Business Cycles and Feasibility Tests in Mining Ventures

Introduction Mining has always been sensitive to the fluctuating income of downstream customer industries. The industry is now becoming more vulnerable to booms and busts as economic pulsations increase and demand for mining products shows little or no long-term growth. As the general economy has become more cyclical in the last decade, the capital-intensive primary industries have become more aware that timing as well as preparation of survival plans are vital in investment decisions. Strangely, however, some of us have not yet included the business cycle in our feasibility studies. Cyclic prices and volumes and fluctuations in profits and cash flows do not fit our linear models. The increased cyclical nature of our economy is recent and poorly understood. Forecasting peaks and troughs is still more an art than a science. Nevertheless, avoiding business cycle parameters can lead to error in value estimation and contingency planning of new projects. Metal and Mineral Industries More than half the iron and steel, aluminum, copper, lead, zinc, manganese, tin, nickel, molybdenum, cobalt, and chrome that we mine, smelt, upgrade, and recycle goes to construction, transportation, capital goods, and consumer durable industries. All are cyclical. Their products are consumed slowly, so replacement can be postponed in recessions. Purchases of such goods are usually financed by debt, and their customers are sensitive to highly cyclical changes in interest rates. During prosperous periods, people tend to buy capital goods despite high interest rates. Upstream industries also tend to be whipsawed by inventory cycles. With high interest rates and good transportation, downstream fabricators can lighten their inventories during recessions. They know that upstream suppliers can deliver supplies and raw materials immediately, And, with the advent of electronic accounting, the fabricator with timely inventory information can afford to hold fewer contingency stocks. Likewise, when recovery returns, inventories surge back through industry pipelines, accelerating demands on primary supplies. The price elasticity of most primary products is low. Their share of the value of finished products of the industries they supply is generally small. The 60 kg (130 lb) of aluminum in a car is vital. But whether it costs $80 or $130 will not visibly influence the demand for an automobile. With low elasticities of demand, the primary producer is hit with decreases (or increases) in prices and in sales volume, during recessions as well as recoveries.