DraftGuidelinesfor TechnicalEconomicEvaluationof MineralsIndustryProjects

TheAusIMM Level3,1531PelhamStreet CarltonVictoriaAustralia3053 PostalAddress: POBox660CarltonSouth VictoriaAustralia3053 Telephone:+61396623166 Email:ceo@ausimm.com.au WebPage:http://www.ausimm.com 1

TableofContents
1 2 INTRODUCTION...............................................................................................................................6 GUIDELINESFORSPREADSHEETMODELLING...............................................................................10 2.1 2.2 2.3 Purpose .................................................................................................................................10 KeyPrinciples ........................................................................................................................10 Easytofollow ........................................................................................................................10 IntuitiveandVisual .......................................................................................................10 Timetodoitproperly ...................................................................................................11 Architecture:WorkbookLayout....................................................................................12 WorksheetLayout.........................................................................................................12 ModularConstruction...................................................................................................13

2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 2.4

TailoredtoPurpose ..............................................................................................................14 Sizeandcomplexity.......................................................................................................14 Minimalistassimpleasappropriate...........................................................................14 Matchingdetailandcontentwithitsimportance ........................................................15 MatchingDataandCalculations ...................................................................................16 DirectinvolvementofProjectTeammembers.............................................................17 HelicopterView.............................................................................................................17

2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 2.4.6 2.5

Transparent...........................................................................................................................17 Thecompleteevaluationflowslikeasimplestorybook..............................................17 Inputdataisexposed ....................................................................................................18 Dubiousdataishighlighted...........................................................................................18 Sourceofdataisrecorded ............................................................................................18 Algorithmsflowvisually ................................................................................................19 Languageinfull .............................................................................................................19 Referencingotherworkbooksisavoided. ....................................................................20 2

2.5.1 2.5.2 2.5.3 2.5.4 2.5.5 2.5.6 2.5.7

2.6

Disciplined,RigorousandConsistent...................................................................................20 Trustwhatisseen .........................................................................................................20 DisciplineandRigour.....................................................................................................21 AggregatesandTotals...................................................................................................21 ColumnHeadings ..........................................................................................................21 ReadymadeModelsandWorkedExamples ................................................................21 LogofChangesandModelVersions .............................................................................21

2.6.1 2.6.2 2.6.3 2.6.4 2.6.5 2.6.6 2.7

RecordingSourcesofAllData...............................................................................................22 Rownotesofthesourceofthedata ............................................................................22

2.7.1 2.8

RapidtoAudit .......................................................................................................................23 Speed.............................................................................................................................23 ProcessofAudit ............................................................................................................23 AuditingReportsbasedontheEvaluation....................................................................23 AuditingMechanisms....................................................................................................23

2.8.1 2.8.2 2.8.3 2.8.4 3

GUIDELINESFORECONOMICEVALUATION ..................................................................................25 3.1 3.2 Purpose .................................................................................................................................25 Context..................................................................................................................................25 TheoryandComputationofNPV,IRRandRisk ............................................................25 EconomicEvaluationandFinancialModelling..............................................................25 EvaluationandValuation ..............................................................................................25 StandAloneorIncrementalValue ................................................................................26 StandAlone,Synergies,UsingTaxLosses .....................................................................26 Gearing(Debt)...............................................................................................................27 ExpectedValuesandResults.........................................................................................27 Alternatives ................................................................................................................... 27 RangesandLikelihoods/SensitivityAnalysis ...............................................................28 InputDataQualityAssessment.....................................................................................28 3

3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 3.2.7 3.2.8 3.2.9 3.2.10

3.2.11 3.2.12 3.2.13 3.2.14 3.2.15 3.2.16 3.3

RealandNominal ..........................................................................................................29 LifeoftheEvaluation ....................................................................................................29 AfterTax........................................................................................................................30 RiskandUncertainty .....................................................................................................31 Materiality.....................................................................................................................32 EvaluationFramework ..................................................................................................33

Process ..................................................................................................................................34 ProductPrices,TreatmentandRefiningCharges,andForeignExchangeForecasts....34 Sales:Volumes,qualities,workingstocks/capital. .......................................................34 Production:Volumes,headgrades,recoveries,productgrade,delivery.....................35 CapitalCosts..................................................................................................................35 OperatingCosts.............................................................................................................37 ClosureCosts.................................................................................................................38 Taxes(directcompanyleveltaxes)andCarbonCosts..................................................39 DiscountRate ................................................................................................................40 Auditing.........................................................................................................................40 Graphs ...........................................................................................................................41 HelicopterView.............................................................................................................42 Avoid .............................................................................................................................42

3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.3.8 3.3.9 3.3.10 3.3.11 3.3.12 3.4

AlternativeEvaluationandAssessmentMethodologies ......................................................43 RealOptionsValuation(ROV) .......................................................................................43 ValueatRisk(VaR) ........................................................................................................44

3.4.1 3.4.2

APPENDIXAWORKEDEXAMPLE........................................................................................................45 ExampleofaSummarypage.........................................................................................................45 ExampleofanExistingCasesheet ................................................................................................46 ExampleofanAlternativecasesheet...........................................................................................48 FinancialAnalysis ..........................................................................................................................49 4

APPENDIXBINTRODUCTIONTODISCOUNTRATES...........................................................................51 WeightedAverageCostofCapital ....................................................................................................51 TheCapitalAssetPricingModel(derivingtheCostofEquity) .........................................................52 AccountingforInflation ....................................................................................................................54 DiscountRatesandNPVsRealandNominal,BeforeandAfterTax ..............................................54 AdditionstoDiscountRates..............................................................................................................55 FinancingCashFlows ........................................................................................................................56 DiscountRatesinOtherValuationMethodologies ..........................................................................56 ConcludingComments ......................................................................................................................57 APPENDIXCRECOMMENDEDREADINGLIST........................................................................................59 APPENDIXDTECHNICALECONOMICEVALUATIONGUIDELINESCOMMITTEEMEMBERS...................60

1 INTRODUCTION
TheAustralasianInstituteofMiningandMetallurgy(TheAusIMM)istheleadingorganisation representingtechnicalmineralssectorprofessionalsintheAustralasianRegion.Membersarebound byaCodeofEthics,andcontinualimprovementofprofessionalandindustrystandardswithinthe sectorinwhichtheywork. Thestandardsandpracticesemployedintheprocessofevaluatingprojects,theapplicationof economicstyledvaluationtechniquesand,byimplication,thespreadsheetmodellingprotocols applied,areanareawhichisofconcerntomembersandtheindustrygenerally.Thereisa compellingcaseforthedevelopmentofhandsonguidelinesforthesepractices.Althoughmany ofthemajormininghouseshavedevelopedinternalguidelinesandprotocols(somemandated), noneexistgenerallywithintheminingindustry.ThedevelopmentofguidelinesforTechnical EconomicEvaluationisseenasbeneficialastheeconomicevaluationofprojectsandbusiness opportunitiesisaregularfeatureinoursector.Also,coupledwithsuchassessmentsarenumerous technicalassumptionsaroundgeology,miningandmetallurgicalparametersalongwithan expectationofaccuratemodellingandapplicationoftheDiscountedCashFlowvaluation methodology.Theconsiderationoftheseitemsisofteninthehandsoftheanalystandprojectteam immediatelyundertakingtheevaluationwithnoreferencetoanindustrystandardaimedat providingguidanceonthesecombinedtasks. Consequently,TheAusIMMhasundertakentoassisttheminingindustryinestablishingstandards andpracticesforthetechnicaleconomicevaluationofmines,projects,processesandbusinesses. TheAusIMMDraftGuidelinesforTechnicalEconomicEvaluationofMineralsIndustryProjects representsacollationofsoundpracticesthatcompetentpractitionersineconomicevaluationhave cometoovertheyears,andcoverwhatisconsideredgoodpracticeinbothspreadsheetmodelling andtechnicaleconomicevaluation.ThedocumentthusincludesasectionspecificallyonGuidelines forSpreadsheetModellingaswellasGuidelinesforTechnicalEvaluation.Appendicesprovide workedexamplesandabriefintroductiontodiscountratesfortheinformationoftechnicalanalysts whodonothavefinancialtraining. Itisintendedthatthisversionshouldbeaworkingtrialdocumentforuseandroadtestingover thenexteightmonthstoenableaswideapracticalreviewaspossibleofitssuitabilityassetof BestPracticeGuidelinesinthisimportantareaofprofessionalpractice.Itisthenintendedthat feedbackreceivedduringthistestingperiodbeusedtopreparearefinedandupgradedversionfor publicationbyTheAusIMM. ShouldtheGuidelinesproceedtofinalpublication,theirusebymembersandcompanieswilla matterforprofessionaljudgement;theyareintendedtoserveasaguideforbestpracticerather thanaCode.Theultimategoalisforconsistencyofpracticeandtoensurethedeliveryofhigher qualityeconomicevaluationandmodellingoutcomesacrosstheindustry.Thefinalversionofthe guidelinesareintendedtobeadvisoryandeducative,notmandatory. 6

MakingaSubmission Commentsandsubmissionscanbelodgedoverthenexteightmonthsviaemailorpostbefore Fridaythe25thFebruary2011. Pleasedirectyourcommentsto: MonikaSarder Manager,PolicyandProfessionalStandards TheAusIMM POBox660CarltonSouth VictoriaAustralia3053 msarder@ausimm.com.au ForadditionalinformationpleasecontactMonikaSarderatmsarder@ausimm.com.auor039662 3166.

WhattheseGuidelinesareandarenotintendedtodo DuringthecourseofthepreparationoftheseGuidelines,inputsandcommentshavebeenreceived fromnumerouspeople,bothonandfromoutsidetheCommittee.Manyoftheseareclearly influencedbythepersonsroleintheindustry,includingtechnicalpractitioners,financiers,and academics.SomeindicatestrongfeelingsabouttopicsthatshouldbeintheGuidelines.The Committeehasreviewedallofthese,andbelievesitisimportanttosetoutthecurrentphilosophy underlyingtheGuidelines,andhencewhycertaintopicshavebeenincluded,butperhapsmore importantly,excluded,fromthisdraft. TheGuidelinesare,asthetitlestates,fortechnicaleconomicevaluation.Theyareprimarilydirected atananalystorevaluatorwithatechnical,ratherthanfinancial,background.Theywilltypicallybe appliedforawiderangeofprojects,rangingfrom,forexample,thejustificationofthepurchaseofa pieceofcapitalequipmentbyarelativelyjuniorengineeronaminesite,totheevaluationofa completeprojectorproperty,leadingtodecisionstoproceedwithdevelopment,ortobuyorsell,by ateamofspecialistsinvariousfields,manyofwhichwillbetechnical,andwhichwilltypicallybeled byapersonwithatechnicalratherthanafinancialoreconomicbackground. Theprimaryfocusisonthetechnicaleconomicevaluation,whichisintendedtoidentifytheviability ofaprojectinitsownright,independentlyofanydecisionsastohowitmightbefinanced.Formany projects,suchastheonsiteevaluationofproposedcapitalexpenditure,financingconsiderations willneverbeanissuetheywillbefullyaccountedforinthespecifieddiscountrate.Inprojectsat theotherendofthescale,suchastheproposeddevelopment,constructionandoperationofalarge newmine,financingmaybecrucial:financiersshouldbeincludedintheteamandfinancing considerationsshouldbeincludedinthedevelopmentoftheevaluationassoonaspracticable. TheseGuidelineshoweverarenotdealingwiththedetailsoffinancingaspectsofsuchprojectsand evaluations,otherthantoidentifythat,dependingonthenatureoftheprojectbeingevaluated, suchconsiderationsmayexist;thatifsotheyneedtobeaccountedfor;andthatthesamesortof processandrigourappliedtothetechnicalandeconomicaspectsoftheevaluationshouldbe similarlyappliedtothefinancingaspects. TheGuidelinesarenotdealingwithwhatonemighttermtheengineeringaspectsoftheproject: thelevelofaccuracyoftheevaluation;themethodsofderivingvariousphysicalinputssuchas constructionquantities,orereserves,andmineschedules;andsourcesofcostinformation.Neither aretheydealingwith,forexample,thevariousalternativetreatmentsofsuchthingsastaxesin variousjurisdictionsanddepreciation,northemechanicsoftheircalculations.Itisimplicitthatall inputsandcalculationswillneedtobedonewiththedegreeofprocess,skill,anddetailappropriate forthelevelofaccuracyofthestudybeingundertaken.Thetechnicaleconomicevaluationisbuta partofthetotalstudy,albeitaveryimportantpartthatinonesensepullsallthevariousnon financingactivitiestogether. TheGuidelinesarealsonotdealingwiththeunderlyingtheoryofdiscountedcashflowtechniques, norwiththeappropriatenessorimplicitassumptionsunderlyingtheuseofparticularvalue measuressuchasNetPresentValue,InternalRateofReturn,andEquivalentAnnualValue.Thereare numeroustextbooksandcoursesthatdealwiththeseissuesandtheGuidelinesarenotintendedto replicateorreplacethese. 8

TheexclusionofthesemattersfromtheGuidelinesisnotinanywayintendedtodownplaytheir importance.Theyshouldbeunderstoodandappliedoraccountedforatthelevelofdetail appropriateforthelevelofstudybeingundertaken.However,ifthereissufficientdemandfrom usersoftheGuidelines,suchmatterscanofcoursebeincludedinlaterversions.

2 GUIDELINESFORSPREADSHEETMODELLING

2.1 Purpose
TheGuidelinesforSpreadsheetModellingoutlinethekeyprinciplesandmechanicsthatshouldbe adopted,notonlyforeconomicevaluationmodelling,butalsoascurrentBestPracticeGuidelines withinourindustryforanyspreadsheetmodellingexercises.Itisrecommendedthatthese GuidelinesareappliedbyCompanies,Organisations,ConsultantsandIndividualswhilstrecognising thattheiradoptionisvoluntaryandnotstrictlymandated.Workedexamplesthatservetoillustrate theseprinciplesandthemechanics(alongwiththosefortheGuidelinesforEconomicEvaluation)are providedinAppendixA. ThefollowingdiscussionusestheterminologyandnomenclatureusedbyMicrosoftExcelTM,whichis thesoftwareusedalmostuniversallybyindustrypractitioners.Thesameprinciples,however,apply regardlessofthesoftwareused.

2.2 KeyPrinciples
Thekeyprinciplesoneshouldadheretowhenspreadsheetmodellingaresimplebutextremely effective.Theyare:

Easytofollow TailoredtoPurpose Transparent Disciplined,Rigorous,andConsistent RecordingSourcesofAllData RapidtoAudit

2.3 Easytofollow

2.3.1 IntuitiveandVisual
Ifyoucannotreadilyunderstandmymodelyoudonothaveaproblem,Ido!

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Apersonunfamiliarwiththebusinessshouldbeabletoreceivetheevaluationmodelbyemailand beabletoreadilyunderstandandfollowtheevaluationfrombeginningtoend.

Thewholeworkbookshouldhaveanobviousvisualflowfromlefttoright,acrosslabelled worksheets,anddowneachworksheet. Withineachworksheet,thecolumnsandrowsshouldhaveobviousvisualflowsjustlikea simpletextbook. Thetitlesandsubtitlesusedineachsheetshouldcascadelikeonewouldseeinacontents page. Theworkbookshouldbeginwithabriefintroductionwhichexplainsthepurposeand contextofthedocumentandhowtointerprettheformattingforfasterunderstanding. Eachworksheetshouldhaveitsboldheadingfollowedbyanoutlineofitspurposeandits broadlinkswithotherworksheets.Sectionswithineachworksheetarediscrete,with obviousinputs,computations,outputsandgraphs. Everycellshouldadhererigidlytotheformattingconventionandsocanbeinterpreted visually. Thisprincipleshouldnotbeseenasarequirementtodumbdownamodelofcomplex processes. Notehoweverthatintuitionincomplexsystemsmaycomefromexperienceofwhatis merelyconventional.Unusualmodellingtechniquesthatsimplifythemodellingprocess,or makeitmorepowerfulorrobust,maybeunintuitiveandrequireexplanation.

