The Determination Of Optimum Ore Reserves And Plant Size By Incremental Financial Analysis

Modern business practice dictates that in order to ensure the economic optimization of investment, the size of any investment venture must be such that every increment of capital invested in such a venture yields at least a corporate minimum acceptable rate of return. This practice is based on the premise that alternative investment opportunities capable of yielding the minimum corporate return are immediately available. If a mining corporation is to make the maximum use of its investment funds, any capital investment in a mining property must comply with the above practice. The most important parameter in estimating ore reserves is the cut-off grade which is used to separate material into ore or waste. The cut-off grade is calculated on the basis that material of cut-off grade produces sufficient revenue to cover the estimated costs of mining and processing through to sales, including depreciation and produce a pre-determined profit. Ore reserves so estimated are adequate for determining the magnitude of an orebody but do not provide a sound basis for determining plant size and therefore capital investment in a new property or for expansion consideration on an existing property. From a financial analysis of this one ore reserve it is impossible to ascertain whether each increment of capital investment is providing the minimum acceptable rate of return, Other difficulties associated with the calculation of a cut-off grade including the determination of depreciation and the amount of pre-determined profit to be included in the cut-off grade calculation are outlined in the text. The proposed solution to determine optimum ore reserves and plant size for new properties avoids the complication of calculating a cut-off grade by computing a series of ore inventories using arbitrarily selected cut-off grades. A comparison of the cash flows generated by production from such ore inventories using incremental financial analysis clearly indicates the ore reserve and plant size which will best serve the corporation's investment and metal production goals. Incremental financial analysis of a corporation's operating mines and prospects assists management in assessing the comparative expansion and investment possibilities of each property for increasing or maintaining metal production on a long term basis.