Mining Economics
Minnesota Minerals
Education Workshop
June 16, 2015
By
Peter Clevenstine
Division of Lands & Minerals
Department of Natural Resources
USA Metal Consumption
Steel
Aluminum
Copper
Lead
Titanium
Zinc
Manganese
Chromium
Nickel
Magnesium
Other
USA Consumption
Metric Tons
100,000,000
90,000,000
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
-
Steel
Scrap
Iron Ore
2011
Aluminum
2012
2013
What is an Ore?


Rock/Mineral that can be sold at a profit
Types of minerals
Fuels – coal, oil, gas
Metallic minerals - Ferrous and non ferrous
Industrial minerals - Sand & gravel, limestone,
phosphate, quarries, clay
Principal Ore Minerals

Non Ferrous (Non Iron)
Sulfide minerals – Copper, Nickel, Cobalt,
Platinum, Paladium

Bauxite – Aluminum ores
Hydrated alumina oxide minerals - Gibbsite
Al2O3 – 3H2O, Boehmite Al2O3 – H2O
Principal Ore Minerals

Iron ores
Hematite Fe2O3
Magnetite Fe3O4
Minnesota Mesabi Range
Providing Iron Ore to the North American Steel Industry
every year - Since 1892
Hibbing
Mesabi Range Iron Ore Production
Million Gross Tons
(Natural Ore and Pellets)
80
70
60
50
40
30
20
10
0
Source: MN Department of Revenue
Active Permit to Mine Areas
Mesabi Iron Range
Range Cities
Babbitt
Virginia
Aurora
Hibbing
Nashwauk
Grand Rapids
Eveleth
Current pits
2020
2050
Chisholm
Beyond 2050
Auxiliary lands
Keewatin
Nashwauk
Calumet
Hibbing
Iron Ore Resource Modeling
Sherman Example
Sherman
Potential Mining Areas
Exploration Drilling
Cross-Section 1
Cross-Section 1
Cross-Section 1
Cross-Section 2
Cross-Section 2
Cross-Section 2
Subject Area
Cross-Section 1
Resource Modeling
Focus Area
Focus Area
Block Model
Section View
Surface Topography
Surface Topography
Surface Topography
Surface Topography
Ore and Rock
Ore and Rock
Ore and Rock
Ore Grade – Weight Recovery
Ore Grade – Weight Recovery
Ore Grade – Weight Recovery
24.64
24.75
29.01
26.04
24.54
Ore Grade – Weight Recovery
24.64
25.34
24.75
24.75
24.75
26.04 26.04
24.54
29.01 29.01
29.01 27.80
26.20
24.54
25.29 25.29
25.34
24.64
24.64 24.64 24.64
Mine Cost Information
2008 Taconite Pellet Production Cost
Block 200x200x100
Crude Ore
Rock
380,000 Tons
350,000 Tons
Per Ton
Per Block
Per Ton
Per Block
Mining cost
$2.15
$2.15
Processing
7.72
--
--
Royalty
1.00
--
--
Admin
1.71
--
--
Taxes
0.87
--
--
$2.15
$752,500
$13.45
$5,110,000
Taxable Mine Value
2008 Taconite Pellet Value - $80.96/ton
Block 200x200x100
Crude Ore
Rock
380,000 Tons
350,000 Tons
Weight
Recovery
Revenue
Per Ton
Revenue
Per Block
Revenue
Per Ton
Revenue
Per Block
24%
$19.43
$7,383,000
--
--
26%
$21.05
$7,999,000
--
--
28%
$22.67
$8,615,000
--
--
30%
$24.29
$9,230,000
--
--
32%
$25.91
$9,846,000
--
--
Net Value per Block
Revenue
Per Block
Cost per
Block
Net Value
per Block
-0-
($752,500)
($752,500)
24%
$7,383,000
($5,110,000)
$2,273,000
26%
$7,999,000
($5,110,000)
$2,889,000
28%
$8,615,000
($5,110,000)
$3,505,000
30%
$9,230,000
($5,110,000)
$4,120,000
32%
$9,846,000
($5,110,000)
$4,736,000
Rock
Crude Ore
Weight Recovery
Ore Grade – Weight Recovery
24.64
25.34
24.75
24.75
24.75
26.04 26.04
24.54
29.01 29.01
29.01 27.80
26.20
24.54
25.29 25.29
25.34
24.64
24.64 24.64 24.64
Economic Pit
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
2.50
2.50
2.50
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
2.44
2.67
3.81
3.81
3.81
3.44
2.95
2.44
2.69
0.75
2.67
2.90
2.90
2.69
0.75
0.75
2.47
2.47
0.75
2.47
0.75
2.47
2.47
Net Value
$28.2 Million
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
2.50
2.50
2.50
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
2.44
2.67
3.81
3.81
3.81
3.44
2.95
2.44
2.69
0.75
2.90
2.69
0.75
0.75
2.47
2.47
0.75
2.47
2.90
2.67
10,850,000 tons rock
7,980,000 tons ore
0.75
2.47
2.47
Net Value
Southern Limit?
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
2.50
2.50
2.50
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
2.44
2.67
3.81
3.81
3.81
3.44
2.95
2.44
2.69
0.75
2.90
2.69
0.75
0.75
2.47
2.47
2.90
2.67
14,350,000 tons rock
7,980,000 tons ore
$20.7 Million Net Value
0.75
2.47
0.75
2.47
2.47
How does a mining company evaluate the cost
of environmental measures?
A mining company may be asked to do
something different and we hear a mining
company say they can, or they cannot , afford
to do it.
How is that determination made?
Project Time Line
Environmental
Review
Production
Exploration
Construction
Closure
Next Steps
Delineate the resource with available
data and preliminary economics.
 Identify additional drilling and/or
analysis that would help further define
this resource.
 Create mining plans
 Auxiliary lands necessary to extract the
resource.