2.3.2 Timetodoitproperly
"Likepaintingaroomathomeitis90%preparation."

Timeshouldbetakentounderstandtheactivitybeingmodelledfromrawmaterialinputs tofinishedproductoutputs,beitabusinessactivity,atechnicalactivityoranintellectual activity. Theevaluationmodelshouldbebuiltspeedilybutcarefullyandmethodically,rigorously usingthemodellingpractices,soastobeeasytofollowandmakinganyerrorsrecognisable duringaquickaudit. Shortcuttingofmodellingpracticesfrequentlyproduceshiddenerrorsbecausethereis inadequatetransparency,consistencyandrigour. Beforeanyresultsarereleased,graphsshouldbegeneratedofthekeyinputsandresultsas essentialchecks.

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Beforeanyresultsarereleasedthemodelshouldbeproperlyauditedinternally,thenby anexternalparty.

2.3.3 Architecture:WorkbookLayout
Thewholemodelshouldbeintuitive,eventoanonexpert,sothatitsstructureisobviousand navigationaroundthepartsofthemodelisrapid.

Thereshouldbecompleteflexibilityinthewaythemodelisstructured.Somemodelswill evolvefromoneworksheettomultipleworksheetsasmoredetailedmodellingisjustified. Theflowofmultipleworksheetsshouldbealogicalsequencefromlefttoright.Each Worksheethasatabnamethatshowsitspurpose. Usuallythemodelshouldbesavedsothatitopensatthetopofthefirstworksheet,where thereisabriefdescriptionof: 1. Thepurposeofthemodel, 2. Contactdetailsoftheauthorandusers, 3. Thedirectorylocationwhereitissecurelystored, 4. TheModelsarchitecture, 5. Anywarningsorlimitations, 6. Auditscompleted, 7. Themodellingpractices/formatting,and 8. Listallothermodelsthatareusedforinputsorthataredirectlylinked.

Themodelshouldincludeasummaryofresultsandkeyinputsinnumericandgraphicforms. Themodellingmaycommenceunderthatsummarybutmorecommonlyonsubsequent worksheets.

2.3.4 WorksheetLayout
Anonexpertshouldreadilyunderstandthefunctionofeachworksheet,howitisarrangedinto componentparts,howthedataisentered,thecomputations,andtherelativeimportanceofthe parts.

Thevisualflowdownandacrosseachworksheetshouldbeintuitiveandlogical. Eachworksheetshouldhaveaboldheadingfollowedbyabriefoutlineofitspurpose,and wherehelpful,itsimportantlinkswithotherworksheets. 12

Sectionswithineachworksheetshouldbeindiscreteworkblocks,withobvioussubsections andsubheadingsusingacascadinglayoutforsubtitles. Visuallyeachworkblockshouldbeselfcontainedwithanobviousstepbystepdevelopment towardaboldsubtotalforthatworkblock. Theseparateworkblocksshouldbeinalogicalsequencedownandacrosstheworksheet andtheiraggregationisobvious. Complexandextendedcomputationsshouldbeshowninaseriesofsmallstepssothatthe logicisvisibleandtheinputparametersareobvious.Thereisnoneedtointerrogatethe algorithm.Explainthelogicofcomplexalgorithmsinanote. Usuallyifarowofdatathathasalreadybeenpresentedaboveisneededagaininawork blockthentheentirerowshouldberepeatedsothatthereisvisualflowofthelogic.If referencedfromanotherworksheetthenitshouldbecolouredcoded. Keyinputsandresultsshouldbeshowningraphsasaselfcheckandforrapidunderstanding. TheDataGroupandOutlinefacilitycanbeusedtodefineworksheetstructure,collapse relatedgroupsofrowsorcolumnstoreducevisualclutter,andaidnavigation. Eachworksheetshouldhaveaheaderand/orfootersothesource,date,etccanbe identifiedwhenlookingathardcopies.

2.3.5 ModularConstruction
Asmuchaspossible,themodelshouldbeconstructedasmodules,eachhavingaclearsetofinputs, calculations,andoutputsthatareusedinvariousothercalculationsdownstream,orpresentedas finalresults.

Thegeneralprincipleis:onlycalculatesomethingonce,thenusethatoneresultinallother placeswhereitisrequired. Modularconstructionandcalculatingsomethingoncefacilitateslatermodificationstothe modelchangesneedonlybemadeinoneplace,ratherthanhavingtosearchthroughthe modeltofindallplaceswherethesameparametershavebeencalculated. Thetestingofsmallindependentmodulesfacilitateserrorcheckingandauditing.

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2.4 TailoredtoPurpose
Thepurposeoftheevaluationwilldetermineamongstotherthingstheparametersthatmustbe investigated,andhencethemodellogicnecessarytohandlechangestothoseparametersinthe evaluationmodel.Modelswherefrontendphysicals(egminingandmillfeedschedules)arefixed orspecifiedexternallymayberelativelysimpletoconstruct.Metallurgicalperformancedatawill drivecalculationsofproducts,andhencerevenues,andcostsmayberelativelysimplyderivedfrom thephysicalquantities.Ifontheotherhandthemodelmustbeabletoflexsuchthingsascutoff grades,miningandmillingratesandthetimingofupgradestothese,andsoon,morecomplexdata structuresandschedulingalgorithmswillberequired.Morecomplexcostmodelsmayalsobe requiredtoaccountforchangesinratiosofvariousphysicalquantitiesthatareimplicitlyfixedin simplercostmodelsforasingleminingschedule.

2.4.1 Sizeandcomplexity
Greatersophisticationandmathematicalcomplexitydoesnotautomaticallydeliverabettermodel.

Somemajordecisions,synthesesandriskscanbeevaluatedwithsmall,simplemodels, whereassomeminorinvestigations/synthesesrequireelaboratemathematicalmodelling. Whenmakingadecisionregardingsizeandcomplexityconsiderwhetherworkingata conceptual,prefeasibility,orfeasibilitylevelofdetail,andhenceitsmateriality. Complexmodelsmayberequiredforsometasks. Increasingcomplexitydecreasesthemodelsuniversalappeal,includingitsauditability. Wherealongandcomplexmodelisrequireditshouldbemadeeasytofollow. Intellectualprowessshouldbeusedtotransformcomplexityintosmallsteps. Modellingshouldproceedasaseriesofvisuallyeasytofollowstepsratherthanusing complexalgorithmsandinbuiltsoftwarefunctions. Modelsshouldtakethereaderthroughthelogicprocessinsmallstepsratherthanusinga trustmymodellingapproachinasinglecellorcomplexalgorithm/function. Itshouldbenotedthatthereisalevelofdetailandcomplexitynecessarytogetagood outcome,butamoredetailedlevelofanalysismayberequiredtoprovethatitisgood, particularlywhereresultsarecounterintuitiveorunexpected.

2.4.2 Minimalistassimpleasappropriate

Eachevaluationshouldbeginwiththethoughtofhavingtheentireactivitysensibly representedinoneworksheet. 14

Asthemodelmaturesandexpandsonlyonemainmodeliscurrent.Thisshouldhandleall thevariations.Thereshouldnotbemultipleversionsofthesamemodelfordifferent scenarios. Itmaybeusefultohavestandalonesubmodelsthatevaluatesubordinateissues.Once resolvedtheoutcomeshouldbeincorporatedintothemainmodel. Inacomplexmodelitmaybehelpfultohaveadiagraminthefrontsheetshowinghowthe modelssheetsinteractandflow. Modelsshouldbecommencedasminimalist.Computationsshouldnotbeincludedincase theymaybeneededinthefuture.However,aspartoftheoverallprojectspecification, modelcapabilitiesthatmightbeneededshouldbeidentifiedatthestartoftheprojectand themodelconstructedinsuchawaythattheyarenotprecludedandcanbeeasilyadded laterifrequired. Complexityanddetailmaybeintroducedwhentheextrarowsofcomputationsarejustified. Computations,whereused,shouldbesteppedoutrowbyrowwithoutskippingobvious steps.Themodellershouldavoidoverlylengthyformulaewherepossiblesoastomakethe modeleasiertounderstandandfollow. Computationsshouldalsonotbeovercomplicatedbymixingmultipleactivities,e.g.having amathematicalformulathatmodelstheprocessandalsoincludesachangeinunits. Someresultsmaybecomputedtosufficientprecisionusingsimpleapproximations.For example: o Operatingcostsmaybesimplefixedandvariableuntiladetailedbottomup computationiswarranted. Mineralconcentratepricesmaybebettercomputedasapercentageofcontained valuesratherthanusingthedetailofcomplexhistoricalpricingmechanisms.

However,caremustbeexercised,assimplerelationshipswilltypicallyhaveasmaller rangeofvaliditythanmorecomplexrelationships,whichmaylimittherangeofsensitivity analysesthatcanbevalidlyconducted.Thelimitsofthevalidityofsimplerelationships shouldbeascertainedandclearlyspecifiedadjacenttoassociateddataitemsorcalculations.

2.4.3 Matchingdetailandcontentwithitsimportance
Computationsshouldbetailoredtomatchtheirimportance.

Thecomputationsthathavegreatestimpactontheresultshouldbegiventhemost attention.

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Thecomputationsofsecondaryandtertiaryimportanceshouldbegivenlesspriorityand detail. Computationsthatareafocusofaparticularpersonshouldnotbegivenundueattention, forexampleworkingcapitalbyanaccountant. Incometaxandworkingcapitalmaybeapproximatedinafewcoarsecomputations,rather thantoaccountingdetail. Accountingstatementsshouldbederivedfromthetechnicaleconomiccashflows,rather thanviceversa. Itisrecognisedthatsomekeydecisionmakersandinfluencersmayhavestronglyheld theorieswhichmayneedtobeprovenordisprovenbyextraevaluationdetail. Selectappropriatetimescalesforcalculationofphysicalquantities,cashflowsandreporting. Thesemayallbedifferent.Thereisatradeoffbetweenaccuracy,complexityandmodelsize. o Smalltimeincrements(e.g.daily,weekly,monthly)maybetoodetailedforthelevel ofstudy,implyanaccuracythatdoesnotexist,andincreasethemodelsize unnecessarily. Largetimeincrements(e.g.yearly)maybetoocoarseforsomepurposes,requiring complexlogictohandleinteractionsbetweentimeperiods(e.g.ifthemodelis generatingautomatedscheduleswithpredecessor/successorrelationships). Anintermediatetimeframe(e.g.quarterly,halfyearly)mayprovideagoodbalance betweenthevariousconsiderations. Smallermodellingtimeincrementscanbeeasilysummarisedforfinalreportingof results.

2.4.4 MatchingDataandCalculations

Createdataentryareasinalayoutthatmakesiteasyandnaturalfortheusertounderstand andtoentertherightdataaccurately. Ifnecessary,preprocesstheentereddatatoconvertunitsusedorintoadifferentformat thatfacilitatesthedevelopmentofsimple,robust,errorfreemodellogic. o Donotforcetheusertoenterdatainanunnaturalwaysimplytosuitthe calculations. Donotdevelopcomplexlogicjustbecausethedataisenteredinaparticularway.

Docalculationsinnaturalorunfactoredunitse.g.tonnes,dollarsetc(thisdoesnotaffect calculationtimeorinternalprecisionoffloatingpointcalculations). 16

Usegradesandrecoveriesasdecimalfractions(valuesbetween0and1),notas percentages(valuesbetween0and100).Makeuseofthespreadsheetsnumber formattingfeaturesandstylestodisplaypercentages. Avoidmultiplyinganddividingby1000,1000000etcinthebodyofthemodel.Thisis errorproneandaddsunnecessarycomputations.Makeuseofthespreadsheets numberformattingfeaturesandstylestoroundthedisplaytoshowthousands, millions,etc. Preprocessrawdataoncebytheseunitand/orscalingconversionfactorsif necessarybeforefurtheruseinthemodel.

Ifexportingresultstoanothermodel,createanexportworksheetintheformatrequiredby thatmodel,anddoanyunitorscalingconversionsnecessary(topercentages,thousands, millionsetc)whenpopulatingtheexportsheet.

2.4.5 DirectinvolvementofProjectTeammembers
KeyTeammembersmayassistwiththecreationofthemodelintheirareasofexpertise.

Theirenthusiasmforlotsofdetailtoreplicatetheintellectualchallengesoftheirspecial areasistemperedbyandmatchedwiththerelativelevelofimportance. Theyaudittheirownpartofthemodelandsocoownthemodel.

2.4.6 HelicopterView
Eachteammemberneedstogainaworkinghelicopterviewofthemodelling.Focusisgiventothe areasthatmatterthemost.Workonintellectuallystimulatingbutminorissuescanbeminimised.

AsummarysectionwithgraphsofkeyassumptionsandresultsgivesTeamMembersand Managementareadilyunderstoodoverview.

2.5 Transparent

2.5.1 Thecompleteevaluationflowslikeasimplestorybook

Bystartingatthetopofthefirstworksheetandreadingonscreenorprintingtotheendof thelastworksheettheinexperienced,nonexpertshouldbeabletoreadilyfollowthelogic. Nonexpertreadersshouldbeabletoreadilyunderstandhowthemodelworksandhowits componentpartsfit. 17

Thearchitectureandadherencetogood/recommendedmodellingpracticesshouldmake theevaluationtransparent. Itshouldbeeasytovisuallydistinguishbetween: 1. Inputofrawdata 2. Referencingofdatafromotherworksheets 3. Computations 4. Outputs

Everyworksheetandeverycellshouldhaveapurposeandgenesisthatisobviousonthe screenandinprint.

2.5.2 Inputdataisexposed

Everypieceofinputdatashouldbeenteredinaninputcellbeforeitisusedinanalgorithm. Noinputshouldbehiddeninanalgorithm,withthepossibleexceptionofeveryday conversionssuchasdividingbythousandsorconvertingpoundstokilograms.However,itis recommendedthatunitconversionfactorsalsobeenteredonce(preferablyinanamedcell), andreferredtowhererequired.Thisavoidstypographicalerrorsorinconsistencies(e.g.the numberofsignificantfiguresused)whenthesamefactorisenteredmultipletimesin multiplelocations,andpotentiallyatdifferenttimesandbydifferentpeople. Aspecificfontcolourshouldbeusedtoreadilyidentifydatainputs.Blueiscommonlyused. AppropriateuseofControls(e.g.dropdownboxes,checkboxesetc)canshowtheranges orspecificoptionsfordatavaluesandscenariosettingsthatmaybevalidlyusedinthe model,andlimitentriestothese.

2.5.3 Dubiousdataishighlighted

Adistinctivecolourcodingshouldbeusedtohighlightinputdataorcomputationsthatare dubiousorverypreliminary.Pinkmaybeused.

2.5.4 Sourceofdataisrecorded

Alldatasourcesshouldberecorded(seesection2.7). Whererelevantincludeanumberofcolumnswithhistoricaldatafrompreviousyearsthis willhelpdemonstratetheveracityofforecastdata.

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2.5.5 Algorithmsflowvisually

Visuallythesequenceofcomputationsshouldflowlikeasimplestorybookdownand acrossthespreadsheet. Complexalgorithmsshouldbebrokenintoeasytofollowsteps. Computationsshouldappearobviousandgenerallydonotrequireinterrogationofcells. Anychangeorinconsistencyinasequenceofalgorithmsacrossarow(ordownacolumn) shouldbehighlighted. Linkstootherworkbookscanbedangerousbecausetheothermodelmaybealtered withoutthechangebeingrecognised.Iflinkstootherworkbooksareused,thewhole row/columnwithtitlesandlabelsshouldbereferencedacrosssothatcovertchangescanbe seen.Thelinkedrowshouldbehighlightedincolour. Macrosthatperformcalculationscannotbereadilyfollowedvisuallyorauditedand generallyarenottrusted. SomespreadsheetFunctionshaveahistoryofmisuseandcannotbeaudited,whereaslong handcomputationscanbefollowedeasilyandvisually. Multiplerecalculationsofthesamethingareavoided. Ifcreatingnewlogicthatsupersedesexistinglogicinanoldmodel,itisrecommendedthe modellereither: o Labeltheoldlogicclearlyassuperseded,andpreferablymoveitawayfromthe activelogic,e.g.tothebottomofthesheet,or Deletetheoldlogic,butlogthechange,identifyingthesupersededversionofthe modelthatusedit.

