Personal Skills: Economic Analysis of Mineral and Energy Investments

L. Alan Weakly, member SME, is a senior staff engineer, Exxon Co. Weakly chaired a Mining Engineering committee formed to solicit materials for six planned "personal skills" articles, to be used in ME this year. What follows are Weakly's introductory comments to the series. Upon graduation from college several years ago, I thought that I was sufficiently prepared to embark in my chosen profession. A short time later I realized that several years of on-the-job training was going to be required before I could use my technical training effectively. It never occurred to me that, professionally, I was seriously lacking in any other skills. My spelling could use a little upgrading, but this was not a serious deficiency. I have been very fortunate to have had two employers that recognized that their engineering professionals did lack other skills and made every effort to give them training to correct these deficiencies. The skills I am referring to are those in administration and interpersonal relationships. Most mining engineers and geologists receive very little, if any, college training in these areas. In addition, many companies do not provide this training and many mining engineers and geologists are unaware of their deficiencies. It is for this reason the subject of personal skills development is being introduced in Mining Engineering. The mining engineer or geologist can pursue one of two basic career directions, managerial or technical. In today's technically sophisticated society and highly competitive business climate, both orientations require administrative and interpersonal skills. Most of us are technically qualified and we continue to upgrade our technical skills. But many studies indicate that we, as a group, are significantly weaker in administrative and interpersonal skills than other professional groups. In addition, these studies indicate that engineers, in general, take longer to reach managerial levels and fewer do so. This series in Mining Engineering, then, should help readers strengthen and broaden their professional capabilities. In all industries, including mining and petroleum, economic analysis of potential investment projects is done to select the projects that will give maximum future value from the investment of available capital. Rather than looking directly at the future values to be generated by investing capital in alternate ways for economic decisions, evaluators usually use either rate of return, present value, annual value, a profit to investment ratio, or various break even analysis results to reach economic analysis decisions in evaluating alternative investments. Alternative economic evaluation techniques are used in industry to properly analyze the economic potential of various investment projects. "Discounted Cash Flow" analysis is the phrase commonly used to describe these techniques. Whether you want to analyze projects in mineral, petroleum, real estate, refining, pipe-line transportation, or any other industry, proper application of discounted cash flow analysis techniques enables you to fairly compare the economic potential of alternative projects as well or better than you can using any other project evaluation approaches. It should be pointed out that investment analysis generally involves more than economic analysis. Financial and intangible considerations sometimes are as important or more important to investment decision-making than economic considerations. Economic analysis refers to evaluation of the profit generating potential of projects, that is selecting which alternative projects will generate maximum future value possible from available investment capital. Financial analysis, on the other hand, relates to analysis of where money is going to come from to finance various projects. Regardless of the economic potential of a project, if financial analysis indicates that we cannot finance the project, it likely will be shelved for financial reasons even though it may be economically satisfactory. Many evaluators use the terms "economic analysis" and "financial analysis" interchangeably, but this author considers that to be undesirable. Intangible analysis relates to project factors that are difficult to quantify in