Economic Pit
37 blocks of rock
21 blocks of ore
Mine Scheduling
Ore
Rock
Total
Period 1
4
7
11
Period 2
4
9
13
Period 3
4
9
13
Period 4
5
8
13
Period 5
4
4
8
21
37
58
Mine Sequencing
Period One
2nd
4th
4th
4th
3rd
3rd
5th
5th
5th
5th
4th
3rd
2nd
2nd
2nd
3rd
4th
7 blocks of rock
4 blocks of ore
Mine Sequencing
Period Two
4th
4th
4th
3rd
3rd
5th
5th
5th
5th
4th
3rd
3rd
4th
9 blocks of rock
4 blocks of ore
Mine Sequencing
Period Three
5th
4th
4th
4th
5th
5th
5th
4th
4th
9 blocks of rock
4 blocks of ore
Mine Sequencing
Period Four
5th
5th
5th
5th
8 blocks of rock
5 blocks of ore
Mine Sequencing
Period Five
4 blocks of rock
4 blocks of ore
Mining Cost
Period 1
Rock tons
Ore tons
Mining cost
Period 2
Period 3
Period 4
Period 5
Processing Cost and Revenue
Period 1
Ore tons
Ore grade
Processing
cost
Revenue
Period 2
Period 3
Period 4
Period 5
Additionally

Preproduction costs
Land position
Exploration
Feasibility
Environmental review/permitting
Construction

Post production
Project Time Line
Environmental
Review
Production
Exploration
Construction
Closure
Project Cash Flow
Earnings before Interest, Taxes, Depreciation & Amortization
Year
1
2
3
Cash in
-$1.00
-$3.00
-$10.00
Project
Earnings
Cumulative
-$1.00
-$4.00
-$14.00
4
5
6
7
8
9
10
Total
-$14.00
$3.00
$4.00
$3.00
$5.00
$3.00
$3.00
-$3.00
-$11.0
-$7.00
-$4.00
$1.00
$4.00
$7.00
$4.00
$14 Investment
$18 Earnings
$ 4 Profit
Payback in 3 to 4 years
of production
$18.00
Evaluate Investment Options