2.5.6 Languageinfull

Unitsandtechnicalexpressionsshouldbeexpressedinfullatleastonceinamodel. ConsiderusingalistofAbbreviationsoraGlossaryofTerms.Abbreviationssuchast,T, mandMhavedifferentmeaningstodifferentpeoplesomeofwhicharenotconsistent withinternationalstandards.ExamplesincludedrytonnesandwetshortTons. Ifanalgorithmrequiresdatafromanotherworksheetthenthecompleterowisfirst referencedacross,usuallyjustabovewhereitisneeded. Everyrowthatisreferencedfromanotherworksheetisshowninadistinctivecolourcoding andorfontstyle. Thismeansthateveryalgorithmusesdataalreadyshowninitsownworksheet.Auditingan algorithmwillnevershowdatathatislinkedfromanotherworksheet.

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2.5.7 Referencingotherworkbooksisavoided.

Linkstoworksheetsinotherworkbooksshouldbetreatedwithextremecaution.Ifdoneit shouldbeobvious,limitedtospecialsituations,anddonewithextremecare.Thewholerow orcolumnorrectangularrangeshouldbelinkedacross.Adistinctivecellformatshould highlightsuchimports. Ideallythisshouldonlybedoneforimportingdatathatwillchangeinfrequently(ornotat all),oftenpreprocessedintosuitabletablestructuresorsummariesforuseinthemodel. (ExamplesmightincludetablesofOreReservesgeneratedfromdataextractedfrom geologicalblockmodelsandmineplanningsoftware,orfixedandvariableunitcostsderived fromdetailedcostrecords.) Informationfromotherworkbooksshouldalwaysbeimporteddirectlyintocellssimilarto dataentrycellswithnootherprocessing,andthenusedincalculationselsewhere.Formulas inacellshouldneverbothimportdatafromanotherworkbookandperformsome calculationonorwiththatexternalinformation. Separateexternaldatafilesshouldbemaintainedforeachversionofsuchdata,linksfrom themainmodelshouldbecarefullycheckedregularly. Informationidentifyingthedataversionshouldbeimportedfromthelinkedworkbookas wellasthedataitself,sothatitcanbeeasilyseenwhatisbeingusedwithouthavingtoedit thelinkages. Calculationlogicthatflowsfromoneworkbooktoanotherandbacktothefirstshouldbe avoidedifatallpossible,aschangesmadeearlyinthelogicinthefirstworkbookwillnot flowcorrectlytolaterstagesofthelogiciftheotherworkbookisnotopenorlinksboth waysbetweenthetwoworkbookshavenotbeencorrectlymaintained.Suchlinkscaneasily bebrokenifoneworkbookissavedwithanewnamewhiletheotherisclosed.

2.6 Disciplined,RigorousandConsistent
2.6.1 Trustwhatisseen

Whatisseenonthescreenorinprintshouldrepresentwhatishappeningineachrow, columnandcell. Everycellshouldadhererigorouslytothemodellingpracticeswhichareshownatthestart ofthemodel. Everycellshouldbeabletobetrustedtobeconsistentwithitsneighboursofthesame formatting. Anyinconsistenciesinalgorithmsshouldbehighlighted. 20

Worksheets,columnsorrowsshouldnotbehidden.TheDataGroupfacilityisacceptable becauseitmarksthecollapseddata.

2.6.2 DisciplineandRigour

Eitherhave100%modellingPracticesorzeroPractices.ModelsthatfollowthePractices inthemainbutwhichcovertlyfalterinpartsarefarworsethanmodelsthathaveno Practices. Timeshouldbeallowedtousethemodellingpracticesandproperlyauditthemodelbefore resultsareexpected.

2.6.3 AggregatesandTotals

Totalsandsubtotalsshouldbeobvious.Itisrecommendedthatacolumnontheleftsideof thespreadsheetisused,whereitisusuallyvisible,ratherthanontheright.Totalrows shouldbehighlightedwithboldfontorborders. Eachdatarangebeingevaluated(rowand/orcolumns)shouldbeaggregatedandthese totalsmadeobvioussothatitcanbereadilyunderstoodandcanbecheckedagainstsource data.

2.6.4 ColumnHeadings

Thesequenceofcolumnsacrosseveryworksheetinaworkbookshouldbeidenticalunless clearlyidentified,especiallyforyear(orothertimeperiod)headings. Onceasequenceofcolumnheadingsisestablishedinoneworksheetitshouldbe maintainedinallotherworksheets.Forexampleiftheyear2013isinColumnKinone worksheetthenitshouldbeincolumnKinallworksheets.Exceptionsshouldbeclearly highlighted.

2.6.5 ReadymadeModelsandWorkedExamples

Modelswithblankinputfieldstobefilledforentryintoablackboxshouldbeusedwith caution.Theymaybeusefulforsortingopportunities. WorkedExamplesofModellingPracticescanbeusedasthestartingpointandadapted.

2.6.6 LogofChangesandModelVersions

Whereahistoryofchangestothemodellingneedstoberecorded: 21

o o

Versionnumbersshouldbegiventomodelsdistributed,and Notedwithoutputsinreports,presentationsetc(i.e.includefilename,worksheet, date,andrevisioninfooterorprintedcellforpublishedoutputs).

Themodeldistributedorusedforreporttablesandfiguresshouldbethelastwiththat versionnumber.Anysubsequentworkdoneshouldbewiththenextversionnumber. Anyoneeditingthemodelshouldlistallupdatesinalogofchangeswith: o o o Dateandperson Adescriptionoftheupdate(withfiguresnoted),newNPVfigureetc,and Commentsdescribinganyreconciliation/explanationoftheeffect(ifrequired).

2.7 RecordingSourcesofAllData
2.7.1 Rownotesofthesourceofthedata

Anyonereadingthemodelshouldbeabletoimmediatelyidentifythesourceanddateofthe data,andsoassesswhetheritisthemostrecentandappropriate. Thisappliestoeveryrowofnumericalinputvaluesandtocomputationallogicthatis unusual. Thesourceofeachitemofinformationshouldberecordedwiththedate,personand/or documentname. Thisshouldshowasarowimmediatelyaboveorbelowtheinputteddataandalways appearsinfullonthescreenorinprint.Itshouldnotbeinahidden,embeddedcellnote. Someanalystsusenotesincellsaspersonalremindersofchangeforrecordingwhy algorithmschangeand/orachronologicalrecordofallhistoricaldatausedandupdates. Anysourcedatathatisknowntobedubiousortoneedcheckingshouldbeidentifiedina specificfontcolour.Pinkormagentaisbeingwidelyused. Atthebeginningofthemodelthenameofthepersonperformingthemodellingshouldbe stated,withthecontacttelephoneand/oremailaddressandthestartdate. Disciplineisrequiredtoupdatesourceinformationwhendataisupdated.Thereislittleor nowaytocheckonthislaterifitisnotdoneatthetime. Itmaybeusefultoretainpreviousdatasets,withcapabilityinthemodeltoswitchbetween them.Inthiscasedatasourceinformationmightbeenteredinaparticularcolumnineach datarow,anditwillbemoreevidentifsomedatasetshavethesameornosource information. 22

2.8 RapidtoAudit
2.8.1 Speed

IfthePracticeshavebeenfollowedrigorouslythemodelshouldbeeasytofollowand thereforequicktoaudit.Consequentlypeoplearelikelytobemorewillingtoauditothers models.

2.8.2 ProcessofAudit

Threephasesofauditarerecommended: 1. Selfauditbythepersonwhodevelopedthemodel, 2. AuditsbyinternalmembersoftheTeamwhochecktheirownsections,and 3. Aformalauditoftheentiremodelbyanindependentperson(s)externaltothe model.

2.8.3 AuditingReportsbasedontheEvaluation

Thepersonauditingthemodelusuallyshouldalsoaudittherelevantsectionsofanyreports basedonthatmodel. Theinterpretationofmodelresultsovertherangesofcasesneedstobeconfirmed.

2.8.4 AuditingMechanisms

Acommonapproachtoauditistoworkfromthekeyoutputs,suchasNPVorproduction, backupthestreamsofcomputationstotheinputsforeach. Createerrorcheckingformulaswithinamodel.Themoreoftheseformulasinamodel themoreselfauditingitbecomes. Again,usingcolumnsspecificallyfortotallingcashflowsandNPVsofeachcomponentof cashflowswillassist. Thetotalforeachdatainputoverthelifeoftheevaluationshouldbecheckedagainstthe sourcedata.Globaltotalsofkeyinputsandoutputsaretested. Wheretheevaluationispartofalargersizedresourceorbusinessitsvalidityandcontext shouldbeinvestigated. Useofspreadsheetauditing/checkingsoftwarecanhighlightinconsistenciesandtheuseof datavalueshardwiredintoformulas. 23

Consistencyofalgorithmsacrossrowsanddowncolumnsmaybetestedbycopyingthe algorithminthefirstrowacross/downallothers.Itisnotuncommonforthefirstcolumnto bedifferent,thoughthatshouldbehighlighted.Copyingthesecondcolumnmaybebetter. Auditdowncolumnsisbetterdoneinotherthanthefirstcolumnincasethefirstcolumn wasalteredbutmistakenlynotcopiedacross,orisdifferentfromtherestforsomevalid reason(inwhichcasethedifferenceshouldbehighlighted). Itisrecommendedtoincludeatotalinacolumntotheleftofthedatatocheckagainst inputdata(asatotaltotherightofthedataislikelytobeoffthescreen). Whenauditing,itcanbeusefultocreateanewsheetatthefrontoftheworkbookwith: o o Allauditingnoteslisted, Aprioritisationcolourcodenotinghigh,mediumandlowrankeditems(usingred, yellowandgreencellcolouring),and Linkstothesectionsofthemodelthattheauditingnotesapplyto.

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3 GUIDELINESFORECONOMICEVALUATION

3.1 Purpose
TheGuidelinesforEconomicEvaluationdiscusskeyconceptsandmechanicsineconomicevaluations andareindependentoftheGuidelinesforSpreadsheetModelling.Itisrecommendedthatthese GuidelinesareappliedbyCompanies,Organisations,ConsultantsandIndividualsascurrentBest PracticeGuidelineswhilstrecognisingthattheiradoptionisvoluntaryandnotstrictlymandated. Workedexamplesthatservetoillustratetheseprinciplesandthemechanics(alongwiththosefor theSpreadsheetModelling)areprovidedinAppendixA.

3.2 Context

3.2.1 TheoryandComputationofNPV,IRRandRisk
RefertoFinancialTheory,RiskTheoryandrelateddocumentsforthecalculationofDiscountedCash Flow(DCF),NetPresentValue(NPV),InternalRateofReturn(IRR),riskadjustmentandrelated metrics.AppendixBprovidesabriefintroductiontodiscountratesfortheinformationoftechnical analystswhodonothavefinancialtraining.

3.2.2 EconomicEvaluationandFinancialModelling
Preferablytheevaluationoftheeconomicsofaninvestmentiskeptseparatefromthemodellingof itsfinancing.

Evaluatetheeconomicsoftheunderlyingcashflowswithoutfinancingasthefirststep. Understandtheviabilityoftheunderlyinginvestment. Considerwaysoffinancingtheinvestment,infinancialmodelling,asthesecondstep. Differentdiscountratesshouldbeuseddependingonwhetherfinancingcashflowsarepart oftheanalysisornot.

3.2.3 EvaluationandValuation
Evaluationisaprocessofwhichavaluationisanoutcome.

Evaluationistheprocessofconsideringtheeconomicworthofanactivity.Itshould investigateallinputs,computations,outputs,casesandalternatives. 25

Valuationisanoutcomeoftheevaluationprocesswhereasinglevalueorarangeofvalues is/areproducedunderset/setsofconditions. Often,valuationisreferredtoasanart.Thenumerousassumptionsinvolvedcanleadto varyingviewsastothevalueofaproject,company,etcwhenapplyingtheDCFtechnique. Thistendstolendweighttoexperiencebeingofparticularimportance. Valuationexercisesaremoreaccuratewhenrankingprojects,etc,onarelativebasis.That is,underacommonsetofassumptions,onecanidentifywhichproject,withinasuiteof projects,willprovidethegreatestvalue.Valuationsarealsoundertakeninanabsolute sense:anabsolutevalueisattributedtotheproject,whichisnotrankedrelativetoother options.Valuesarealwaysbasedonfutureestimatesandhencealevelofuncertaintyis inherent. Whenundertakingvaluationsonanabsolutebasisarangeofoutcomesshouldbe determined.

3.2.4 StandAloneorIncrementalValue
Theoverallapproachtoevaluationmaybeincrementalvalueorabsolutevalue.

Anexistingbusinessoractivityisusuallyvaluedinabsoluteterms. Aninvestmentisusuallyvaluedasitsincrementaleconomicimpactthevalueof proceedingminusthevalueofnotproceeding. Incrementalevaluationsshouldincorporateallimpactsofachange.Itmaybebetterto modelthewholebusiness,withandwithoutthechange,ratherthantryingtoisolatethe incrementalimpactsonly. Inallcasestheevaluationshouldconsiderwhethertherearealternativesi.e.stayingwith thestatusquoorwhetheritmayimproveitsbaseactivitywithasmallerinvestment. Synergiesbroughtbycombiningoperationswillusuallyrequireastandaloneevaluation.

3.2.5 StandAlone,Synergies,UsingTaxLosses
Normallytheassessmentistobeoftheentityonastandalonebasis.Ifthereisaspecialreasonfor crosssubsidyorcrosspenaltythenitsquantum,importanceandlikelihoodmustbeclearly described.

Typicalbenefits/penaltiesfromoutsidemayincludetherealisationofpreexistingtaxlosses, (ifusable),synergiesfromcombiningactivities,andmarketposition. Thisshouldnotbeincludedifthebenefit/penaltyislikelytorealisedinthenormalcourseof businesswithoutthisactivity/investment. 26

Thevaluationclearlydifferentiatesbetweenthevalueoftheentityonitsown("standalone") andthevalueofanyspecialbenefits/penaltiesfromoutside. Theconditionsforreceivingbenefits/penaltiesfromoutsideareoutlined.Otherwaysof realisingthesebenefits/penaltiesareoutlined.

3.2.6 Gearing(Debt)
Normallytheassessmentistobeoftheunderlyingeconomicsbeforetheintroductionofanydebt. Ifforsomereasondebtmustbeconsideredthediscountratemustbeadjustedandthequantum, risksandimportanceofthedebtdescribed. Insomecases,cashflowanalysisisundertakeninnominaltermsandinclusiveofdebt.Thisis commoninfinancialcirclesdeterminingifinterestondebtcanbecoveredwithoutperiodsofdefault, ifthedebtcanberepaid,andwhattheequityvalueisviathisparticularapproach.

Normallythecashflowsaretobeunleveragedorungearedi.e.beforetheuseofany debtand,hence,interestcostsondebt. AccordingtoFinancialTheorythediscountrateisadjustedifdebtisintroduced. FaultyevaluationscanmakedebtappeartoimprovetheNPV.

