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South Africa remains the largest global producer of gold, accounting for 11.3 per cent of total world mine production, which amounted to 2520.2 t in 2005. The benefits and disadvantages associated with hedging practices in general, and among South African gold producers is examined. The wide variety and unique nature of risks faced by the mining industries provide a strong case for hedging. Only the principles of hedging, such as selling ounces of gold in the ground at a pre-agreed price for delivery at a future date as a cost-effective mechanism for price risk management, is discussed. Progressive and cumulative increases in the volume of forward sales in the major producing countries are considered by many to be the cause of the declining gold price over the past decade. In spite of negative publicity, forward selling continued as an industry-wide practice until recently (2002) when the global hedge book contracted by 352 t; contraction amounted to 158.6 t in first quarter of 2006. The objectives and benefits of hedging include continuity and stability of cash flows, stability in price achieved, reduction of frictional costs, and creating an effective management tool. The importance of a defined hedging strategy in reducing uncertainty about the hedging objectives is essential to a successful hedging policy. Historical patterns in hedging revenues at an industry level indicate five distinct periods during which the fortunes of hedgers have fluctuated. Finally, since 2001 the rising gold price and reduced price volatility through the consolidation in the global price means that the need to stabilize revenue flows is less urgent. This has meant that hedging is becoming progressively less important for the mining industry at large.

Jan 1, 2007

By V. S. S. Yadavalli, J. Hager, R. Webber-Youngman

"This article investigates the complex problem of a budgeting process for a large mining operation. Strict adherence to budget infers that financial results align with goals. In reality, the budget is not a predetermined entity but emerges as the sum of the enterprise’s operational plans. These are highly interdependent, being influenced by unforeseeable events and operational decision-making.Limitations of stochastic simulations, normally applied in the project environment but not in budgeting, are examined and a model enabling their application is proposed. A better understanding of budget failure in large mines emerges, showing that the budget should be viewed as a probability distribution rather than a single deterministic value.The strength of the model application lies with the combining of stochastic simulation, probability theory, financial budgeting, and practical scheduling to predict budget achievement, reflected as a probability distribution. The principal finding is the interpretation of the risk associated with, and constraints pertaining to, the budget.The model utilizes a four-dimensional (space and time) schedule, linking key drivers through activity-based costing to the budget. It offers a highly expressive account of deduction regarding fund application for budget achievement, emphasizing that ’it is better to be approximately right than precisely wrong’."

Jan 1, 2015

By R. T. Jones

Technical publications in the field of mining and metallurgy have existed for a long time. Recent developments in electronic publishing on websites make it possible to disseminate information more widely and cost-effectively than before. Professional societies have an opportunity to serve their members and their industry by publishing high-quality peer-reviewed papers on their websites as well as in printed form. Older publications can be scanned, and optical character recognition used to provide searchable text. Various business models exist around this process. This paper outlines the approach used by the Southern African Institute of Mining and Metallurgy (SAIMM) to provide free open access to their journal papers and conference proceedings, as well as the work being done by OneMine.org to collect technical papers from a number of international societies and make them available to subscribers via a large database. An approach is outlined that should be of benefit to authors, readers, and society at large.

Jan 1, 2012

The optimum cut-off grade policy maximizes the net present value (NPV) of an open pit mining operation subject to the mining, processing, and refining capacity constraints. The traditional approaches to cut-off grade determination ignore the escalation of the economic parameters such as metal price and operating costs during life of an operation, and consequently lead to unrealistically higher values of the objective function. Further, the NPV of a mining operation declines due to the depletion of the available reserves, causing a decline in the optimum cut-off grade, i.e. higher cut-off grades in the early years of an operation and lower cut-off grades during the later years. Hence, low grade material mined in the earlier years may be stockpiled for processing during later years to offset the effect of escalating economic parameters on NPV. This paper demonstrates the combined impact of introducing economic parameters, escalation and stockpiling options into the cut-off grade optimization model. The model promises an enhancement in NPV as illustrated in a case study incorporating practical aspects of an open pit mining operation.

Jan 1, 2011

By D. S. van Vuuren

Over the last 60 years many different processes were conceived to reduce the cost of titanium produced by the Kroll process. However, success eluded all previous efforts, which were consequently terminated in periods of economic downturn. Recently, the grow thin demand for titanium and the high cost of producing the metal again sparked renewed attempts in various parts of the world to replace the antiquated Kroll process with a more efficient route. The different options to produce titanium are reviewed, classified and evaluated in terms of the fundamentals underlying the technologies, and it is shown that the options considered to be the most likely to replace the Kroll process, are continuous processes to reduce TiCl4 metallo-thermically to titanium powder. Of these, continuous magnesio-thermic reduction of TiCl4 would conceptually result in the lowest-cost and highest-value product. However, when considering by-product salt removal from the titanium product and recycling of the salt as well, sodio-thermic reduction of TiCl4 is better.

