.0 11,200.00 12.00
Semiannually 2.0 6.00 11,236.00 12.36
Quarterly 4.0 3.00 11,255.09 12.55
Monthly 12.0 1.00 11,268.25 12.68
Daily 365.0 0.03 11,274.75 12.75
each hour 8,760.0 0.00137 11,274.96 12.75
each minute 525,600.0 2.3E-05 11,274.97 12.75
each second 31,536,000.0 3.8E-07 11,274.97 12.75

Number of compounding times per year return a different interest rate called effective interest rate

32
Nominal versus effective Interest Rate
Compound annually F
Start P
End F=P*(𝟏 + 𝒓)𝒏 P n = 1, r nominal
I = (start – End)/start
P∗(1+𝑟)𝑛 −𝑃 P((1+𝑟)𝑛 −1)
i= = = ((1 + 𝑟)1 −1)=r
𝑃 𝑃

F0 F
Compound m times per yr
Start P P m = 2 , r nominal/2
End F=P*(𝟏 + 𝒓/𝒎)𝒎
I = (start – End)/start
P∗(1+𝑟/𝑚)𝑚 −𝑃 P((1+𝑟/𝑚)𝑚 −1) 𝑚 −1)
i effective= = = ((1 + 𝑟/𝑚)
𝑃 𝑃

𝑟 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑚
i effective = 1 + −1
𝑚
Day 4 33
 Nominal versus effective Interest Rate
𝑟 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑚
i effective = 1+ −1
𝑚
• Where m is number of compounding periods per year.
• When m > 1, then i > r
• the effective interest rate is useful for describing the compounding effect of
interest earned on interest within one year.

Example: ABC Mining Co. got a loan of 1000 from a bank at an annual nominal interest rate
of 20% that is compounded monthly, find the effective annual rate.
0.2 12
• Solution: i effective = 1 + − 1 = 1.219 − 1 = 0.2198 = 21.98 %
12

34
Solved example 1

P, $ n, years r, % F
28,452 10.0 12.00
n, total number of
m, compounding times/yr compounding r, nominal % F I Effective
Anually 1.0 10.0 12.0 88,367.59 12.00
Semiannually 2.0 20.0 6.00 91,249.42 12.36
Quarterly 4.0 40.0 3.00 92,811.50 12.55
Monthly 12.0 120.0 1.00 93,902.61 12.68
Daily 365.0 3,650.0 0.03 94,445.34 12.75
each hour 8,760.0 87,600.0 0.00137 94,463.19 12.75
each minute 525,600.0 5,256,000.0 2.3E-05 94,463.95 12.75
each second 31,536,000.0 315,360,000.0 3.8E-07 94,463.97 12.75

Day 4 35
 Solved example 2
P, $ n, years r, % F I Effective
27,579 4.0 7.74
m, compounding times/yr n, total number of compounding r, nominal % F
Anually 1.0 4.0 7.7 37,160.92 7.74
Semiannually 2.0 8.0 3.87 37,367.98 7.89
Quarterly 4.0 16.0 1.94 37,475.87 7.97
Monthly 12.0 48.0 0.65 37,549.51 8.02
Daily 365.0 1,460.0 0.02 37,585.63 8.05
each hour 8,760.0 35,040.0 0.00088 37,586.81 8.05
each minute 525,600.0 2,102,400.0 1.5E-05 37,586.86 8.05
each second 31,536,000.0 126,144,000.0 2.5E-07 37,586.86 8.05

Day 4 36
Discrete versus Continuous Compounding
Discrete cash flows assume the cash flows occur a discrete intervals (e.g. once a
month, half year or even a year), but continuous compounding assumes
compounding is continuous throughout the interval i.e. (m = ∞)
In continuous compounding ------ (1+r) should be replaced by 𝑒 𝑟
The number e , sometimes called the natural number, or Euler's number, is an
important mathematical constant approximately equal to 2.71828