3.2.7 ExpectedValuesandResults

Thereisalwaysanelementofsubjectivitywhenestimatingwhatisexpectedinthefuture evenifbasingestimatesonhistoricaldata,aspastoccurrenceswillnotnecessarilyrepresent whatwillhappeninthefuture. Certainvariableswillbemoresubjectivethanothers:futurecommoditypricesaregenerally unknownandcanvarywidelyfromtheforecast,whereasfutureconcentratorrecoveryrates foranoperatingplantmightchangebutaremorelikelytobeunderstoodverywell. Theimpactofachangetoaparametershouldbeanticipatedandcheckedagainsttheresult fromthemodel.Unexpectedeffectsshouldbereconciled.

3.2.8 Alternatives
Theevaluationshouldconsiderallreasonablealternativeactivities/investmentsthatarepossible.

Althoughoneactivity/investmentisproposedtheremaybealternative activities/investmentsthatachievethedesiredoutcome. Thedonothingcaseisalwaysanoption,andislogicallytherealbasecase. 27

3.2.9 RangesandLikelihoods/SensitivityAnalysis
Withineachactivity/investmenttheevaluationshouldconsidertherangeofpossibleoccurrences andevaluatethespreadandlikelihoods.

Unlessonlyoneresultispossibletheevaluationshouldconsiderthelikelyrangeofinputs, computationsandresultsratherthanreportingasinglecase. Therearevariousmethodsofconsideringrangesandlikelihoods. Onemethodconsidersaseriesofdiscretefeasiblecasesfromlowtohighandprobability weightsthem. Anothermethodusessoftwaretogenerateadistributionofoutcomes.Ifthismethodis used,theparametersincludedandexcludedshouldbedisclosed. Keyinputsshouldbeprioritisedbasedonassessmentandcouldbevariedby10%,25%or upto50%keepinginmindifapplyingthesamepercentagemovementtoallinputsis appropriategivendifferentlevelsofvariabilityoftheinputs.Theeffectofthisinput variationontheoutputshouldbereported. Itisimportanttorecognisethatthistypeofsensitivityanalysistypicallyassumesonlyone variablechangesatatime,andthesameunderlyingphysicalmining,treatmentandsales planismaintainedforallvariationsconsidered.Itdoesnottakeanyaccountofhow decisions,andhencetheplans,wouldchangeinresponsetorealchangesintheinputsbeing flexedintheevaluation.

3.2.10 InputDataQualityAssessment
Ifdistributionsorlikelyrangesarenotavailableforvariousinputdataitems,thefollowingranking schemeisoneofmanythatmaybeuseful:

Aseparatecolumnbesidetheinputnumbersmaybepresentedtoindicatethereliabilityof variousinputdataitems.Thescoreofinputdatawouldbeputasanumbere.g.from1to3. Forexample,iftheinputisfromareliablesuppliersquoteitmayscore1,iffromopen literatureandverified,2,andifaneducatedguesswithlargeuncertainty,score3. Totalscoresmaybeaveraged.Thenuncertaintycanbelow,mediumorhighdependingon theclassofscorethedatareceived.Iftheinputdataqualityscoredlessthan2,uncertainty islow,ifabove2butbelow4,mediumandifabove4ishighetc. Insomesituationsthedataqualitymayberequiredtoscorea1andinothersituations, e.g.preliminarytechnicaleconomicevaluationorwheretheprocessisconceptual,ahigher uncertaintyisacceptable.

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Othersmaychoosetodescribethelevelofaccuracyasconceptual(e.g.30%),pre feasibility(e.g.20%)orfeasibility(e.g.10%)andreflectaccuracyincontextofsome weightedaverage.

3.2.11 RealandNominal
ARealmodelexpressesatimeseriesofcashflowsinwhichtheeffectofinflationisexcluded.The advantageofpresentingdatainrealtermsisthatevaluationsaremoreeasilyunderstoodand audited.Economicmodelsofwholeoflifeprojectsandstrategicplansarenormallyexpressedin realterms. ANominalmodelexpressesatimeseriesofcashflowsintheactualdollarsoftheperiod,thatis withinflationincluded.Budgets,shorttermforecastsandcommoditypriceforecastsareusually expressedinNominaldollars. Caremustbetakentoensurethattherealandnominalinformationisnotmixedandthateachis clearlyidentified.Arealcurrencyunitshouldbelabelledwithitsyear.

Ifapplyingthecorrectrealandnominaldiscountratestotherealandnominalcashflows, theNPVandIRRwillbethesamebyeithermethod,andIRRsfromrealandnominalcash flowswilldifferonlybytheinflationrate.Caremustbetakentoapplyanominaldiscount ratetonominalcashflows,andarealdiscountratetorealcashflows. ForRealTermsevaluationstheeffectofinflationovertheyearsisremoved.Pricesmay increase/decreaseinrealtermsbecauseofproductionefficiencies,marketdemand/supply, foreignexchangemovementsandothernoninflationimpacts. Careneedstobetakenwithinputstodistinguishwhethertheyarespecifiedinrealor nominalterms. Ifworkinginrealterms,therearetwowaysofhandlingtaxdepreciationandotheritems normallycalculatedinnominalterms. o o modeltheseitemsinnominaltermsandconvertbackintorealterms,or Modeltheseitemsinrealtermsanderodetheirvaluebyinflation

3.2.12 LifeoftheEvaluation
Normallyanevaluationisdoneforthefull,remainingeconomiclifefromthepresentdaytotheend includingclosureandlegacies.Ifthereisaspecialsituationandonlypartoftheeconomiclifeis consideredthepartsofthelifeexcludedandestimatesoftheirimpactonvalueshouldbeclearly described.

TheNetPresentValue(NPV)canbemathematicallycalculatedatanypointinthelifeofa cashflow.Forpracticalpurposesaconvenientdateintherecentpastorthenearfuture(as aguide,withinsixmonths)isusedwithanysignificantcashflowsintheinterveningperiod 29

clearlynoted.Manycompaniesspecifyavaluationdatetobeappliedforconsistencyinall evaluationsconducted.TheremainingNPVatvarioustimesinthefuture(i.e.theNPVthat wouldbedeterminedbyanalystsatthattime,assumingtheprojectandtheworldeconomy proceedaspredictednow)mayalsobeausefulmeasureforcomparingoptionsinalonglife project.

Theenddateshouldbeasensibletimeinthefuturewhensignificantcashflowsand liabilitiesareexpectedtofinish. Estimatesofclosurecostsandlegaciessuchasongoingremediationmaybesubstantialand canhaveasignificantimpactonNPV.Abroadassumptionthatsalvagewillpayforclosure costsandlegaciesisnotusuallyvalid. SunkcostsshouldbeexcludedfromanNPVcalculationastheydonotrepresentafuture cashflow.However,thewrittendownvalue(fortaxpurposes)ofpreviouslypurchased assetsisrelevanttofuturetaxcalculationsandmayberequired.

3.2.13 AfterTax
Normallyevaluationsareafteralltaxes.Iftherearespecialcircumstanceswherepretaxevaluation isappropriatethecircumstancesshouldbeexplained.

Taxesotherthancompanyincometaxandinternationalwithholdingtaxesarenormally includedinthecapitalcosts,operatingcostsandrevenue. Normally,companyincometaxisincludedintheevaluation. Normally,theevaluationisunleveragedandsocompanyincometaxisbeforethe introductionofdebtrelatedcashflows. Wherethevaluationisofanentityinanothercountrytheimpactofinternationaltaxes,such aswithholdingtax,shouldbeestimated. Whereinternationaltaxesarenotyetadequatelydefined,astatementdescribingtherange ofpossibilities,alongwiththeimpactsonvalue,shouldbeincluded. Itishowevernotuncommonforcompaniestospecifythatevaluationsbeingconductedat minesitese.g.toselectbetweenvariousoperatingstrategiesbeconductedonapretax basis.Thisisusuallysatisfactoryforoptionswithsimilarlevelsofcapitalintensity,butmay givemisleadingresultsifcomparisonsarebetweenlowcapital/highoperatingcostandhigh capital/lowoperatingcostoptions.Itisadvisableforthetechnicaleconomicevaluatortoat leastincludeasimpletaxcalculationtoensurethepreandposttaxevaluationsarenot suggestingdifferentstrategies.

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3.2.14 RiskandUncertainty
Theinclusionorexclusionofriskinanevaluationisofhighimportance.

Acompleteeconomicevaluationrequiresanunderstandingoftheimpactofriskand uncertaintyonthefinaloutcome.Decisionsshouldtakeintoaccounttherobustnessinthe expectedperformance.Therearemanywaysofmodellingriskanduncertaintyineconomic evaluations:thesemethodsaretouchedonbutnotcomprehensivelycoveredinthis document.Toadequatelyevaluateriskanduncertainty,economicevaluationsshould includeoneormoreofthefollowingfeatures: o SensitivityAnalysis:theimpactofchangingonevariableatatime.Theseresults haveseverelimitationsbecausetheytypicallyneglecttheflowonimpactsofthat changeontheplan. ScenarioAnalysis:thesearesuperiorbecausetheyconsiderthedynamicsof interrelatedchanges MonteCarloSimulation:Independentorcorrelatedvariablearechangedmultiple timestoreflecttheprobabilitydistributionsoftheirvalues,producingaprobability distributionoftheoutcomes. Optionanalysis(seesection3.4.1) ValueatRisk(seesection3.4.2)

o o

Theevaluationshouldclearlydescribeifriskwasexcludedanddescribestheriskcontext. Theevaluationreportshouldclearlydescribetheprocessbywhichriskwasincludedandany recogniseddeficiencies. Therisksmaybeintroducedintothecomponentcashstreamsduringcomputations,orinto thecaseasawholebywayofthediscountrate. o Ifintroducedintothecomponentcashstreamsariskcanbereflectedbyadjusting theinputrelatedtotheriske.g.metallurgicalrecoveryratelowerrecovery,lower valuation.Caremustbeexercisedifworstcasevaluesareusedforanumberof variables:theprobabilityofalltheworstcasescenariosoccurringconcurrentlyis generallyverylow.Aprobabilisticanalysisispreferableifsuitabledistributionscan bedevelopedforvariousinputparameters. Ifintroducedbythediscountratethenariskpremiumcanbeaddedtoincreasethe discountrateandgeneratealowervaluation.ThisisdiscussedfurtherinAppendixB

Someprojectmanagerswillidentifyrisksthatareconsideredpartiallyortotallyavoidable. Theassessorsofsuchtechnicalandnontechnicalriskswillrelyontheirprofessionalopinion andprecedenttoweighupthevalidityofsuchassumptions.Thisdoesnotguaranteethe riskswillbeaddressedasenvisagedandtheanalystinconjunctionwiththeproject membersandleaderwillhavetodetermineiftheserisksshouldbeconsideredinthe 31

quantitativecomponentofevaluationviatheapproachesdescribedaboveorviaanexercise inlikelihood/sensitivityanalysis.

3.2.15 Materiality
Theevaluationshouldmatchthequality(detail,precision,complexity)ofeachcomputationwithits impactontheresult.

Theevaluationshouldgivemostattentiontotheinputsandcomputationsthathavethe greatestimpactonvalue.ExtracolumnstotallingcashflowandshowingNPVmayhelp identifymateriality. Theevaluationshouldaimtoreducethecomplexityanddetailoflessimportant computationswherethiswillnotsignificantlyreducethevalidity/precisionoftheresult. Focusshouldbeonthekeydriversofvalue.Itavoidscomputationsthatareoverlydetailed inareaswithminorimpactonthekeyresults. Usually,thecomputationofRevenuehasthegreatestimpactonvalue,followedby OperatingCostsand/orCapitalCosts,andtheleastimpactcomesfromTaxes. Normallythegreatestfocusisonthegenerationofrevenuefromtheresourceintheground throughproductiontosalesvolumesandproductquality,andtopriceandforeignexchange rates. Operatingcostsinpreliminaryevaluationsmaybesimplefixedandvariablecosts,whereas inprecisionevaluationsmaybedetailedfixedandvariablecosts.Detailedvariablecosts usuallyusePhysicalsxUnitCosts. Capitalcostsinpreliminaryevaluationsmaybecoarseestimates,whereasinprecision evaluationsmaybedetailedestimates. Inmanyevaluationstaxesandworkingstockcalculationscanbegreatlysimplifiedwithout significantlossofprecision.

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3.2.16 EvaluationFramework
AneasytofollowframeworkistousethefourcashstreamsofProduction/Revenue,CapitalCosts, OperatingCostsandTaxesleadingtoNetCashFlowandvaluemeasuressuchasNPV. Reducingtheevaluationtofourcashstreamsmakescomputations,auditandunderstandingrapid. Cashstream1(Production)=SalesxPrice=Revenue+/debtors Cashstream2=Capital+/anyworkingstocks Cashstream3(Production)=ConsumptionsXCosts(includingrelatedtaxes)=Operating Costs+/WorkingCapital Cashstream4=CompanyIncomeTax+GovernmentRoyalties(ifnotinoperatingcosts)= Taxes+/adjustmentsforcashpaymentdates Internationaloperationsmayrequireconsiderationofsuchthingsasvarioustaxesinthecountry wheretheoperationislocated,plusrepatriationoffundstotheparentcompanyslocationand furthertaxationandvaluationthere.

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3.3 Process

3.3.1 ProductPrices,TreatmentandRefiningCharges,andForeignExchangeForecasts
Usuallyforecastsofproductpricesandforeignexchange(forex)areamongstthemostimportant assumptionsforcalculatinganNPV.Theynotonlypartiallydeterminerevenueeachyearbutthey determinehowmuchofthemineraldepositiseconomic.Thefollowingactivitiesarerecommended:

Explainthesourcesofforecasts,andwhethertheyweremodified. Graphthekeyprice(s)andforeignexchangeinhistoricaltermsandthelow,midandhigh price(s)assumedintothefutureforthelifeofproject. Usuallythecomputationsofrevenuehavegreatestimpactonvalue.Ironicallycomputations ofrevenueareusuallysimpleonceproductionandsalesarecomputed. Wherethecomputationofpriceiscomplexsuchasthetreatmentterms,refiningcharges andassociatedchargesformetalconcentratesatopdownapproachmaybeasuperior method. o ForexamplethehistoryofTreatmentCharges(TC)andRefiningCharges(RC)is convertedintographsofhowthevalueofeachcontainedmetalintheconcentrate hasbeensharedonapercentagebasis,e.g.67%tominesand33%tosmeltersand thisisforecastratherthanusingTCsandRCs.Howeverthesplitmayvarywithprice andamorecomplexpricingmodelmayberequired.

Therearenumerousapproachesusedfordealingwithcurrencymixesandrealandnominal termswithintheeconomicevaluation.Oneapproachisdescribedinthesectionbelowon OperatingCosts.

3.3.2 Sales:Volumes,qualities,workingstocks/capital
Togetherwithpriceandforeignexchangeforecaststhesalesvolumesareimportantassumptions.It isrecommendedthatthemodel:

Outlinemarketvolumeandqualityassumptions. Outlinetheforecastimpactofthesesalesonthemarket. Outlineanyunusuallogistics. Workingcapitalindebtorsandcreditorscanbeapproximatede.g.4weeks/52weeksxSales Revenuefordebtors(andcostsforcreditors).Revenuelagsforbasemetalsconcentrates maybeestimatedfromactualortypicalsalesterms. 34

Workingstocksofsalesproductshouldbeapproximatedinthesynthesisofproduction wheretheyaresignificant. Establishingworkingstocksmaybesignificantatprojectstartupandduringrampup.There maybeasignificantlagbetweenproductionrampupandproductdespatchesuntilthe businessplateaus. Movementsinworkingcapitalarethenincludedinthecashflow. Simplestockscalculationmethodscaninclude: o Maintainingaspecifiedstockpilesizeattheendofeachtimeperiod,drawndownat theendofthelife,or Applyingatimelagbetweenproductionandsalesdates.