Jan 1, 2009

By Ö. Uysal

This study deals with the presentation of the mechanized longwall mining project introduced some years ago to increase productivity and output of Aegean Lignite Establishment (ELI) owned by Turkish Coal Enterprises (TKI.) and the comparison of this method with a planned alternative new mining method called ?shortwall mining? where continuous miners will be introduced as primary coal excavation machines. Following the planning phase, production costs have been calculated for both mining methods on the basis of a panel having a height of 7.5 m. In addition to cost analysis, both methods have been evaluated using ?the multi-dimensional objective system?. In this evaluation the value synthesis has been carried out according to scoring models. Lastly, the advantages and disadvantages of both production methods have been stated by analysing them according to related criteria. In the light of outputs gathered from the analyses, it has been determined that the shortwall mining method will out perform the longwall method. Keywords: continuous miner, shortwall mining, longwall mining, multi-dimensional objective system.

Jan 1, 2006

By S. Heukelman

Zinc or, a zinc refinery in South Africa, uses oxygen enrichment of up to 26% O2 in its fluidizing air to increase concentrate-throughput in its fluidized bed roasters. The aim of the study is to determine whether O2 enrichment can be reduced by introducing micro-pelletized concentrate into the feed blend, while maintaining concentrate throughput rates and calcine quality. A laboratory scale fluidized roaster was used to determine the strength and oxidation kinetics of suitable micro-pellets. The strength of the pellets was determined by the extent of attrition during roasting. It was found that micro-pelletization decreases the fines in the feed to the roasters; the ?500 µm fraction decreased from 87% to 10%. The micro-pelletized particles do break down during roasting, which increases the -500 µm fraction to 31%. The general morphologies of the roasted particles are similar to those found by previous workers. Micro-pelletized concentrate particles require more time than non-pelletized concentrate particles to oxidize in the roasting step, although this is less than the mean residence time of the Zincor roasters. Roasting micro-pellets in O2-enriched fluidizing air increased the reaction rate.

Jan 1, 2011

By S. D. Viljoen

The use of ceramics to protect equipment subjected to wear in abrasive and corrosive applications has been accepted by most plants as the industry norm. Little is, however, known about alternative special ceramic based products which are available for the protection of plant assets. With careful engineering, impact resistant ceramics can be used in high impact zones using modern ceramic technology. Properly selected and properly installed, ceramics will provide a tough wear resistant lining for protection against abrasion and impact. Basalt, on the other hand, is widely used in coal washing plant process pipes with varying degrees of success. Basalt is normally not used for the lining of bends, ?T? pieces or reducers due to the reduced wear resistance compared to alumina ceramic. The advantage is a much reduced initial capital cost. A patented ceramic composite non-return valve solved an old problem encountered in the operation of medium sumps. The design approach overcomes the lack of functionality of alternative designs and reduces valve wear while preventing medium settlement during plant shutdown periods. Direct bonded ceramic pulley lagging is becoming the industry norm, eliminating most of the problems encountered with conventional pulley lagging systems.

