In a previous article I outlined my thoughts on the usefulness of early stage financial modelling (“Early Stage “What-if” Economic Analysis – How Useful Is It?”). My observation was that it is definitely useful to take a few days to build a simple cashflow model yourself to help you understand the project. By “simple” I mean simple.
This article describes one of the techniques that I use to take a quick look at any project; whether it is for a client wishing to understand his project at a high level; or whether it is a project that I have read about and am curious about its viability. It takes about 10 minutes to plug the numbers into the template to get quick results. The image below is an example of the simple model that I use.
I term this a one dimensional (“1D”) model since it doesn’t require the typical X-Y matrix with years across the top and production data down the page. The 1D model simply relies on life of mine (“LOM”) totals to estimate the total revenue, total operating cost, and total profit in order to determine how much capital expenditure the project can tolerate. I do this analysis on a pre-tax basis to keep things simple.
Using estimated metal prices and recoveries, the first step is to calculate the incremental revenue generated by each tonne of ore (see a previous article “11. Rock Value Calculator – What’s My Rock Worth?”). Next that revenue per tonne is multiplied by the total ore tonnage to arrive at the total revenue over the life of mine.
The second step is to determine the life of mine operating cost, and again this simple calculation is based on estimated unit operating costs multiplied by the total tonnages being handled.
The third step is to calculate the life of mine profit based on total revenue minus total operating cost.
The potential net cashflow would be calculated by deducting an assumed capital cost from the life-of-mine profit. The average annual cashflow is estimated based on the net cashflow divided by the mine life. An approximate NPV can be calculated by determining the Present Value of a series of annual payments at a certain discount rate.
One can easily evaluate the potential impact of changing metal prices, changing recoveries, ore tonnages, operating costs, etc. to show what the economic or operational drivers are for this project. This can help you understand what you might need in order to make the project viable.
My bottom line is that a 1D economic calculation is simplistic but will still provide a conceptual vision for the project. The next step in the economic modelling process would use a 2D model based on an annual production schedule, but the 1D approach is a good first step in looking at a potential project and it doesn’t take a lot of time.