3.3.3 Production:Volumes,headgrades,recoveries,productgrade,delivery.
Theeconomicevaluationmaysynthesisetheproductionprocessoruseoutputsfromdetailed computationsandsyntheses.Itisrecommendedthatthemodel:

Outlinethemethodsusedtoestimateproduction,includinghowLifeofMine(LOM)figures aredetermined,whichmayincludemineandplantavailabilities,miningvolumes,mining recoveryanddilution,headgrade,processrecoveriesandproductspecificationsfor economicmetalsandkeydeleteriousconstituents. Describethemethodsbywhichtimeframeofthelifeoftheentitywasestimated,including constructiontime,rampup,operationallifeandclosure. Outlinethevariousbroadproductioncasesconsidered. Disclosewhethertheresourceandreservefiguresusedinthemodelarereportedin accordancewiththeAustralasianJointOreReservesCommitteeCode(JORC)i.e.ifthe figuresareexistingResourcesandReserves,iftheevaluationwillbeusedtosupport publicationofReserveCategories,oriftheyareestimatesthatarenotJORCcompliant(Note thattheJORCCodeisforpublicreportingofResourcesandReserves.Internalevaluations candowhateverisreasonableforthepurposesoftheevaluations,thoughJORCCode categoriesofresourcesandreservesmaybeimportantinputinformationevenifresultsare nottobemadepublic).

3.3.4 CapitalCosts
Estimatesofcapitalcostscanvaryfromhighlevelestimatestocomprehensiveestimatesincluding contingenciesandallowances.Itisrecommendedthatthemodel:

35

Outlinethemethodusedtoestimatecapitalcosts,includingindirectcosts,contingencies, allowances,etc.Preferablytheseestimateswouldbebasedonstudiesthatemployan industriallyacceptedmethodologyandsupportedbyappropriatedocumentation.The accuracyandconfidenceintheestimateisexpectedtoincreaseastheprojectprogresses throughtheconceptual,scoping,prefeasibility,feasibilityanddetailedengineeringstudy stages. Outlinethemethod(suchasquotations,materialtakeoffs,factors,benchmarking,etc)used toestimatecapitalcosts,includingindirectcosts,contingencies,allowances,construction costs,EPCM,freightcosts,localduties,etc. Outlinethekeyconstructioncostsandtimetocommissioningassumptions. Itisnotimportantifaparticularitemisclassifiedasanoperatingcostorasacapitalcostin theevaluationfordeterminingpretaxcashflows.However,correctclassificationisessential fordeterminingdepreciationandprofitortaxableincomeforthemodellingofbothtaxation andfinancialaccountingeffects.Itshouldbenotedthatcertainitemsmaybecapitalisedfor onesetofcalculationsandexpensedfortheother,orcapitalisedbutdepreciatedby differentmethodsand/orratesfortaxandfinancialaccountingcalculations. Outlinetherangeofestimatesofcapitalcost. Considerthetimingdifferencesbetweenwhencapitalconstructionandpayment. Outlinedetailsofanybond(egenvironmental)thatmayberequired,distinguishingbetween noncashaccountingprovisionsandcashflows. Ongoingorsustainingcapital,whichmaintainsthecapabilitiesacquiredbytheinitialproject, shouldbecalculatedfromitsdrivers.Itmaybeaproportionoftheinitialcapital expenditure,orbasedonhistoryinamorematureoperation.Althoughoftenexpressedas anannualcost,itmaybemoreappropriatetoexpresssomecomponentsonapertonne basisifchangesinproductionratesaretobemodelled. WorkingCapitalmaysignificantlyimpactonearlycashflows.Keyitemsaretypically: o o o o Firstfillofconsumablesintheoperatione.g.grindingmedia,tyresetc Majorcriticalspareparts Initialstockingofotherwarehouseconsumables Operatingcostsincurredbeforeinitialrevenueisreceived.

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3.3.5 OperatingCosts
Estimatesofoperatingcostscanvaryfrombroadapproximationstodetailedestimates.The principlesdiscussedinthecapitalcostsectiononaccuracyanddatasourcesgenerallyapplyto operatingcost.Itisrecommendedthatthemodel:

Outlinethemethod(suchasquotations,materialtakeoffs,factors,benchmarking,etc.) usedtoestimateoperatingcosts,includingfixedandvariablecosts,socialand environmentalcosts,contingencies,etc. Categorisecostsbyfunctione.g.mining,milling,etc,orbycostelemente.g.labour,fuel, consumables,power,maintenance,materials,etc.Coststructuresthatarebuiltupbyboth functionandcostelementalongwithfixedandvariablecomponentsareconsideredto representthehighestorderofdetail.Itshouldbenotedthatwhenaccessinghistorical accounting,functionalandcostelementinformationisgenerallyavailablewhilsttheanalyst willhavetoformaviewonwhatcostsarefixedandwhatcostsarevariableasaccounting systemsdonotcategoriseonthisbasis. Asageneralprinciple,variablecostsshouldbeappliedtoeachphysicalactivitywhose quantitieswillvaryrelativetothekeyactivityquantitiesasaresultofchangesininputsthat maybeflexed,ornaturallyasaresultofchangesintheresourcebeingminedorthetonnage treated.However,materialityeffectsandtherequiredlevelofaccuracyofthestudyshould alsobetakenintoaccountchangesintheratiosofthephysicalquantitiesmaybesmall enoughtoobviatetheneedforthemorecomplexcostmodel,andasimplefixedplus variablepertonneoforemodelmaybeadequate. Outlinethecommissioningandrampupassumptions. WorkingstocksareincludedinthesynthesisofProductionandareapproximatedwhere thereisinsignificantimpactonvalue. Privateroyaltiesareincludedasanoperatingcostbutgovernmentroyaltiescanbeincluded eitherasanOperatingCostorasaTaxdependingoncustom.However,theprocedure adoptedintheevaluationshouldbedefined. Forleasedequipment,noteiftheleaseisanoperatingleaseorafinancedlease. Aspertheclassificationofcapitalcosts,itisnotimportantifaparticularitemisclassifiedas anoperatingcostorasacapitalcostintheevaluationfordeterminingpretaxcashflows. However,correctclassificationisessentialfordeterminingdepreciationandprofitortaxable incomeforthemodellingofbothtaxationandfinancialaccountingeffects.Itshouldbe notedthatcertainitemsmaybecapitalisedforonesetofcalculationsandexpensedforthe other,orcapitalisedbutdepreciatedbydifferentmethodsand/orratesfortaxandfinancial accountingcalculations. Theoperatingcostscomponentofworkingcapitalmaybesimplymodelledby:

37

Maintainingaspecifiedinventoryatthestartofeachtimeperiod,drawndownat theendofthelife,butallowingforspoilageandobsolescence,or Applyingaleadtimebetweenproductionandspending.

Outlinetherangeofestimatesofoperatingcost. Therearenumerousschoolsofthoughtwhendealingwithoperatingcostsinvarious currenciesandamixtureofrealandnominaltermsoneapproachthatcanbeappliedto overseasoperationsisasfollows: 1. Initiallymodelcostsinthecurrencyinwhichtheyareincurred. a. Itmaybenecessarytoseparatedifferentcurrenciese.g.expatriateand locallabourcosts,consumablessourcedfromvariouslocations,etc. b. Identifythecostswhicharequotedinonecurrencybutareactuallyincurred inanothere.g.petroleumproducts. 2. Deriveasreal(orperhapsmoreaccurately,"uninflated")costsinthecurrencyin whichincurred,forthephysicalquantitiesscheduled. a. Notetheageofvariousdataitemsandinflate/deflatetoacommonpointin timeifappropriate. 3. Applyinflationfororiginalcurrency,appropriatetoeachcashflowitemproduces nominalcashflowsinthosecurrencies. 4. Converttothecurrencyofthecountrytaxingtheoperatingentity(usuallythe countrywheretheoperationislocated),usingnominalexchangerates. 5. Calculatedepreciationfortaxpurposes,andhencetaxableprofitandtax,andhence netcashflowinthecurrencyofthetaxingcountry. 6. Converttothereportingcurrency,usingnominalexchangerates.(Additionaltaxes mayneedtobecalculatedinthiscurrency.) 7. Deflatetorealmoneyamountsusingtheappropriatedeflatorforthereporting currency. 8. Discountusingrealaftertaxdiscountrate.

3.3.6 ClosureCosts
Estimatesofclosurecostscanvaryfrombroadapproximationstodetailedestimates.Itisnot adequatetoassumethatclosurecostswillbeoffsetbytheproceedsofsalvage.Itisrecommended thatthemodel:

38

Outlinethemethodusedtoestimateclosurecostsandongoingactivities.Describeif indirectcosts,contingencies,allowances,etcareincluded. Iftheevaluationswillvaryparametersthatwillchangetheminelife,itmaybenecessaryto expressrehabilitation,redundancycosts,salvageandscrapvaluesasfunctionsoftheclosure date.

3.3.7 Taxes(directcompanyleveltaxes)andCarbonCosts
Inaneconomicevaluation,taxesarenotusuallycomputedtotheprecisionofofficialincometax returns,butusuallyaremoresimplifiedsothattheresultsmatchtheprecisionandimpactofother keycomputations.

Taxesincludecompanyincometax,specialcompanytaxes,capitalgains,withholdingtaxes, internationaltaxesandgovernmentroyalties.Ifnotincludedinoperatingcosts,indirect taxesareusuallyincludedincapitalandoperatingcosts. Outlinecompanyincometax,otherdirectcompanytaxes,governmentroyaltiesandany internationaltaxes.Describeanyspecialtaxissuese.g.ifwithholdingtaxescanbecredited inthetaxregimewhereprofitsarerepatriatedto. Outlineanytaxbenefitsorpenaltiesthatarespecifictothisinvestment,suchaspreexisting losses,orcrosssubsidyspecialgovernmenttaxationarrangements.Describethe importancetovalue. Incometaxmaybeapproximatedwheretheimpactisnotmaterial.Afewrowsof algorithmsmaysubstituteformanyrowsoflonghanddepreciationorothercalculations.If theevaluationmodelisconstructedtobeflexibletopermittheevaluationofalargenumber ofoptionsandscenarios,itisessentialthattaxcalculationsarealsoflexiblewithinthemodel. Itisnotthenappropriatetohavetaxescalculatedindetailbytaxaccountantsfewafew casesenteredasdataformanydifferentcases. Ifcapitalcostsarecomputedinrealtermsthenintheevaluationmodelthetaxdeductions forcapital(andanyotherdeductionsspreadoveryears)areerodedbyinflationunlessthe impactofinflationisnotsignificant.Thisiscapturedwhentaxdepreciationiscomputedin nominaltermsandconvertedbackintorealterms. AsdiscussedinthesectiononOperatingCosts,governmentroyaltiescanbeincludedin OperatingCostsorinTax,dependingoncustom. Companieshavecommencedconsideringcarboncostsintheoveralleconomicevaluation. Insomecasesthesearetreatedasdeductibleforthetaxcalculations.Thetopicofcarbon costsisstilldevelopingandtheissueofdeductibilityfortaxpurposesshouldbegiven consideration.

39

3.3.8 DiscountRate
Technicaleconomicanalystswillrarelyhavetoderivethediscountratetobeused.Doingthisisan experttasknotnormallywithintheexpertiseofsuchanalysts.TheDiscountRateiscomputed accordingtoFinancialTheoryandistypicallyspecifiedbythecompanycommissioningthe evaluation.NotesonthederivationofdiscountratesareincludedinAppendixBasbackground informationfortechnicalevaluatorswithoutfinancialtraining.Theimportantthingfortheanalystis toensurethatthediscountrateusedandthecashflowstowhichitisappliedareconsistent.

HistoricallyintheMiningIndustrytherehavebeenvariousconflictingapproachesto computingdiscountrate.Theseinclude: 1. IsthediscountratefortheCompanyorfortheindustrysectorbeingevaluated? 2. Howisdebtincluded? 3. Istheevaluationbeforeoraftertax?

InanevaluationmodelthenetcashflowcanbeconvertedtoanNPVusingseveralmethods. Onemethodistouseafewrowsofeasytofollowcomputations(longhand)ratherthan usingNPVFunctionsorsoftware.(Longhandcomputationsaremorereadilyunderstood andcheckedforbasedateanddiscountfactorforthefirstperiods).Theothermethodisto usespreadsheetfunctions.Howevertheseareoftenusedincorrectly,andcareisrequired withregardtothetimingofcashflows. Thediscountratemustmatchthecashflowi.e.realornominalterms,andbeforeorafter tax. Usingtheappropriatediscountratewithacashflow,whetherinrealornominalterms, shouldgivethesameNPV.BeforeandaftertaxNPVscandiffer. Cashflowsfromoperationsoccurthroughanyyear,notnecessarilyatthestartorendofa year.Toreflectthis,discountingfromthemidpointofeachperiodisrecommendedfor obtaininganabsolutevaluation.Forcomparativevaluations,thisislessimportant,but consistencyofapproachforallcasesisessential.

3.3.9 Auditing
Auditingisanessentialcomponentoftheevaluationprocess.Itbestoccursduringtheevaluation, andmustbeundertakenbeforeanyresultsarereleased.ProgressisrecordedintheIntroduction toeveryevaluationmodel. Step1:Periodicselfauditsoftheevaluationmodelasitisdeveloped. Step2:Auditsofthepartsoftheevaluationbytheexpertsineachoftheparts. Step3:Athoroughauditofthefinalevaluationmodelbypartiesexternaltotheevaluation project.Onepartymayauditthemechanicsofcomputationswhileotherspecialists auditthevalidityofinputsandoutputs. 40

Additionaltipsonauditing: o o o Checkthegraphsforanomalies,inconsistenciesandtrendsthatlookincorrect. Usesoftwarethatanalysesspreadsheetstofinderrors. Includeselfchecksfortotalsandsubtotalsthroughoutthemodel.Dothesetotals matchtheinputdataandexternaldocuments? StartingattheNPVworkbackupeachofthecashstreamstotheinputs. Checkacolumnawayfromthefirstcolumnofcomputationsincaseachangehas beenmadebutaccidentlynotcopiedacrosstherows. Copythealgorithminthefirstcolumnofcomputationsacrosstotheendoflifeand seeiftheresultschange(butbeawareofrowswherethefirstcolumnmay legitimatelybedifferentfromtheothers). Checktheoutputsoflargeevaluationsbycreatingastandalonesummarymodel ofonlyafewrows. Whenauditing,itcanbeusefultocreateanewsheetatthefrontoftheworkbook with: Allauditingnoteslisted, Aprioritizationcolourcodenotinghigh,mediumandlowrankeditems (usingred,yellowandgreencellcolouring),and Linkstothesectionsofthemodelthattheauditingnotesapplyto.

o o

3.3.10 Graphs
Graphsarerecommendedas: 1. Aquickcheckforerrorsininputdata,computationsandoutputs,and 2. Afastwayforotherstounderstandtheevaluation.

Adequatetimeshouldbeallowedfortheevaluationmodeltographallkeyinputsand outputsaschecksonerrorsandforrapidunderstandingoftheentity.Theseshouldinclude includingcashflows,NPV,prices,salesvolumes,production,grades,saleableproduct, revenue,capitalcosts(constructionandongoing),operatingcosts,tax,netcashflow.

41

3.3.11 HelicopterView
Theevaluationprocessshouldbeconductedwithregularpausestounderstandhowtheentitylooks fromahelicopterview.

Resultsandgraphsshouldbeviewedafterimportantstagesinthedevelopmentofthe evaluation.

3.3.12 Avoid

Overcomplexityandblackboxspreadsheetfunctions. Linkstootherworkbooks:thesearedangerousbecausetheothermodelmaybealtered withoutthechangebeingrecognised.Ifusedthewholerow/columnwithtitlesandlabelsis referencedacrosssocovertchangescanbeseen. Macrosthatperformcalculations:thesecannotbereadilyfollowedvisuallynorauditedand generallyarenottrusted. Hiddenrows,columnsorworksheets:theDataGroupfacilityissatisfactorybecauseit marksthecollapseddata. Spreadsheetfunctionsthathaveahistoryofmisuse:thesearedifficulttoaudit,whereas longhandcomputationscanbefollowedeasilyandvisually.