𝑫𝒊𝒔𝒄𝒆𝒓𝒆𝒕𝒆 𝑭 = 𝑷 ∗ 𝟏 + 𝒊 𝒏 𝑪𝒐𝒏𝒕𝒊𝒏𝒖𝒐𝒖𝒔 𝑭 = 𝑷 ∗ (𝒆𝒓 )𝒏 =𝑷 ∗ (𝒆)𝒓𝒏

𝐶𝑜𝑛𝑡𝑖𝑛𝑢𝑜𝑢𝑠 𝑃 = 𝐹 ∗ (𝑒)−𝑟𝑛

37
Solved examples P and F with continuous compounding
Find F
P r, % n F
34,085.00 4.62 4.00 41,003.50
35,389.00 5.54 11.00 65,091.96
22,335.00 7.38 7.00 37,440.57
20,510.00 4.62 5.00 25,839.71
26,177.00 3.69 11.00 39,282.58
35,578.00 7.38 8.00 64,207.98
28,431.00 3.69 6.00 35,476.84

Find P
F r, % n P
126,186.00 9.23 8.00 60,301.50
205,026.00 4.62 7.00 148,374.10
86,261.00 5.54 6.00 61,866.42
219,430.00 6.46 4.00 169,462.77
209,488.00 3.69 4.00 180,741.25
84,182.00 10.15 6.00 45,786.13
126,355.00 4.62 10.00 79,606.47

Day 4 38
Example 1
ABC Mining company invested $30,000 in a bank that pays an annual interest rate
of 7% that is compounded continuously. The amount the company can get after 5
years from the bank is enough to buy mining machine A. What is the price of this
machine, round to the nearest integer.
Solution: P = 30000, n = 5 , i= 0.07 -------- the price of machine A= F is required
F = 𝑷 ∗ (𝒆)𝒓𝒏 =$𝟑𝟎, 𝟎𝟎𝟎 ∗ (𝒆)𝟓∗𝟎.𝟎𝟕 = $ 42,572

Example 2
ABC Mining company is planning to buy a certain machine after 7 years. The
machine cost then is $250,000. How much money the company should invest now
in a bank that pays an annual interest rate of 5.25% that is compounded
continuously.
Solution: F = 250000, n = 7 , i= 0.0525 ----- the money to be invested= P is required
P= 𝑭 ∗ (𝒆)−𝒓𝒏 =$250000 ∗ (𝒆)−𝟎.𝟎𝟓𝟐𝟓∗𝟕 =$𝟏𝟕𝟑, 𝟏𝟏𝟓. 𝟖
Day 4 39
Ordinary Annuity (continuously compounded)

1+𝑟 𝑛 −1
F disc.= A ,
𝑟
𝑒 𝑟 𝑛 −1 𝒆𝒓𝒏 −𝟏
F continuous = A =A
𝑟+1−1 𝒆𝒓 −𝟏

1− 1+𝑟 −𝑛
P disc. = A ,
𝑟
1− 𝑒 𝑟 −𝑛 1− 𝑒 𝑟 −𝑛 𝑒 𝑟𝑛 (𝒆𝒓𝒏 −𝟏)
P continuous = A =A * = A
𝑒 𝑟 −1 𝑒 𝑟 −1 𝑒 𝑟𝑛 (𝒆𝒓 −𝟏)∗𝒆𝒓𝒏

40
continuous compounding (ordinary annuity)
Solved examples
Find F
Find P
A, $ n, years r, % F A, $ n, years r, % P
38,734 3.00 5.38 122,743.2
10,660 7.00 7.17 56,592.0

A, $ n, years r, % F A, $ n, years r, % P
20,068 7.00 6.27 170,884.2 26,113 7.00 6.27 143,364.9

A, $ n, years r, % F A, $ n, years r, % P
17,206 9.00 6.27 114,669.3
46,830 9.00 5.38 527,726.3
A, $ n, years r, % P
A, $ n, years r, % F 7,421 13.00 8.06 57,404.7
35,935 6.00 4.48 241,869.0
A, $ n, years r, % P
23,239 4.00 8.06 76,300.7
41
Annuity Due (continuously compounded)
1+𝑟 𝑛 −1
F disc.= A x (1 + r),
𝑟
𝑒 𝑟 𝑛 −1 𝒆𝒓𝒏 −𝟏
F continuous = A *𝒆𝒓 =A *𝒆𝒓
𝑟+1−1 𝒆𝒓 −𝟏

