Mineral Investment and Finance

Petrick, Alfred Jr. ; Vogely, William A.
Organization: Society for Mining, Metallurgy & Exploration
Pages: 75
Publication Date: Jan 1, 1985
INTRODUCTION The scope of mineral finance extends beyond the economic aspects of property evaluation to all of those activities involving acquisition and utilization of funds with an objective to optimize the value of the firm. It must, therefore, en- compass consideration of the overall financial goals of the firm, decisions involving external versus internal growth and domestic versus foreign investments, management of working cap- ital, efforts to minimize the cost of capital, and decisions with regards to the instruments of long- term debt and equity financing. The scope of this section is limited to considerations of special interest to the mineral or petroleum engineer, which include the following aspects of mineral finance: (1) The technical aspects of mineral or coal property or oil and gas reservoir evaluation which provide the basis for estimation and forecasting of revenues and costs. (2) Estimation and forecasting of costs and prices in a inflationary economic environment. (3) Calculation of cash flows which model .. , the investment in minerals, coal or oil, and gas. Such models require assumptions as to the timing of cash flows, escalation of capital and operating costs, base prices, and escalation, the tax regime, royalties, division of profits and the economic aspects of loans. (4) The role of discount rate in the economic analysis of an investment which requires consideration of the opportunity costs of the firm, cost of capital, risk premiums. (5) Risk analysis including application of the concepts of conditional net present value, expected value, and risk preference as well as the application of the techniques of sensitivity and simulation. (6) Selection of application criteria for in- vestment decision making. (7) Capital structure with particular reference to the effect of debt financing. (8) Consideration of sources of funds utilized by the minerals industries. (9) Long-range planning including portfolio analysis. This section is limited to principles, methodologies, and trends in mineral investment, finance, and long-range planning in the United States with a perspective from the year 1984. Consideration of the key concepts is supplemented by case examples of investment risk analysis and financial structure. Important factors affecting mineral investment evaluation during the 1980s include volatile metals prices, cost inflation, and the introduction of techniques requiring the computer and its capacity for improved technical and economic analysis into the hands of those who know most about the industry. The personal computer is replacing the calculator on the desk of the individual analyst and is rapidly becoming a required tool for the study of engineering and economics. Examples of change brought about by the micro-computer include greatly improved techniques of cost estimation, wider application of the computer for project analysis, computer graphics, reserve estimation, geostatistical analysis, mine design and other techniques that capitalize on the ability of the computer to handle
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