42

3.4 AlternativeEvaluationandAssessmentMethodologies
AlthoughtheDCFapproachisthepreferredmethodologyusedintheminingindustry,numerous othermethodologiesareavailableandareincreasinglybeingusedonamoreregularbasis.During thecourseofdevelopingtheAusIMMGuidelinesforModellingandEvaluationthetopicof alternativemethodologieswasraisedanddiscussed.Itwasdeemedprudenttohighlightthe existenceandcontinuingemergenceofthesealternatemethodologiesandtodiscussacouplein brief,namelyRealOptionsValuation(ROV)andValueatRisk(VaR).TheAusIMMdoesnotinany waysuggestthatthesemethodologiesbeusedinassessingmineralprojects,butratherthat memberskeepinmindthatalternativetoolsareavailableandarebeingincreasinglyacceptedin conjunctionwiththetraditionalDCFapproach.

3.4.1 RealOptionsValuation(ROV)
WhatisRealOptionsValuation? TheRealOptionsValuation(ROV)techniquewasderivedfromtheBlackandScholesfinancial optionpricingmodeldevelopedin1973.Thesequenceandtimingofdecisionscanbemodelled usingROVthusprovidingamethodwhichvaluesprojectflexibility. WhenROVshouldbeapplied? RealOptionsValuationissuitedtoprojectswithinherentfutureuncertainties.Foraprojectwith littleornouncertainty,ROVcanbeused;howeveritwillyieldthesameresultasatraditionalDCF valuation. ROVshouldbeusedwhendifferingbusinessstrategiesexisttodeterminethevalueofeachstrategy. Additionally,itcandetermineatwhichtimeastrategyshouldbeactedupon. Benefitsanddrawbacksofthemethod ROVcanaccuratelyvaluedecisionsunderanuncertainfuture.However,theaccuracyofthe valuationdependssignificantlyontheassumptionsusedtocarryoutthevaluation. Computingtimeisdependentofthenumberofuncertainparametersincorporatedintothe valuation,thusasROVcomplexityincreasessotoodoescomputingtime.Tominimisecomputation timekeyparameters(i.e.commodityprice,recoveryandminingrate)needonlybeincluded. Computerprograms,suchasDPL(DecisionProgrammingLanguage),allowaROVtobecomputedin underaminutewithasmanyastenuncertaininputparameters. 43

Oneofthegreatestbenefitsofusingarealoptionsprocessisthatitcanchangeadecisionmakers wayofthinking.Therealoptionwayofthinkingmayseetheearlyabandonmentofanuneconomic projectasasuccess.Itplacesimportanceontheabilitytomodifyaplanratherthantoadheretoit anditfavoursinvestmentsthatarerobusttouncertaintyratherthandependentonit.

3.4.2 ValueatRisk(VaR)
WhatisValueatRisk? VaRisusedinfinanceformeasuringandmanagingrisk.Whenusedinportfoliomanagementitis commonlyexpressedasaprobabilityofmakingalossorreturnbelowacertaindollarvalueovera specifictimeperiode.g.anassetportfoliowithaoneweek5%VaRof$10mhasa5%chanceof decreasinginvaluebymorethan$10movertheweek. WhenVaRshouldbeapplied? TheVaRmethodprovidesanestimateddistributionofoutcomes.Italsoallowsthemanagementof riskbyprovidingafeelforexposureonthedownsideandhenceprovidesanopportunitytotailor riskexposure. Benefitsanddrawbacksofthemethod ApplicationofVaRintheminingindustryinvolvestheidentificationofrisksandtheir interdependenciesatalllevels.Thisinvolvesacomprehensivestageofquantifyingandconsidering alltherisksreducingthechanceofoversightsthatmayoccurwhenusingalternativemethods. Theidentificationofrisksthatarematerial,understandingtheirinterdependencies,alongwiththe quantificationandmodellingofprobabilitycurvesisaninvolvedprocessthatrequiresgatheringa considerableamountofinformation. Theconceptthatastatisticalapproachcanbeappliedforunderstandingthedistributionofvalue outcomesandthatthenstrikingaVaRisapplicabletonumerousmarketsholdstrue.Infinancial markets,themethodisusedtomakedecisionsforinvestinginvariousmarketseachwiththeir respectivelevelsofrisk,liquidityandvolatility.Miningassetsdemonstratetheirownpeculiar characteristicsaroundliquidityandvolatility,suggestingthatconceptsinherentinVaRwillbeused formakinglongertermdecisionsconcerningexistingandproposedprojectsratherthan,asitis currentlyusedinfinancialmarkets,forshortertermportfoliomanagement.

44

APPENDIXAWORKEDEXAMPLE
Thefollowingexampleisillustrative,andnotintendedtobedefinitive,ofhowtostructureamodel. Theanalystshouldalwaysconsider,amongstotherthings,that,whenstructuringamodeland summarypage,itisimportanttoconsiderthelevelofdetailatwhichtheexerciseistobe undertaken,theaudienceitisintendedfor,andtheinformationnormallyexpectedtobeconveyed.

ExampleofaSummaryPage
Summary
Purpose Thisworksheetsummariestheresultsandinputassumptions

ExistingCase
ABCMineproposesproducinggoldusingcarboninpulptechnology

NetPresentValueExistingCase A$ InternalRateofReturnExistingCase

2,007,342 9.1%

AlternativeCase
ABCMineisconsideringifitshouldcontinuetostudyusinglowergradeoreandthenewunproven'rapidtransfer'technology

NetPresentValueAlternativeCase A$ InternalRateofReturnAlternativeCase

37,833,798 9.4%

CumulativeNPV
CumulativeNPVExistingCase CumulativeNPVAlternativeCase

TonnesOreorOuncesGold

TonnesOreorOuncesGold

Mining ExistingCase
1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 OreProduction Containedgoldmined Headgrade
6

Mining AlternativeCase
1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 OreProduction Containedgoldmined Headgrade
6

Grams/Tonne

4 3 2 1 0

4 3 2 1 0

ExistingCase GoldSoldandPrice
60 50 1,200 1,000 60 50

ExistingCase GoldSoldandPrice
1,200 1,000

Ounces(000's)

$/ounce

30 20 10 0
1 2 3 4 5 6 7 8 9 10

600 400 200 0 Goldsold Goldproduced GoldpriceForecast Pretaxmargin/oz

30 20 10 0
1 2 3 4 5 6 7 8 9 10

600 400 200 0 Goldsold Goldproduced GoldpriceForecast Pretaxmargin/oz

60 40 20

ExistingCase CashStreams

60 40 20

AlternativeCase CashStreams

A$M

A$M

0 20 40 60 Cashstream1:Revenue ExistingCase Cashstream2:CapitalCosts ExistingCase CashFlow Cashstream3:OperatingCosts ExistingCase Cashstream4:Taxes ExistingCase

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0 20 40 60 Cashstream1:Revenue AlternativeCase Cashstream2:CapitalCosts AlternativeCase CashFlow Cashstream3:OperatingCosts AlternativeCase Cashstream4:Taxes AlternativeCase

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

ExistingCase NPV
60 40 20 60 40 20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

AlternativeCase NPV

A$M

A$M

0 20 40 60 80 DiscountedCashflow ExistingCase Cashflowifpositive CumulativeNPV ExistingCase

0 20 40 60 80 DiscountedCashflow AlternativeCase Cashflowifpositive CashflowDeficit CumulativeNPV AlternativeCase

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

$/ounce

40

Ounces(000's)

800

40

800

Grams/Tonne

45

ExampleofanExistingCasesheet

Existingcase
Purpose ThisworksheetvaluestheexistingmethodofproducinggoldatABCMine ExistingCase ABCMineproposesproducinggoldusingcarboninpulptechnology Results

NetPresentValueExistingCase A$

InternalRateofReturnExistingCase

2,007,342 9.1%

TonnesOreorOuncesGold

Mining ExistingCase
1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 OreProduction Containedgoldmined Headgrade
6 60

ExistingCase CashStreams
Grams/Tonne
5 4 3 2 1 0 40 20

A$M

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

20 40 60 Cashstream1:Revenue ExistingCase Cashstream2:CapitalCosts ExistingCase CashFlow Cashstream3:OperatingCosts ExistingCase Cashstream4:Taxes ExistingCase

ExistingCase GoldSoldandPrice
60 50 1,200 1,000 60 40 20

ExistingCase NPV

Ounces(000's)

$/ounce

40 30 20 10 0
1 2 3 4 5 6 7 8 9 10

800 600 400 200 0

A$M

0 20 40 60 80 DiscountedCashflow ExistingCase Cashflowifpositive CashflowDeficit CumulativeNPV ExistingCase

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Goldsold

Goldproduced

GoldpriceForecast

Pretaxmargin/oz

LifeofMine

units

Total

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Cashstream1:ProductionandRevenue
Production 10Aug09TBensonmineschedule"MinePlanABCMineGoldProduction12June09" 2,150,000 OreProduction tonnes Headgrade grams/tonne 3.1 213,183 Containedgoldmined ounces ProcessingRecovery %ofcontainedgold 175,736 Goldproduced ounces Sales 23Aug09JGomachie:"ABCMineSalesPlan:July2009" Goldincircuit weeks Goldincircuit ounces Goldsold ounces Revenue 23Aug09JGomachie:"ABCMineSalesPlan:July2009" GoldpriceForecast A$/ounceREAL GoldRevenue A$REAL 23Aug09JGomachie:"ABCMineSalesPlan:July2009" Debtors days DebtorsClosing A$REAL 300,000 2.5 24,116 78% 18,810 500,000 3.1 49,839 83% 41,367 500,000 3.8 61,093 83% 50,707 500,000 2.9 46,624 83% 38,698 350,000 2.8 31,511 83% 26,154

0 0

0 0

0 0

0 0

0 0

3 0

175,736

3 0 0

3 0 0

3 1,085 17,725

3 2,387 40,065

3 2,925 50,169

3 2,233 39,391

3 1,509 26,878

3 0 1,509

3 0 0

1,000 175,736,334

1,000 0

1,000 0

1,000 0

1,000 17,725,080

1,000 40,065,236

1,000 50,168,501

1,000 39,390,613

1,000 26,877,999

1,000 1,508,904

1,000 0

30 0

30 0

30 1,456,856

30 3,293,033

30 4,123,438

30 3,237,585

30 2,209,151

30 0

30 0

Cashstream1:RevenueExistingCA$REAL

175,736,334

16,268,224 38,229,059 49,338,096 40,276,467 27,906,433 3,718,055

Cashstream2:CapitalCosts
10Aug09GDawson"CapitalCostEstimateABCMine:IndicativeEstimatesVersionG" InitialCapitalCosts A$REAL 58,000,000 3,000,000 OngoingCapitalCosts A$REAL 10,000,000 30,000,000 25,000,000 3,000,000 4,000,000 2,000,000 1,000,000

Cashstream2:CapitalCostsExistA$REAL

68,000,000 3,000,000 30,000,000 25,000,000 3,000,000 4,000,000 2,000,000 1,000,000

TaxdeductionsforCapitalExpenditure 3May09EHermiAssumeallcapitalisdeductedinproportiontothegoldsoldoverthelifeofmine. TaxDeductionforCapitalExpenditure %ofcontainedgold Taxdeductionforcapitalexpenditure

10% 6,858,601

23% 15,502,975

29% 19,412,366

22% 15,241,935

15% 10,400,262

1% 583,860

0% 0

68,000,000

46

LifeofMine

units

Total

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Cashstream3:OperatingCosts
5May09GDawson"OperatingCostEstimateABCMine:IndicativeEstimates."Thereisnowastetobemined. 31 miningcostpertonne A$REAL/tonneore miningcost processingcostpertonne processingcost fixedcosts costperounce A$Real A$REAL/tonneore A$Real A$REAL A$/ounceReal 5 1,500,000 20 6,000,000 3,000,000 5 2,500,000 20 10,000,000 3,000,000 375 6 3,000,000 20 10,000,000 3,000,000 316 7 3,500,000 20 10,000,000 3,000,000 426 8 2,800,000 20 7,000,000 3,000,000 489 0 0 0 0

13,300,000
100

43,000,000
15,000,000

Cashstream3:OperatingCostsE A$REAL

71,300,000

10,500,000 15,500,000 16,000,000 16,500,000 12,800,000

558

0
0

0
0

Cashstream4:Taxes
GovernmentRoyaties 2June09RTorply:XXStateRoyaltyis1%ofrevenuepaidmonthly StateRoyalty %ofrevenue 1,757,363 StateRoyalty A$REAL 1% 0 1% 0 1% 0 1% 177,251 1% 400,652 1% 501,685 1% 393,906 1% 268,780 1% 15,089 1% 0

CompanyIncomeTax 2June09RTorply:CompanyIncometaxrateis30%.Thecashpaymentaveragesmidyear.Assumeoperatingcostcashstreamapproximatesthecostofgoodssold. 175,736,334 0 0 0 17,725,080 40,065,236 50,168,501 GoldRevenue less 71,300,000 0 0 0 10,500,000 15,500,000 16,000,000 Cashstream3:OperatingCostsExistingCase 68,000,000 0 0 0 6,858,601 15,502,975 19,412,366 Taxdeductionforcapitalexpenditure 1,757,363 0 0 0 177,251 400,652 501,685 StateRoyalty 34,678,971 0 0 0 189,228 8,661,608 14,254,450 AssessableIncome 2June09RTorply:CompanyIncometaxrateis30%.Thecashpaymentaveragesmidyear.Assumeoperatingcostcashstreamapproximatesthecostofgoodssold. CompanyIncomeTaxRate %ofassessableincome 30% 30% 30% 30% 30% 30% 10,403,691 0 0 0 56,768 2,598,483 4,276,335 IncomeTax 10,403,691 0 0 0 56,768 2,598,483 4,276,335 Incometaxpayment

39,390,613 16,500,000 15,241,935 393,906 7,254,773 30% 2,176,432 2,176,432

26,877,999 12,800,000 10,400,262 268,780 3,408,957 30% 1,022,687 1,022,687

1,508,904 0 583,860 15,089 909,955 30% 272,986 272,986

0 0 0 0 0 30% 0 0

Cashstream4:TaxesExistingCase A$REAL

12,161,055

234,019

2,999,135 4,778,020 2,570,338 1,291,467

288,075

CashflowandNPV
Cashlows Cashstream1:RevenueExistingCase A$REAL Cashstream2:CapitalCostsExistingCase A$REAL Cashstream3:OperatingCostsExistingCasA$REAL Cashstream4:TaxesExistingCase A$REAL

CashflowExistingCase

A$REAL

175,736,334 68,000,000 71,300,000 12,161,055 24,275,280

0 3,000,000 0 0

0 30,000,000 0 0

0 25,000,000 0 0

16,268,224 3,000,000 10,500,000 234,019

38,229,059 4,000,000 15,500,000 2,999,135

49,338,096 2,000,000 16,000,000 4,778,020

40,276,467 1,000,000 16,500,000 2,570,338

27,906,433 0 12,800,000 1,291,467

3,718,055 0 0 288,075

0 0 0 0

3,000,000

30,000,000

25,000,000

2,534,205

15,729,924

26,560,076

20,206,129

13,814,966

3,429,979

InternalRateofReturnExistingCase

9.1%

47

ExampleofanAlternativecasesheet

Alternativecase
Purpose ThisworksheetvaluesthealternativemethodofproducinggoldatABCMine AlternativeCase ABCMineisconsideringifitshouldcontinuetostudyusinglowergradeoreandthenewunproven'rapidtransfer'technology Results

NetPresentValueAlternativeA$ InternalRateofReturnAlternativeCase

37,833,798 9.4%

TonnesOreorOuncesGold

Mining AlternativeCase
1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 OreProduction Containedgoldmined Headgrade
6 60