Jan 1, 2010

By A. McKenzie

During the late 1990s Anglo American PLC was evaluating the Gamsberg zinc deposit in the Northern Cape Province. As the primary South African metallurgical technology provider, Mintek became involved in the evaluation of a pyrometallurgical process for the recovery of zinc from the Gamsberg deposit. eloping DC arc furnace technology for the metallurgical industry. This includes the patented Enviroplas® process for the treatment of zinc bearing waste materials. As a consequence Mintek has developed extensive expertise in the pyrometallurgical processing of zinc bearing materials. However, Mintek?s technologies stopped with the production of Prime Western Grade (PWG) zinc. Early on in the evaluation of the Gamsberg project, it became evident that the refining of PWG zinc would play an important part in the economic viability of the project. At the time the only pyrometallurgical technology available for the refining of PWG zinc to Special High Grade (SHG) zinc was the New Jersey process. This process represents 50-year-old technology and has not undergone significant refinement since the technology was developed. In order to provide a complete pyrometallurgical flow sheet for possible implementation at Gamsberg, Mintek assessed the New Jersey process with a view to either improving the technology or developing a new technology appropriate to the 21 century. In 1998 Mintek convened a consortium consisting of Mintek, the University of Cape Town, Eskom Enterprises, Bateman Metals and Anglo American PLC. The consortium successfully applied to the Innovation Fund for funding to develop a new process for the pyrometallurgical refining of PWG zinc to SHG zinc. The main aims of the project were to develop a new technology for pyrometallurgical zinc refining that conformed to the following: ?Decrease the production cost of SHG zinc metal to stimulate the development of the Gamsberg deposit. ?Be compatible with the current Enviroplas® process, preferably as an add-on to that process. ?Should use electrical energy to benefit from local price tariffs. The project commenced at the beginning of 2000 and consisted of three phases: ?an initial technology search and assessment of the fundamental aspects of zinc distillation. ?the design of a pilot plant for zinc refining. ?the manufacture, commissioning and operation of the pilot plant. A new technology based on a DC arc boiler feeding a packed distillation column was developed and during 2003 the project culminated in the successful operation of a 200 kg/h pilot plant. Ultimately, all of the aims of the project were met and the main outcome is that an advanced process for the pyrometallurgical refining of zinc (the Zincref process) has been developed. The main innovation of the technology was the switch from an energy transfer limited process to a mass transfer limited process (for which a patent has been registered).

Jan 1, 2004

By P. C. Schutte

Ergonomics is the scientific discipline concerned with the understanding of interactions among humans and other elements of a system, and the profession that applies theory, principles, data and methods to design in order to optimize human well-being and overall system performance. Despite the fact that the application of ergonomics principles can make a major contribution to the management of significant occupational safety and health risks, ergonomics is currently applied on a limited scale in the South African mining industry. The objective of this paper is to provide a perspective of ergonomics, the main aim being to create a point of departure for the development of strategic objectives to enhance existing health and safety initiatives through the application of sound ergonomics principles. Two of the major consequences of poor ergonomics, namely work-related musculoskeletal disorders and worker fatigue, and possible means of introducing ergonomics into the South African mining industry, are discussed.

Jan 1, 2005

By F. R. Camisani-Calzolari

Surface defects on continuously cast slabs require treatment by grinding. This extra phase in the process causes lower throughput of final product and extra energy costs. The elimination of slab treatment after casting implies that slabs can be direct rolled or hot charged, resulting in higher throughput and lower energy costs. To increase the number of slabs that can be direct rolled or hot charged, defects have to be predicted before a slab has completed the casting process. Transversal and longitudinal cracking, casting powder entrapment and other inclusions, bleeders, deep and uneven oscillation marks, stop marks and depressions are the defects thatare considered for prediction. A structure with two models is proposed. The first model describes the effect of mould level, water inlet temperature and casting speed (MV?manipulated variables) on 38 thermocouple temperatures (IV?intermediate variable). Casting speed is a manipulated variable while mould level and water inlet temperature are treated as measured disturbances. This model is known as the MV to IV model, and is used to control the occurrence of defects. The second model describes the effect of the thermocouple temperatures on the defects at different positions and locations on the slabs (OV?output variables). This model is known as the IV to OV model and is the predictor of defects. The models are determined using time-series methods in the form of auto regression with exogenous input using data of approximately 500 slabs cast over a period of 6 months. The models are validated using plant data from 44 slabs gathered three years later, with good results. As an example, published results give a sensitivity and specificity of 61.5 per cent and 75 per cent respectively for longitudinal cracks on validation data, while the presented method gives 63.6 per cent and 93.5 percent, respectively. The IV to OV model is used in an inversion to determine the optimal thermocouple temperatures for each slab width. Keywords: Continuous casting, model, defect, prediction, direct rolling, hot charging, goodness-of-fit, correlation, time-series, soft sensor, ARX.

Jan 1, 2003

Stope support systems, typically consisting of props and packs, are used extensively in the gold and platinum mining industry to stabilize the rock mass in the excavation vicinity and to reduce the hazard associated with rockfalls and rockbursts. The design of stope support systems was historically based predominantly on past experience and practices, and cost considerations. The recent development of a new and improved support design methodology, has led to the potential for significant increases in worker safety and support cost savings. This paper reviews some of the fundamental rock mass and support criteria that form the basis of the improved support design methodology. The considered design criteria are the height of potential fall; quasi-static stope closure rates; dynamic stope closure rates; compressive hangingwall stresses; discontinuity spacing, orientation and interface properties; effect of support length (stoping width); effect of compression rate; consistency of support performance; a real coverage; support spacing; and zone of support influence. The proposed support design methodology combines both the zone of influence and key block stability theories, resulting in optimized support systems for rockfall and rockburst conditions. The site-specific methodology consists of two stages: (i) a tributary area analysis, and (ii) a zone of support influence and a stability analysis, considering hangingwall failure due to buckling, shear and block rotation, which gives maximum safe spacing of individual support units. The methodology is suitable for designing support systems for both blocky hangingwalls and hangingwalls fragmented by face-parallel extension and shear fractures.

