The Role of Weighted Average Cost of Capital in Evaluating a Mining Venture

Investment in the mineral industries-particularly in the mining industry-differs from investment in nonminera1 industries in that the latter have an indeterminate life, assumed to be perpetual, and are not called upon to replace the firm's original investment. In mining ventures, on the other hand, once the ore bodies are depleted the mine has no economic value; the original capital investment must be returned to the investor by the time the ore is exhausted. A mining venture is also characterized by the significant cost and time associated with the exploration phase. A myriad of samples must be taken, geological features investigated, and ore grade assured. In addition, most mining ventures require substantial capital expenditures aggregating several hundred million dollars for a number of years before the project begins producing any revenue. Any theoretical model employed in evaluating a mining venture, as well as similar mineral ventures, must take all these factors into consideration.