AlternativeCase CashStreams
Grams/Tonne
5 4 3 2 1 0 40 20

A$M

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

20 40 60 Cashstream1:Revenue AlternativeCase Cashstream3:OperatingCosts AlternativeCase Cashstream2:CapitalCosts AlternativeCase

ExistingCase GoldSoldandPrice
60 50 1,200 1,000 60 40 20

AlternativeCase NPV

Ounces(000's)

$/ounce

40 30 20 10 0
1 2 3 4 5 6 7 8 9 10

800 600 400 200 0

A$M

0 20 40 60 80 DiscountedCashflow AlternativeCase Cashflowifpositive CashflowDeficit CumulativeNPV AlternativeCase

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Goldsold

Goldproduced

GoldpriceForecast

Pretaxmargin/oz

LifeofMine

units

Total

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Cashstream1:ProductionandRevenue
Production 10Aug09TBensonmineschedule"MinePlanABCMineGoldProduction12June09" 4,300,000 OreProduction tonnes 1.5 Headgrade grams/tonne Containedgoldmined ounces 204,180 ProcessingRecovery %ofcontainedgold Goldproduced ounces 162,090 Sales 23Aug09JGomachie:"ABCMineSalesPlan:July2009" Goldincircuit weeks Goldincircuit ounces Goldsold Revenue 23Aug09JGomachie:"ABCMineSalesPlan:July2009" GoldpriceForecast A$/ounceREAL GoldRevenue A$REAL 23Aug09JGomachie:"ABCMineSalesPlan:July2009" Debtors days DebtorsClosing A$REAL 600,000 1.3 25,080 75% 18,810 1,000,000 1.5 48,232 80% 38,585 1,000,000 1.6 51,447 80% 41,158 1,000,000 1.7 54,662 80% 43,730 700,000 1.1 24,759 80% 19,807

0 0

0 0

0 0

0 0

0 0

0 162,090

3 0

3 0 0

3 0 0

3 1,085 17,725

3 2,226 37,444

3 2,374 41,009

3 2,523 43,581

3 1,143 21,187

3 0 1,143

3 0 0

1000 162,090,032

1000 0

1000 0

1000 0

1000 17,725,080

1000 37,444,348

1000 41,009,152

1000 43,581,499

1000 21,187,237

1000 1,142,716

1000 0

0 162,090,032

30 0

30 0

30 1,456,856

30 3,077,618

30 3,370,615

30 3,582,041

30 1,741,417

30 0

30 0

Cashstream1:RevenueAlternatiA$REAL

16,268,224 35,823,587 40,716,154 43,370,073 23,027,861 2,884,133

Cashstream2:CapitalCosts
10Aug09GDawson"CapitalCostEstimateABCMine:IndicativeEstimatesVersionG" InitialCapitalCosts A$REAL 83,000,000 3,000,000 OngoingCapitalCosts A$REAL 15,000,000 40,000,000 40,000,000 6,000,000 6,000,000 2,000,000 1,000,000

Cashstream2:CapitalCostsAlterA$REAL

98,000,000 3,000,000 40,000,000 40,000,000 6,000,000 6,000,000 2,000,000 1,000,000

TaxdeductionsforCapitalExpenditure 3May09EHermiAssumeallcapitalisdeductedinproportiontothegoldsoldoverthelifeofmine. TaxDeductionforCapitalExpenditure %ofcontainedgold Taxdeductionforcapitalexpenditure

11% 10,716,624

23% 22,638,938

25% 24,794,226

27% 26,349,473

13% 12,809,852

1% 690,889

0% 0

98,000,000

48

LifeofMine

units

Total

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Cashstream3:OperatingCosts
5May09GDawson"OperatingCostEstimateABCMine:IndicativeEstimates."Thereisnowastetobemined. 31 miningcostpertonne A$REAL/tonneore miningcost processingcostpertonne processingcost fixedcosts costperounce A$Real A$REAL/tonneore A$Real A$REAL A$/ounceReal 5 1,500,000 20 6,000,000 3,000,000 5 2,500,000 20 10,000,000 3,000,000 375 6 3,000,000 20 10,000,000 3,000,000 316 7 3,500,000 20 10,000,000 3,000,000 426 8 2,800,000 20 7,000,000 3,000,000 489 0 0 0 0

13,300,000
100

43,000,000
15,000,000

Cashstream3:OperatingCostsE A$REAL

71,300,000

10,500,000 15,500,000 16,000,000 16,500,000 12,800,000

558

0
0

0
0

Cashstream4:Taxes
GovernmentRoyaties 2June09RTorply:XXStateRoyaltyis1%ofrevenuepaidmonthly StateRoyalty %ofrevenue 1,757,363 StateRoyalty A$REAL 1% 0 1% 0 1% 0 1% 177,251 1% 400,652 1% 501,685 1% 393,906 1% 268,780 1% 15,089 1% 0

CompanyIncomeTax 2June09RTorply:CompanyIncometaxrateis30%.Thecashpaymentaveragesmidyear.Assumeoperatingcostcashstreamapproximatesthecostofgoodssold. 175,736,334 GoldRevenue 0 0 0 17,725,080 40,065,236 50,168,501 less 71,300,000 0 0 0 10,500,000 15,500,000 16,000,000 Cashstream3:OperatingCostsExistingCase 68,000,000 Taxdeductionforcapitalexpenditure 0 0 0 6,858,601 15,502,975 19,412,366 1,757,363 StateRoyalty 0 0 0 177,251 400,652 501,685 34,678,971 0 0 0 189,228 8,661,608 14,254,450 AssessableIncome 2June09RTorply:CompanyIncometaxrateis30%.Thecashpaymentaveragesmidyear.Assumeoperatingcostcashstreamapproximatesthecostofgoodssold. CompanyIncomeTaxRate %ofassessableincome 30% 30% 30% 30% 30% 30% 10,403,691 IncomeTax 0 0 0 56,768 2,598,483 4,276,335 10,403,691 Incometaxpayment 0 0 0 56,768 2,598,483 4,276,335

39,390,613 16,500,000 15,241,935 393,906 7,254,773 30% 2,176,432 2,176,432

26,877,999 12,800,000 10,400,262 268,780 3,408,957 30% 1,022,687 1,022,687

1,508,904 0 583,860 15,089 909,955 30% 272,986 272,986

0 0 0 0 0 30% 0 0

Cashstream4:TaxesExistingCase A$REAL

12,161,055

234,019

2,999,135 4,778,020 2,570,338 1,291,467

288,075

CashflowandNPV
Cashlows Cashstream1:RevenueExistingCase A$REAL Cashstream2:CapitalCostsExistingCase A$REAL Cashstream3:OperatingCostsExistingCasA$REAL Cashstream4:TaxesExistingCase A$REAL

CashflowExistingCase

A$REAL

175,736,334 68,000,000 71,300,000 12,161,055 24,275,280

0 3,000,000 0 0

0 30,000,000 0 0

0 25,000,000 0 0

16,268,224 3,000,000 10,500,000 234,019

38,229,059 4,000,000 15,500,000 2,999,135

49,338,096 2,000,000 16,000,000 4,778,020

40,276,467 1,000,000 16,500,000 2,570,338

27,906,433 0 12,800,000 1,291,467

3,718,055 0 0 288,075

0 0 0 0

3,000,000

30,000,000

25,000,000

2,534,205

15,729,924

26,560,076

20,206,129

13,814,966

3,429,979

InternalRateofReturnExistingCase

9.1%

FinancialAnalysis
Whyandwhenweshouldconsiderfinancialanalysiswitheconomicanalysis DCFanalysisconcernsitselfwithcashinandcashout,thetimingofthesecashflows,andwhatthe netvalueisinpresenttermsunderthedesiredrateofreturnsetbytheinvestorsthatprovideequity andthelendersthatprovidedebt.Thepartiesprovidingequityanddebtfinancingwillrequirea returnthatiscommensuratewithofthelevelofrisk(perceivedorreal)andtheseratesdetermine thediscountrateusedinDCFanalysis. AlthoughDCFanalysiswillidentifytheexpectedcashflowsattheoperationallevelitwillnot necessarilyidentifythetimingandquantityofreturnsthatthepartiesprovidingtheequityanddebt fundingwillreceive.Thisisofobviousimportancewhenconsideringthatthepartiesproviding financewillwanttoknowwhentheirpaybackwillbereceived.Debtholderswillrequireassurance that,underarangeofpossiblescenarios,interestontheloanfacilitycanbecoveredandthatthe debtwillbepaidback.Equityholderswillwanttounderstandwhenpaybackintheformof dividendswillcommenceandwhatthereturnwillbeoverthelifeofaproject.Giventhatdividends arepaidfromretainedearningsanddebtrepaymenthasseniorityoverequitypayouts,the operationneedstobemodelledfinancially.Ultimatelyitcomesdowntohowprovidersofcapital receivereturnsbasedonwheretheysit,e.g.geographically,inwhichcurrency,basedontaxregimes thatapply,howandwhentheycanaccesscashreturnsorearnings,etc.

49

Publicallylistedcorporationsaroundtheworldhaveastatutoryrequirementtoreporttheirresults undertherespectiveaccountingstandards.Hencefinancialperformanceisassessedunderthese accountingmeasures.Itisimportanttounderstandthat:

DCFprovidesameasureofvalueunderaneconomicapproachandtestsifthecostofdebt andequityissatisfied(etc)overtheperiodofthecashflows,andthat Financialanalysisisanecessarystepwhengravitatingtowardsthecorporateandfinancial environmentsandwilltest,amongotherthings,forthesameovermorediscretetime periods(e.g.ifinterestpaymentscanbecoveredeachyear).

50

APPENDIXBINTRODUCTIONTODISCOUNTRATES
Thisappendixisintendedtobeabriefintroductiontothetheoryunderlyingthespecificationof discountrates.Itisassumedthatthereaderunderstandsthebasicprinciplesofthetimevalueof moneyandthemechanicsofconductingadiscountedcashflow(DCF)analysistoderiveaNet PresentValue(NPV):thesearenotdiscussedhere.Rather,thepurposeistoprovidebackground informationtothetechnicaleconomicanalystwhomaynothaveformaltraininginthefield,sothat he/sheunderstandswhatthediscountrateisintendedtodo,howitislikelytohavebeenderived, andmostimportantlytoensurethatthediscountrateusedandthecashflowstowhichitisapplied areconsistent. ItshouldbenotedthatthediscussionisfortypicalDCFevaluations.However,manyoftheprinciples apply,withvariations,toalternativevaluationmethodologiessuchasRealOptionsValuation(ROV). Thediscussionisunderseveralsubheadings,asfollows: WeightedAverageCostofCapital(WACC):Thediscountratetypicallyusedinmany companies. TheCapitalAssetPricingModel(CAPM):Typicallyusedtodeterminetherateofreturn requiredbyshareholders(orequityholders)inacompany. CashflowsRealorNominal,BeforeorAfterTax:Anyofthefourcombinationsofthese parameterscouldbederived,anddifferentdiscountrateswillberequiredineachcase. CashflowscanalsobeexpressedasbeforeandafterDebt,i.e.excludingorincluding interestcoststhatwillapply.Cashflowsthatareafterthedeductionofinterestcostsare typicallyreferredtoasgeared.Inourcoverageofdiscountratewewill,asistypicalinthe resourcesindustry,refertoanalysisonanungearedbasis,beforeconsideringthefinancing cashflows,hencethefourpossiblediscountratesratherthantheeightthatarepossible ifalsoconsideringgearedcashflowanalysis. AdditionstotheWeightedAverageCostofCapital:Therearetwogenerallyaccepted approachesforreflectingriskinDCFvaluationsviathecashflowsorviathediscountrate. Thatis,eitherthecashflowisreducedorthediscountisincreasedandthisresultsinalower valuation.Ineffect,thehighertherisk,thenthegreaterthereturnsought.Many companiesaddriskpremiumstotheWeightedAverageCostofCapitaltoaccountforrisks ofdealingwithdifferentcommoditiesordifferentcountries.

WeightedAverageCostofCapital
Tospecifyadiscountrate,itisessentialtoaskwhatitisintendedtoachieve.Clearlythiswillbethe sameaswhatitisintendedthattheprojectshouldachieve.Theunderlyingpurposeofanyproject willtypicallybeatleasttoreturntotheinvestorstheircapitalplusarequiredrateofreturn.The mechanicsofatypicalDCFcalculationaresuchthat,ifwediscountacompanyscashflowatthe companysWeightedAverageCostofCapital(WACC)andgetanNPVofzero,wehaverepaidthe capitalanddeliveredtherequiredreturn.AnypositiveNPVistheValueAddedbytheprojectover andabovetherepaymentofcapitalanddeliveryoftherequiredreturn. 51

Anyventurewillbefundedbydebt,equity,oramixofthetwo.TheWeightedAverageCostof Capitalisthecosttothecompanyofitstotaldebtandequityfunding.Itisderivedfromthe followingformula: WACC=rE.E/V+rD.(1t).D/V where rE=returnrequiredonequity,orcostofequity rD=returnrequiredondebt,orcostofdebt E=marketvalueofequity D=marketvalueofdebt V=E+D t=taxrate WhendiscountingacashflowtocalculateanNPVitisimportanttouseadiscountratethatisinthe sametermsasthecashflow.TheWACCisappliedtoungearedaftertaxcashflowsandsohasa componentofcostofdebt(orinterest)andcostofequitytosuitthefactthatthecashflowis availableforservicingdebtandequity.Thecostofdebtispaidbeforetax.Hence,itsaftertaxcost isrD.(1t).The1tfactorisoftenreferredtoasthetaxshield.Equityholdersarepaidfrom retainedearningsandthephysicalcashpaymentfromcashflowsaftertax.Hence,thecostofequity isalreadyposttaxanddoesnotneedtobeadjustedforthetaxshielditdoesnotapply. ThevariablesEandDaresometimesdeterminedfromthecompanyspubliclyreportedBalance Sheet.Thebalancesheetfiguremaybeagoodrepresentationofthemarketvaluefordebtwhilst themarketvalueofequityforpublicallylistedentitiesisbetterrepresentedbythemarket capitalisationofthefirm. Thecostofdebt,rD,istypicallyrelativelyeasytodeterminefromthedollaramountandinterestrate ofeachsourceofdebtfunding,typicallydescribedindetailinthenotestotheannualaccountsin thecompanysannualreport.Oneshouldalsoremembertocheckforanyneworretireddebt facilitiesreportedbythecompanysincethelastreportedbalancesheet. Therequiredreturnonequitycapital,rE,canbederivedbyvariousmethods:thisdiscussionwill covertheCapitalAssetPricingModel(CAPM)approach.