Jan 1, 2001

The unpaved road network on a surface mine is extensive, comprising numerous roads of varying construction and material qualities with highly variable traffic volumes. Existing haul road maintenance management systems (MMS) work well for predictable traffic volumes, but for complex mine road networks, the MMS becomes onerous. This results in sub-optimal road maintenance strategies with the attendant increase in total road-user costs and reduction in service. A real-time maintenance management system was thus sought to overcome the deficiencies of existing MMS for mine roads. Since most large mines operate trucks with on-board diagnostic data collation, linked through a centralized communication and GPS backbone, it was proposed that road condition could be monitored on a real-time basis through on-board vibration signature analysis. The aim of this paper is to present the development of a real-time mine haul road maintenance management system. Following are view of mine road maintenance practices, the real-time system architecture is introduced and the results of a field trial of on-board vibration signature assessment is presented. The trial results are discussed in the light of road defect signature recognition, analysis, signature repeatability and system limitations. This approach has applicability to other situations such as a network of district roads, subject to an analysis of the economic feasibility. The paper concludes that modern technology has the potential to apply maintenance as and where needed with possible reductions in authority cost and an improvement in service provided for the road user.

Jan 1, 2003

By S. Z. Pethö

Pillar extraction at shallow depths with small pillars that were not originally intended for secondary extraction can provide a huge benefit to the coal mining industry in those areas where a significant percentage of the remaining coal reserves are locked up in small pillars at shallow depths and where opencast mining methods are simply not as cost-effective and practical to implement. A system considering all of the pertinent geotechnical and mining aspects for the safe and efficient pillar extraction of small pillars at shallow depths at Xstrata Coal South Africa (XCSA) has been further developed and implemented as part of an ongoing improvement process addressing all of the relevant legal and associated risk aspects. This work follows on from the previous pillar extraction work carried out at the ATC, Boschmans, and Spitzkop Collieries. The process involved a number of in-house workshops and sessions arranged with all key personnel from Tavistock Colliery, and also included Professor Nielen van der Merwe of the University of the Witwatersrand, a world renowned authority on pillar extraction, towards reviewing and developing the Modified NEVID pillar extraction system employed previously at Boschmans Colliery. The system is currently being employed at Tavistock Colliery with success and no major accidents, with around 655 000 t of coal having been successfully extracted from the pillar extraction panels.

Jan 1, 2012

By J. R. Menasce

Mechanization in low-stope panels situated in hard rock infers roof support by tensile bolting to allow free passage of trackless mining equipment in the production areas. This is in sharp contrast to conventional mining, where compressive roof supports?such as timber and grout packs?have traditionally been used, up to 1.5 metres from the production face. Bolting is a hazardous operation because material is dislodged from the roof during the drilling activity. Even with temporary roof support installed, small pieces of rock are dislodged by the percussive action of the drifter. Operations with the man situated directly under the drill, during the drilling activity, are hazardous. The only way to remove the hazard is to move the man away from the machine for as much as possible throughout the complete cycle Costs associated with safety cannot be quantified, but need to form part of the decision-making process. Machine selections based on purchase and running costs alone do not justify the investment cost of mechanized bolters. The equipment selection process needs to take into account the total cost of mining as well as the human safety impact and loss of production costs from having to re-bolt roofs in a production panel to prevent falls of ground. Labour costs in mechanized low-stope bolting are between one-quarter and half the labour costs of non-mechanized bolting. This paper reviews the mechanized bolting option versus handheld bolting from a mining process and cost perspective in a hard rock, low-stope room-and-pillar mining operation in the platinum and chrome industries.

