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.

2 thoughts on “23. Project Economics – Simple 1D Model”

hardrockminer

I have a simple model that I use to similarly value projects, but I include columns for each year. Why not, if the years are laid out in the technical report? My first column is reserved for inputs that can be quickly changed to change the output. Each year of the various lines in the model (tonnes, grade, cost, etc) are linked to that first column so that a simple change of the column will change all others.

The output is IRR, although the sheet also calculates NPV at various discount rates, and like you I only go to pre-tax level, and unleveraged. I don’t use the Excel version of NPV, as it wrongly assumes a discount on the first year. I have set up a discount table in another area that uses no discount on first year expenditures.

I think your sheet is good for projects where pit shells have not yet been developed because you can do whatifs much easier on yours. Mine requires a pit shell and accompanying pit schedule.

Ken Kuchling Post author

I have a 2D DCF version similar to what you do, but as you noted, the 1D model is suited for cases where only a resource has been reported without a PEA or any type of schedule or costing. Looking at the resource only one needs to guess if it is OP or UG deposit or a bit of each, and if OP what type of strip ratio might apply and then play with those numbers. Its more a tool just to see if a project has a chance.

I have a simple model that I use to similarly value projects, but I include columns for each year. Why not, if the years are laid out in the technical report? My first column is reserved for inputs that can be quickly changed to change the output. Each year of the various lines in the model (tonnes, grade, cost, etc) are linked to that first column so that a simple change of the column will change all others.

The output is IRR, although the sheet also calculates NPV at various discount rates, and like you I only go to pre-tax level, and unleveraged. I don’t use the Excel version of NPV, as it wrongly assumes a discount on the first year. I have set up a discount table in another area that uses no discount on first year expenditures.

I think your sheet is good for projects where pit shells have not yet been developed because you can do whatifs much easier on yours. Mine requires a pit shell and accompanying pit schedule.

I have a 2D DCF version similar to what you do, but as you noted, the 1D model is suited for cases where only a resource has been reported without a PEA or any type of schedule or costing. Looking at the resource only one needs to guess if it is OP or UG deposit or a bit of each, and if OP what type of strip ratio might apply and then play with those numbers. Its more a tool just to see if a project has a chance.