1− 1+𝑟 −𝑛
P disc. = A x (1 + r),
𝑟
1− 𝑒 𝑟 −𝑛 𝒓 1− 𝑒 𝑟 −𝑛 𝒓 𝑒 𝑟𝑛
P continuous = A 𝑟 *𝒆 = A *𝒆 *
𝑒 −1 𝑒 𝑟 −1 𝑒 𝑟𝑛
(𝒆𝒓𝒏 −𝟏) 𝒓
=A 𝒓 *𝒆
(𝒆 −𝟏)∗𝒆𝒓𝒏

42
Solved examples Annuity Due (continuously compounded)
A, $ n, years r, % Find (F)
50,615 10.00 3.58 619,562.8
59,304 6.00 6.27 445,685.0
𝒆𝒓𝒏 −𝟏
58,278 10.00 4.48 751,803.4
F= A *𝒆𝒓
53,295 8.00 4.48 524,343.4 𝒆𝒓 −𝟏
58,746 10.00 3.58 719,091.9
51,884 4.00 4.48 232,423.0
57,223 7.00 4.48 481,100.8

A, $ n, years r, % Find (P)

54,571 6.00 5.38 287,430.0
56,364 10.00 5.38 447,746.1
55,539 6.00 5.38 292,528.5 (𝒆𝒓𝒏 −𝟏)
59,240 11.00 5.38 505,183.7 P= A *𝒆𝒓
(𝒆𝒓 −𝟏)∗𝒆𝒓𝒏
58,198 8.00 4.48 400,116.3
51,699 10.00 3.58 442,395.6
53,047 11.00 6.27 434,915.6
Day 4 43
 Example

• A mining company is required to pay a late royalties of $1.5M today as a

single payment. What are the required uniform savings from year 4 to 8
that would be the equivelant to this amount. (Assume r = 10%, savings
are to be paid by the end of each year)

44
Cash Flow

• Engineering projects generally have economic consequences that occur

over an extended period of time
• For example, if an expensive piece of machinery is installed in a plant were
brought on credit, the simple process of paying for it may take several years
• The resulting favorable consequences may last as long as the equipment
performs its useful function
• Each project is described as cash receipts or disbursements (expenses) at
different points in time

45
Categories of Cash Flows

• The expenses and receipts due to engineering projects usually fall

into one of the following categories:
• First cost: expense to build or to buy and install
• Operations and maintenance (O&M): annual expense, such as electricity,
labor, and minor repairs
• Salvage value: receipt at project termination for sale or transfer of the
equipment (can be a salvage cost)
• Revenues: annual receipts due to sale of products or services
• Overhaul: major capital expenditure that occurs during the asset’s life

46
Cash Flow diagram (CFD)

• The costs and benefits of engineering projects over time are

summarized on a cash flow diagram (CFD). Specifically, CFD
illustrates the size, sign, and timing of individual cash flows, and
forms the basis for engineering economic analysis
• A CFD is created by first drawing a segmented time-based horizontal
line, divided into appropriate time unit. Each time when there is a
cash flow, a vertical arrow is added  pointing down for costs and up
for revenues or benefits. The cost flows are drawn to relative scale

47
Drawing a Cash Flow Diagram

• In a cash flow diagram (CFD) the end of period n is the same as the beginning of
period (n+1)
• Beginning of period cash flows are: rent, lease, and insurance payments
• End-of-period cash flows are: salvages, revenues, overhauls
• The choice of time 0 is arbitrary. It can be when a project is analyzed, when
funding is approved, or when construction begins
• One person’s cash outflow (represented as a negative value) is another person’s
inflow (represented as a positive value)
• It is better to show two or more cash flows occurring in the same year
individually so that there is a clear connection from the problem statement to
each cash flow in the diagram

48
An Example of Cash Flow Diagram
• A man borrowed $1,000 from a bank at 8% interest. Two end-of-year
payments: at the end of the first year, he will repay half of the $1000
principal plus the interest that is due. At the end of the second year,
he will repay the remaining half plus the interest for the second year.
• Cash flow for this problem is:
End of year Cash flow
0 +$1000
1 -$580 (-$500 - $80)
2 -$540 (-$500 - $40)

49
Cash Flow Diagram

$1,000

1 2

$540
$580

50
Thank you

Day 4 51