Jan 1, 2006

The simple act of taking a sample implies that someone will use the information contained in the analytical result to make a decision about a course of action. In the mining industry, the decisions may involve huge capital commitments for opening or closing a mine, or marginal tactical costs that involve deciding if a truckload of mineralized rock should be sent to the mill for processing, or the waste dump. Sampling is among the most fundamental activities in a mining operation, and this paper aims to examine some of the technical issues that can assist in ensuring that samples are representative and correct. Insights into the scale of variability require that we disaggregate sampling variance into its component parts and evaluate each one individually. The work of Pierre Gy in understanding the different sampling errors is the first step in establishing an optimal protocol. This must be followed by the appropriate measures to ensure the protocol is implemented such that minimal bias is introduced in the sampling process. Even with these insights the possibility exists for large unseen and hidden costs can accumulate in a mineral development because of sampling errors. These hidden costs arise due to misunderstanding of the principle factors that affect the size of sampling errors, such as the mass of the sample, the effects of splitting a sample to reduce the mass, and the influence of the nominal particle size. The handling of sample material without due regard to the sampling characteristics of the material being sampled is also a major source of sampling errors. The most significant problem is due to the influence of the so-called volume-variance effect. This effect is a consequence of the support effect and the information effect both of which relate to the difference in size at which samples are collected and mining blocks are extracted. The information effect is a function of the availability of data at the time that decisions are made about the destinations of mineralized rock, namely the mill or the waste dump. Implementation of appropriate sampling protocols in the mineral value chain remains a challenge throughout the industry. The growing understanding and deepening appreciation of sampling theory and methods means we stand on the threshold of a new era for implementing and understanding appropriate sampling procedures and protocols. In the interests of optimal development of the national patrimony it is suggested that standardization through the identification of structural problems and continuous improvement of mining processes be instituted at a national level.

Jan 1, 2007

By R. C. M. Minnitt, W. Dr. Assibey-Bonsu, F. A. Camisani-Calzolari

Born in Bothaville (OFS) on the 26th August 1919, Daniel G. Krige grew up in Krugersdorp on the West Rand. Hematriculated from Monument High School in Krugersdorpin 1934 at the age of 15 and graduated with a B.Sc. (Eng.)degree in mining engineering from the University of the Witwatersrand at the end of 1938 (age 19). In 1938 he joined Anglo Transvaal where he worked on a number of gold mines until 1943, gaining a wide range of valuable practical experience in surveying, sampling and ore valuation. He then joined the Government Mining Engineer’s Department where he worked for 8 years during which time he participated in the uranium negotiations with the British and American authorities and designed the uranium pricing formula for the contracts which led to the establishment of South Africa's profitable uranium industry in the early 1950s. During the same period he began his pioneering work in the application of mathematical statistics to the valuation of new gold mines using a limited number of boreholes and of ore reserves for existing mines. His early papers in the application of mathematical statistics, some republished in French, created world-wide interest that led to the development of the science and concepts that surround the spatial evaluation of mineral resources and reserves known as geostatistics. This technique has contributed to improved ore evaluation techniques as well as the reduction of the financial risks associated with investment in mining enterprises. Furthermore, it led to the recognition of his contributions to the evaluations of mineral deposits through the coining of the term ‘kriging’ that is used to describe a spatial mineral evaluation process known and practised in international mining circles. He continued his work in geostatistics throughout his career as Group Financial Engineer of the Anglovaal Group until his retirement in1981 and afterwards for ten years as Professor of Mineral Economics at the Witwatersrand University. He is still active as a consultant and is a registered Professional Engineer. He has published some 90 technical papers both locally and overseas, some in Russia, and has lectured and participated in international congresses in many countries. His contributions were recognized by the Witwatersrand University through the award of the D.Sc. (Eng.) degree in1963, by three honorary degrees (from the universities of Pretoria, UNISA and Moscow State Mining University), by many awards from the South African Institute of Mining and Metallurgy, the International Association for Mathematical Geology, Die Suid Afrikaanse Akademie vir Wetenskap en Kuns, the SME of the American Institute of Mining Engineers, the International APCOM Council in1999, the University of Antofagasta in Chile, and by the South African President (Order for Meritorious Service, Class 1, Gold). He has served on various Government committees, notably that for State Aid for gold mines (1967/8) and designed the State Aid formula which enabled many mines to survive a period of low gold prices; also various taxation committees, and the mining mission to Iran in 1974. He is a fellow and/or honorary life member of various technical societies locally and overseas, including the Royal Society of South Africa. During the period in the Government service he also handled several of the post-war lease applications in the Free State and Klerksdorp goldfields. The fact that decisions on new gold mines of critical importance to the State and the economy as a whole, were being taken on a limited number of drillholes without any scientific analysis of the risks of failure, stimulated him to start basic research into ore evaluation. His approach was based on the application of Mathematical Statistics to these problems, an approach of which very little was known world-wide at that stage but which had already been initiated in South Africa by Sichel via the lognormal frequency distribution model. In Krige's 1951 paper published in the Journal of the Chemical, Metallurgical and Mining Society of South Africa he covered the statistical explanation of the conditional biases in ore block valuations and stimulated the use by several gold mines of regression corrections for routine ore reserve valuations, a technique which, in effect, was the first use on an elementary basis of what is now known as kriging. His 1952 paper introduced, inter alia the basic geostatistical concepts of ‘support’, ‘spatial structure’,’ selective mining units’ and ‘grade-tonnage curves’. His 1951 paper was based on his M.Sc. (Eng.) thesis submitted in the Department of Mining Engineering to the University of the Witwatersrand, and expounded his pioneering work in geostatistics in more detail. His early research papers that had stimulated interest in several mining circles overseas, were republished in French in1955, resulting in a major research effort by French mining engineers in this field. This, in turn, led to the establishment of the now world-renowned French school of ore evaluation in Fontainebleau, Le Centre de Geostatistique de l’École des Mines de Paris. As the Group’s Financial Engineer at the Anglovaal Head Office until his retirement in 1981, he was responsible for

