Special Report : Mineral Investment 1983 Depends on Prices

The current financial state of the mineral industry, in general, is bad. Economic prospects for improvements in the near future are uncertain. What will improve mineral investment economics so the mining industry can return to a more normal (in terms of past experience) production level? Basically, mineral commodity prices must rise. They must rise to economically justify reopening closed mines and for management to seriously consider expansion or development of existing and new mines. With the worldwide economy depressed for more than a year now (longer for most segments of the mineral industry), supply/demand relationships for mineral commodities are such that prices are depressed-except for precious metals. In investment analysis of the economic potential of existing or new investments in any industry, product price generally is one of the key parameters having great impact on the economic viability of projects. Petroleum and synfuels industry development contracted last year for the same product price reasons that have brought mineral industry development to a standstill. Much of the new mine development activity now underway or in the serious planning stages around the world involves precious metals ore body development simply because precious metal prices are high enough now or are projected to be high enough in future production years to give overall satisfactory project economics. It will take significant improvement in nonprecious metal mineral commodity prices in 1983 to develop significant new mine investment interest except in very high grade ore body special situations. Mineral Investment Decision Making Before progressing further with the discussion of mineral investment considerations for the coming year, it should be emphasized that mineral investment decision making-like all industry or individual investment decision making does not relate just to economic considerations. Investment decision making should and generally does involve three analyses: • Economic analysis • Financial analysis • Intangible analysis Economic analysis evaluates the relative economic merits of investment situations from a profitability viewpoint based on discounted cash flow analysis of projected investment revenues and costs. Financial analysis, on the other hand, refers to where and how the funds for proposed investments will be obtained. Regardless of the project's economic potential, if you can't finance it, the project will not be done. Intangible analysis considers factors affecting investments but which cannot be quantified easily in economic terms. Typical intangible factors are legal considerations, public opinion, goodwill, environmental and ecological impacts, and regulatory or political considerations, to name a few. New mine development investment decision making in the US has been impacted heavily by intangible considerations in the past decade and will probably continue to be impacted by them in 1983. There is a common tendency in literature and management practice to interchange the terms economic analysis and financial analysis. This often leads to confusion about the rationale for investment decisions. For example, in the past year a majority of companies in all types of industries cut back budgets for new projects. Often this was done not because new project economics were unsatisfactory, but because cash flow from existing operations was reduced compared to previous years due to the recession, and debt service requirements were high from existing loans so new borrowing was undesirable. For financial reasons, in other words, many projects were shelved last year. That included some precious metal mining projects and many petroleum projects. Many other projects were shelved for economic reasons (sometimes combined with financial reasons in the case of marginal economic projects). New mine development for copper, lead, zinc, molybdenum, iron ore, and synthetic fuels are a few examples. Economic Uncertainty and Financial Considerations Mineral project analysis has always involved a lot of uncertainty with respect to determining ore grades, tonnage of producible reserves, operating and capital cost projects, and mineral commodity prices estimates. The wide swings in mineral commodity prices in recent years and the almost impossible task of projecting future prices with any degree of confidence or accuracy concerns mineral project investment decision makers. In developing a new copper or silver mine, it is not today's price of copper or silver that is relevant to economic analysis of the mine, but what the price will be during the producing years. There is no way to avoid projecting the escalation (or de-escalation) effects on revenues and costs. To analyze a project in terms of today's dollar revenues and costs implicitly assumes that escalation will not change today's project costs and revenues; or that, if they do change, the project economics will be unaffected by the changes. This often is not the best or even a realistic assumption. The inherent uncertainty associated with historical mineral price swings is exacerbated in 1983 by the uncertainty of when