Question

Evaluating a Mineral Deposit

Background. With the proceeds from the development of the oil and gas deposits from your inherited property, you were interested in investing in a mineral prospect.  You have almost $2 million.  There was an opportunity to develop a copper deposit in the mountains of southern Arizona.   It was a recent discovery, and investors were sought to partner with a mining company to mine it and asked you if you would want to provide 50% of the funds needed to start up the mine.  You are interested, but skeptical.  Your class in Environmental Geology had prepared you to consider the factors that make a mineral deposit economically viable for development. These considerations included:

• The richness (grade) of the ore
• The volume of enriched ore
• The cost to extract the ore
• The cost for transporting and milling/processing of the ore to a metal
• The price offered for the refined metal

If the costs for extracting the ore and refining it were sufficiently less than the money paid for the product, it would be profitable to develop the deposit.  The profit would need to be large enough to justify the investment.  There were potentially other investments that would have similar risks but higher returns if the profit was too low.  You could, for example, buy stock in Microzon that was returning an average of 15% a year. So, you would want to get 15% return on your investment.  

Information has been provided by the mining company who was handling the evaluation of the deposit.  The preliminary investigation of the mineral deposit revealed that the ore had an average copper content of 1.3%.  The company also indicated the mine would potentially produce 800,000 tons of ore a year at a cost of approximately $41/ton. There would be a start-up cost of $3,900,000 of which you would be helping cover about 50% of the cost.   The cost for processing the ore into copper at a nearby mill near Globe, Arizona is $19/ton, including transportation.  The recent price for copper has been around $2.70/lb.   

Problem. To evaluate the investment:

1. Compute the annual cost for producing the copper ore, transporting and processing it (produced tonnage of ore multiplied by the total cost per ton for producing, transporting, and processing it).  
2. Compute the value of the refined copper produced in a year, multiplying the tonnage of ore by the grade (remember to convert the percentage to a decimal value) and then by 2000 lb/ton to get the number of pounds, and then by the price per pound.
3. Compute the total annual profit by subtracting the cost from the value for the refined copper.
4. Compute your share of the annual profit by multiplying your percentage (50%) by the total profit.
5. Compare that return on your $2,000,000 investment to the 15% return on an alternative investment ($300,000 per year).

If the profit you get from the mining is greater than the profit from the alternative investment, you would decide to invest.  If not, then you will decline to invest.  Complete the following:

1. Annual cost to produce, transport, and process the copper ore:  $_______
2. Value of the copper produced per year:                                     $_______
3. Total annual profit:                                                                   $_______
4. Your share of the annual profit (#3 multiplied by 50%)                $_______
5. Should you invest in the mine?    Yes ___,  No ____

Answer 1

1). Annual cost for producing, transporting and processing the ore = annual production in tons*(production cost per ton + transportation & processing cost per ton)

= 800,000*(41 +19) = $48,000,000

2). Value of copper produced per year = annual production in tons*copper grade*2000 lb/ton*price per lb

= 800,000*1.3%*2,000*2.7 = $56,160,000

3). Annual profit = value of copper produced per year - total cost = 56,160,000 - 48,000,000 = 8,160,000

4). Your value of the annual profit = 50%*annual profit = 50%*8,160,000 = $4,260,000

5). Yes,you should invest in the mine as return is much higher than $300,000.