Jan 1, 2003

By D. Limpitlaw

The origins of mine closure practice have influenced the way in which it is implemented by companies and regulators. Mine closure practices essentially started developing in the 1970s in countries with advanced economies and mature mining industries. In these settings, the emphasis was justifiably placed on restoration of the landscape and an attempt was made to return to the ?natural? pre-mining land cover. These practices continued to evolve and incorporated socio-economic and cultural aspects, especially after the Brundtland Report in 1987 and the subsequent Earth Summit in 1992. Today mining is increasingly occurring in remote parts of developing countries where there may be significant need for infrastructure such as roads, clinics, and schools. The costs of returning land to low (economic) value pre-mining use may be far greater than establishing a viable postmining land use that could potentially add value to the community and take pressure off sites for greenfield development elsewhere. Furthermore, natural resource limitations (such as topsoil availability) may limit the degree to which the historical land cover can be re-established. Establishing post-mining land uses may aid in mitigating the loss of employment that is inevitable when mines close. Stakeholder participation in establishing post-mining land cover and land use options is critical for long-term success. Similarly, third parties must be identified to support the development of the post-mining land use This paper draws on the experience of the authors in several developing countries and presents a case for maximizing re-use of mining infrastructure. The paper does not advocate the adoption of poor rehabilitation standards, nor or the wholesale destruction of land capability, but rather leaving key infrastructure in place for post-mining use that may support sustainable development.

Jan 1, 2014

By A. du Plessis

The study summarized in this paper focused on expanding existing South African mine closure cost calculation models to provide a new model that incorporates risks, which could have an effect on the closure costs during the life cycle of the mine. This research is important because currently there are a number of mines that do not have sufficient financial provision to close and rehabilitate the mines. The magnitude of the lack of funds could be reduced or eliminated if the closure cost calculation is done in a more risk-orientated manner. The model consists of an expansion of existing closure cost calculation models, by applying the Monte Carlo risk simulation technique to model influences of external and internal changes affecting closure costs. It is shown that the proposed risk-based model provides a way to understand better the implications of uncertainty on the closure costs.

Jan 1, 2006

By M. R. Samis

The great variability of mineral and energy prices has motivated some governments to incorporate a windfall profits tax into their mineral taxation regimes. Windfall profits taxes are a means for governments to capture additional mineral revenue when mineral prices are considered higher than some historic level. Governments need to be aware of the effects of such contingent taxes on the exploration, development and operating decisions of mining companies. Mining companies need to be able to calculate the full impact of windfall profits taxes on the economics of their projects. This paper examines the valuation of a multi-phase copper-gold project in the presence of a windfall profits tax. Real options Monte Carlo simulation is used to characterise the different exposures of the mine owner and of the government to the risky cash flow streams that they receive from the project. The results highlight that Monte Carlo simulation paired with the real option valuation method is able to account appropriately for the differing risk exposures, while the traditional discounted cash flow valuation model is not. Our key conclusion for governments and mining companies is that the impact of contingent tax and royalty terms can and should be assessed using advanced valuation techniques, and the results used to improve contract designs under the constraint of actual and perceived fiscal system stability.

Jan 1, 2007