A quick estimation of the economics of exploration projects - rules of thumb for mine capacity revisited - the input for estimating capital and operating costs

Abstract

Despite striving to make the most of the recycling economy, primary raw materials will always be needed. The discovery of these requires primary exploration, which is inherently associated with risks and costs. Nevertheless, by minimizing exploration expenditure, we can increase resource efficiency. One way of ensuring that this is accomplished is to continuously assess the odds of reaching our economic goals during exploration. For this purpose, order of magnitude economic calculations are needed, using rules of thumb. For estimating operating and investment costs, capacities for a putative mine are assumed, always allowing for economies of scale, i.e. the fact that with increasing capacity the operating costs decrease, while the capital costs increase. For estimating both the capacities and the life of a mine, for a given deposit, a rule called “Taylor’s Rule”, formulated in 1977, is widely applied. In 2009 Long derived a new relationship between reserves and mine capacities, observing that over time, but especially in the last two decades of the last millennium, the international mining industry experienced a trend of increasing mine capacities. He separated open pit and block caving mines with larger capacities from conventional underground mines, which in general have smaller capacities. In this paper, we use our own rules of thumb, to examine what influence these two approaches have on evaluating the economics of a mine, taking the internal rate of return (IRR) as our criterion of economic viability. The upshot in general is that when moving from capacities according to Taylor to capacities according to Long, the economic outcomes of the rules-of-thumb economic evaluations vary significantly. When Long’s and Taylor’s recommendations were tested with real world examples of active mines, either in production since 2012 or later, or projects at the construction or feasibility stage, we found relatively good agreement between real world data and Long’s relationships. Therefore, we recommend that in predictive economic evaluations of projects at the exploration stage Long’s method should be used instead of Taylor’s Rule. This study shows that due to technological progress the reserve-capacity relationship needs to be periodically re-examined.