TheCapitalAssetPricingModel(derivingtheCostofEquity)
Shareholdersreceivereturnsbytwomeans,DividendsandCapitalGains.Therateofreturn requiredbyshareholdersdependsontheriskinessoftheinvestment:ifhighrisk,highexpected returnsarerequired;iflowrisk,lowexpectedreturns. Whileacceptingthatinrealitythereisalwayssomerisk,thereareinvestmentsthatareconsidered riskfreee.g.governmentbonds.TheseprovidetheRiskfreeReturn,rF,andthe10year governmentbondrateismostoftenused. 52

Investmentsspreadoverthetotalmarketwouldfacethemarketrisk,andwouldbeexpectedto providetheMarketReturn,rM. Investmentportfolioscanbebuiltwithalowerriskthanthemarket,andtheseareexpectedto providereturnsbetweentheriskfreeandmarketreturns(i.e.greaterthanrFandlessthanrM). Similarly,investmentportfolioscanbebuiltwithahigherriskthanthemarket,andtheseare expectedtoprovidereturnsgreaterthanrM.Notethatreturnsforinvestmentsinnonriskfree assetsareaverageexpectationsinthelongterm,butarenotguaranteedinanytimeframe,and certainlynotintheshortterm. TheCapitalAssetPricingModel(CAPM)relatesshareholdersexpectedreturn(rE)toriskbyalinear functionwithagradientof,knownasthebetafactorofsimply,thebeta. rE=rF+(rMrF) whereistheratioofVolatilityofCompanyReturnstoVolatilityofMarketReturns

ThebetacanbeestimatedastheChangeinSharePrice(AdjustedforDividends)dividedbythe ChangeintheMarketAccumulationIndexforthesametimeperiod.Todetermineacompanysbeta, aseriesofsuchdatapointsisplottedovertime,andthegradientcalculated.Onecouldtrackshare pricesandmarketmovementsoneself,orbuyinformationfromspecialistmarketresearchfirms.In amathematicalsense,betarepresentsameasureofsystematic(ornondiversifiablerisk)ina portfolioofassetsandismeasuredasthecovarianceofanassetsperformancerelativetothe marketdividedbythevarianceinperformanceofthemarket. Companybetasarequotedonvariousmarketwebpages,suchasthemajorbankssharetrading websites,andalsopublishedbytheAustralianGraduateSchoolofManagement.Itisalsoimportant torememberthatbetascanbecalculatedovervariousperiods(e.g.over18months,fouryears,etc) andthereismorethanoneapproachavailable(butoftentheOrdinalLeastSquaremethodisused). Acompanysbetacanalsochangeovertimemorethanonefigurecanbequotedovertime. Bydefinition,themarket=1(if <1,theriskislowerthanthemarket,andif >1,higher),and (rMrF)isdefinedtobethemarketriskpremiumabovetheriskfreealternative.Thefigurebelow showstheserelationshipsgraphically:isthegradientofthereturnvsriskline.

53

 Whenidentifyingthebeta,itisalsoofsomeimportancetonotethestatisticalcorrelation coefficientfortherelationshipidentified:althoughabetavaluemaybedetermined,itmaynotbe statisticallysignificant.Itshouldalsobenotedthatsomecompaniesarecountercyclicalandhave negativebetas:theirreturnsmoveintheoppositedirectiontotheoverallmarket.

AccountingforInflation
Interestrateschargedbyfinanceproviders,andquotedinthecompanysannualreport,areusedto specifynumericallythedollarvaluesoftherepaymentsthatwillbemadeinthefuture,inthemoney ofthetimethatthepaymentsaremadethesearethereforenominalrates.Similarly,therates ofreturngeneratedtoderiverEaretypicallybasedonreportedpricesovertime,withoutany adjustmentfortheeffectsofinflationthesearealsothereforenominalratesofreturn.The discountrateformulasquotedabovearethereforeNominalDiscountRates,whichcanonlybe correctlyappliedtoNominalCashFlows. Inflationerodesthepurchasingpoweroftheinterestandcapitalrepaidovertime.Therealreturn isthatwhichisoverandabovetheinflationrate. If rN= thenominalrateofreturn,and ri= theinflationrate, therealrateofreturnrRisNOTgivenby (rNri), butratherbytherelationship(knownastheFisherequation) 1+rR=(1+rN)/(1+ri) i.e. rR=[(1+rN)/(1+ri)]1

DiscountRatesandNPVsRealandNominal,BeforeandAfterTax
Combiningtheabove,fourpossiblediscountratescanbederivedandapplied.Theappropriateone tousewilldependonwhatthecashflowstobediscountedare: Nominal,BeforeTax Nominal,AfterTax Real,BeforeTax Real,AfterTax rNBT=WACC/(1t)=rE.E/V/(1t)+rD.D/V rNAT=rE.E/V+rD.(1t).D/V rRBT=[(1+rE.E/V/(1t)+rD.D/V)/(1+ri)]1 rRAT=[(1+rE.E/V+rD.(1t).D/V)/(1+ri)]1

Thecostofequity,rE,isanaftertaxcostandsothebeforetaxdiscountrateshaverEgrosseduptoa pretaxbasisofrE/(1t). BeforeandaftertaxNPVscanbedifferent:

Theaftertaxdiscountratewillbelowerthanthebeforetaxdiscountrate. 54

Thepointsintimesatwhichcapitalexpenditureisincurredandwhentaxdepreciationis realisedaredifferent. Anaftertaxevaluationmayincludetaxlossescarriedforwardatthestartoftheproject,itis quitepossiblefortheaftertaxNPVtobegreaterthanthebeforetaxNPV(ifavalueisnot attributedtothetaxlossesinthebeforetaxNPVcalculation).

NPVscalculatedfromrealandnominalcashflowsshouldbethesameifthecorrectdiscountrates areused.Mathematically,deflatingnominalcashflowstorealandapplyingtherealdiscountrate doesintwocalculationstepswhatisdoneinonestepbyapplyingthenominaldiscountrateto nominalcashflows.Nominaltermcalculationsmayusedifferentinflatorsforvariousdriversand componentsofthecashflow.Theeffectofthesewillnotnecessarilyaverageouttothegeneral inflationratethatmaybequoted,butiftheoveralldeflationrateusedintheanalysisisalsousedin theFisherequationforarrivingattherealandnominaltermdiscountrates,thereshouldbeno differenceinNPVs.

AdditionstoDiscountRates
ThediscountratesasdefinedabovebytheWACCtakeaccountofinvestorsrequiredreturnsonly, andthesystematicormarketrisk.Theydonottakeaccountofthebusinessriskofdealing withcertaincommoditiesorincertainpartsoftheworld. ManycompaniesaddariskpremiumtotheWACCtoaccountforthesefactorstypicallyupto severalpercentagepointsforsomecommodities,andforvariouscountriesorregions. Riskpremiumsarerulesofthumbthatappeartohaveacquiredlegitimacybyconsensusandlong use.Thecommitteedevelopingtheseguidelinesisnotawareofanytheoreticalorevidentiary supportfortheprocessitself,norforthevaluesusedfortheriskpremiums.Thecommitteenotes that,whileusingdiscountratesthatincluderiskpremiumsmaybesatisfactoryforcomparing alternativeswithinaparticularproject,givenitslocationandcommodity,thereareconceptual difficultieswithcomparingsimpleNPVsderivedatdifferentdiscountratesforprojectswithdifferent commoditiesand/orindifferentcountries.Itisalsoperhapsworthnotingthatthecompanysbeta alreadyaccountsforitscurrentmixofcommoditiesandcountrieswhereitisoperating. MonteCarlosimulationmaybeamorerigorouswaytoaccountforbusinessrisk,butonlyifreliable probabilitydistributionsforvariousdataitemsareavailable.Allkeyparametersincluding productionrateandmineableresourceneedtobeincluded:notjusttheeasiertoquantify parametersofoperatingcosts,capitalcosts,gradesandrecoveries,etc.Itissuggestedwithout proofthattheloweringoftheNPVresultingfromusingadiscountrateelevatedbytheuseofarisk premiumisperhapsasurrogateforidentifyinganNPVthathasahigherprobability(perhaps90%)of beingbetteredthantheexpectedvaluethatwouldbederivedwithnosimulationofbusinessrisks anddiscountingattheWACC,whichwouldtypicallyhaveperhapsa50%probabilityofbeing achieved. Proponentsofothervaluationmethodologieswouldalsosuggestthattheuseofthesewould precludetheneedtoapplysuchriskpremiums.ThisisdiscussedbrieflyinthesectionDiscount RatesinOtherValuationMethodologiesbelowinthisappendix. 55

FinancingCashFlows
Thefinancingcashflowscapitalrepayments,interest,dividends,andthetaxeffectsofinterest paymentsareaccountedforinthediscountrates.Theyarethereforenotincludedinthecash flowsforeconomicevaluationsdeterminingprojectNPVetcforatypicalungearedtechnical economicevaluation. Thefinancingcashflowsmayhoweverneedtobecalculatedoutsidetheeconomicevaluationto confirmtheabilityoftheoperationtorepayloansandmeetdebtcoveragerequirements,asmaybe requiredbyfinanciers. CalculationofanEquityNPVcalculationmayberequested,assumingspecifieddebtfundingfor theproject,todeterminethereturntoshareholders.Debtdrawdowns,andrepaymentsofcapital andinterestwillthencomeintothecashflowanalysis,andthediscountratetobeusedwillbethe requiredreturnonequity.Thisisgenerallynotrecommendedforthetechnicaleconomicevaluation: theprojectshouldstandonitsownmerits,andnotdependonthefinancingarrangementsforits viability. Onecouldalsoevaluateaprojectattheequitydiscountratewithzerodebtfundingtoassessstand aloneviabilityofproject.Thiswouldtypicallybeamoreconservativeapproach,astherequired equityrateofreturnwouldusuallybegreaterthantherateofreturnfordebt.

DiscountRatesinOtherValuationMethodologies
Asnotedintheintroductiontothisappendix,theprecedingdiscussionisfortypicalanalysesoftotal netprojectcashflowwithdiscountingatthecompanysWACC,whichinessencetreatsthenetcash flowbyreferencetothecompanysoverallriskinessasperceivedbythemarket.Riskpremiumsare usedbysomecompaniestoaccountfortheadditionalperceivedrisksofdealingwithcertain commoditiesand/orincertaincountries. Othervaluationmethodologies,suchasModernAssetPricing(MAP),ArbitragePricingTheory(APT), andRealOptionsValuation(ROV)approachthevaluationproblemfromthepointofviewof identifyinganddealingwithvariousrisksindividually.Someofthesemethodologiesaredescribedin moredetailinothersectionsoftheseguidelines,butforthesakeofcompletenessinthisdiscussion ofdiscountrates,certainaspectsaredescribedhere. Someofthesetechniquesaccountfortheriskassociatedwithindividualcomponentsofthecash flow.Individualbetasarederivedfor(forexample)metalpricesandvariouscostcategories,suchas labour,consumables,energy,andsoon.Thetechniquesusedtoderivethesebetaswillbesimilarto thosedescribedabovefordeterminingtheshareholdersrequiredrateofreturn.Thebetasthus derivedareappliedtothemarketpremium(iethedifferencebetweenthemarketandriskfree ratesofreturn)toderivediscountratesrelatingonlytothesystematicormarketriskofeachcash flowitem. Eachcashflowitemisthendiscountedatitsappropriatediscountrate,theresultingcashflowsthen summedtoobtainatotal,whichisthenaccountingforallrisks.Theonlyotheritemtothenbe

56

accountedforisthetimevalueofmoney.Thetotalriskdiscountedcashflowisthereforethen discountedattheriskfreerateofreturntoaccountfortheeffectsoftimingonly. Thebetasderivedforeachcashflowitemwillautomaticallyaccountfortherisksassociatedwiththe commoditiesandcountriesinvolvedintherevenueandcoststructureofthecompanyand/or project.Theresultwillbeadollardenominatedvalue,butsincethediscountratesusedhaveno referencetothecostsofdebtandequity,thereisnoguaranteethatapositivevalueimpliesthat debtprovidersandequityholderscanberepaidtheirinvestmentsandpaidtheirrequiredratesof return.

ConcludingComments
Itisrarelythetaskoftheengineerortechnicalanalysttoderivediscountrates.Theyareusually specifiedbythecorporatefinancedepartment. Technicaleconomicanalystsshouldhoweverbefamiliarwiththeassumptionsunderlyingtheir derivation,andensurethattheappropriaterateisapplieddependingonthecashflowsgenerated: realornominal,beforeoraftertax. Inparticularitshouldbenotedthat,whilegeneratingapositiveNPVusingtheWACCasthediscount rateimpliesthatallprovidersoffundinghavereceivedtherepaymentoftheirinvestmentsplustheir requiredratesofreturn,thisdoesnot,asnotedinthebodyoftheseguidelines,implythatany particularpatternoffinancerepaymentscanbemade. Differentprojects,companiesandindustrieshavedifferentWACCs.Therearenumerousviewson whattheapplicableWACCiswhenvaluinganinvestment.Theauthorsmakenorecommendations regardingthesesometimesopposingviewsexcepttomakereadersawaretheyexist.However,itis recommendedthatsomethoughtisgiventosuchmattersas:fromwhatperspectivethevaluationis beingundertaken,thesizeoftheinvestmentrelativetothecompany,whetheritisinanindustry withdifferentrisksandtypicalWACCsfromthecompanysinvestorsperceptions,howitwillalter thecostofcapitalifthetransactionproceeds,andhavingawellconsideredandjustifiableposition. Someofthe(conflicting)viewsthatmaybeencounteredare:

Whenvaluinganinvestment,themarginalcostofcapitalisconsideredrelevant.Butthe WACCcanbeusedifweightedwiththeadditionalmarginalcost.Thisignoresissuessuchas themarginalcapitalrequirementsbeingfullyfundedusingdebtandanyeffectsoncredit ratingsandapossibleincreaseincostofdebt.Manybelieve,iffullyfundedbydebt,then usetheexistingWACCatmargin.Overtime,companiesrefinanceandthemarginalcostof capitalwillceasehencethislendssupporttousingthecurrentproportionofdebtand equityatexpectedcostsofdebtandequity. Whenvaluinganothercompanyforacquisition,useyourcompanyWACCasthatiswhatthe acquiredcompanyscashflowswillbevaluedatwhenconsolidated. Whenvaluinganothercompanyforacquisition,usethatcompanysWACC.

57

Dobothoftheabovetoidentifywhetheryouandtheothercompanyvalueitdifferently, withpotentialimpactsonacquisitioncosts. Whenvaluingacompanyinthesameindustry,usetheindustryWACCthismaybebased ontheviewthatanoptimalcapitalstructureisobtainableand,giventheoptimalmixis difficulttoobserve,oneusestheindustryaveragecostofcapitalinstead. Whenvaluingacompanyinadifferentindustry,usetheindustryWACCwithanadjustment foryourdebtposition. BusinessUnitswithinacompanyeachhavetheirownsetofrisks,henceitisappropriateto useadifferentcostofcapitalwhenrankingopportunities.

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APPENDIXCRECOMMENDEDREADINGLIST
DiscountRates Smith,L,1990.Inflationinprojectevaluation,CIMBulletin,83(935):129133. Smith,L,1995.Discountratesandriskassessmentinmineralprojectevaluations,CIMBulletin, 88(989):3443. Smith,L,2002.Discountedcashflowanalysis,CIMBulletin,95(1062):101108. ValueatRisk Lai,F.J.andStange,W.UsingValueatRiskforIntegratedProjectRiskEvaluation.AusIMMProject EvaluationConference2009,2122April2009. Stange,W.andCooper,B.ValueOptions,RiskandFlexibilityinPlantDesignandOperations. AusIMMMetallurgicalPlantDesignandOperatingStrategies(MetPlant2008),1819August2008 Perth,WA. Whittle,G.,StangeW.andHansonN.OptimisingProjectValueandRobustness.AusIMMProject EvaluationConferenceMelbourne,Vic,1920June2007. RealOptions Howell,S,Stark,A,NewtonDP,Paxson,D.,Cavus,M.,AzevedoPereira,J,Patel,K.,2001,Real Options:EvaluatingCorporateInvestmentOpportunitiesinaDynamicWorld,(FinancialTimes: PrenticeHall). Copeland,TEandAntikarov,V,c2001,RealOptions:APractitionersGuide,(Texere:NewYork). Schwartz,ESandTrigeorgis,L,RealOptionsandInvestmentUnderUncertainty:Classicalreadings andrecentcontributions,c2001,(MITPress:Cambridge,Massachusetts). Clemen,RT,c1996,Makingharddecisions:Anintroductiontodecisionanalysis,(DuxburyPress: Belmont,California)

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 APPENDIXDTECHNICALECONOMICEVALUATIONGUIDELINES COMMITTEEMEMBERS
ConvenorandChairman SubCommitteeMembers SimonAllard PeterCard MichaelConanDavies TimDaffern BrianHall RichardHorton AlisonMorley DrNawshadHaque DrAndrewNewell TimPeters MonikaSarder StellaSearston DrBillShaw DrWayneStange AlexTrevisin MikeWarren GrahamWood DrBrianWhite

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