Upfront Investment
Net Present Value
Internal Rate of Return
Upfront Investment



Capital - $
Labor - People
Management & Administrative
Net Present Value



Value today of a dollar amount at some
specific point of time
Considers that a dollar invested today
would earn interest
Interest rate, or present value factor, is a
function of a company’s cost of money
(debt & equity) and risk tolerance
Time Value of Money
Year
1
2
3
Cash in
-$1.00
-$3.00
-$10.00
Project
Earnings
Cumulative
-$1.00
4
5
6
7
8
9
10
-$14.00
$3.00
$4.00
$3.00
$5.00
$3.00
$3.00
-$3.00
-$4.00
-$14.00
-$11.0
-$7.00
-$4.00
$1.00
$4.00
$7.00
$4.00
Beginning
$1.00
$4.05
$14.25
$14.96
$15.71
$16.50
$17.33
$18.20
$19.11
Interest
@5%
$0.05
$0.20
$0.71
$0.75
$0.79
$0.83
$0.87
$0.91
$0.96
Cash in
$1.00
$3.00
$10.00
Ending
$1.00
$4.05
$14.25
Total
$18.00
$6.07
14.00
$14.96
$15.71
$16.50
$17.33
$18.20
$19.11
$20.07
$20.07
Net Present Value
Year
(n)
0
1
2
3
4
5
6
7
8
9
10
10% Discount Rate (i)
Current
PV Factor
1/(1+i)n
Present
Value
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
$1.00
$0.91
$0.83
$0.75
$0.68
$0.62
$0.56
$0.51
$0.47
$0.42
$0.39
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
1.0000
0.9524
0.9070
0.8638
0.8227
0.7835
0.7462
0.7107
0.6768
0.6446
0.6139
$1.00
$0.95
$0.91
$0.86
$0.83
$0.78
$0.75
$0.71
$0.68
$0.64
$0.61
5% Discount Rate (i)
Current
PV Factor
1/(1+i) n
Present
Value
Net Present Value
Year
1
2
3
Cash in
-$1.00
-$3.00
-$10.00
Project
Earnings
Cash Flow
-$1.00
4
5
6
7
8
9
10
$3.00
$4.00
$3.00
$5.00
$3.00
$3.00
-$3.00
-$3.00
-$10.00
$3.0
$4.00
$3.00
$5.00
$3.00
$3.00
-$3.00
Total
5% Discount Rate (i)
PV Factor
1/(1+i) n
0.9524
0.9070
0.8638
0.8227
0.7835
0.7462
0.7107
0.6768
0.6446
0.6139
Present
Value
-$0.95
-$2.72
-$8.64
$2.47
$3.13
$2.24
$3.55
$2.03
$1.93
-$1.84
$1.20
10% Discount Rate (i)
PV Factor
1/(1+i) n
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
Present
Value
-$0.91
-$2.48
-$7.51
$2.05
$2.48
$1.69
$2.57
$1.40
$1.27
-$1.16
-$0.59
Internal Rate of Return

Discount Rate where the sum of the Net
Present Values of a stream of cash flows
is zero.
Internal Rate of Return
Year
1
2
3
Cash in
-$1.00
-$3.00
-$10.00
Project
Earnings
Cash Flow
-$1.00
-$3.00
-$10.00
0.7916
4
5
6
7
8
9
10
$3.00
$4.00
$3.00
$5.00
$3.00
$3.00
-$3.00
$3.0
$4.00
$3.00
$5.00
$3.00
$3.00
-$3.00
0.7323
0.6774
0.6267
0.5797
0.5363
0.4961
0.4589
$2.20
$2.71
$1.88
$2.90
$1.61
$1.49
-$1.38
Total
8.1% Discount Rate (i)
PV Factor
1/(1+i) n
0.9250
0.8558
Present
Value
-$0.93
-$2.57
-$7.92
$0.00
How does a mining company evaluate the cost
of environmental measures?
A mining company may be asked to do
something different and we hear a mining
company say they can, or they cannot , afford
to do it.
How is that determination made?
How Environmental Measures
Effect Mining Cost
1.
2.
3.
4.
5.
Delaying construction and subsequent
production
Increased construction cost
Higher mining or processing cost
Less mine reserves/shortened mine life
Mine closure expense
Project Time Line
Environmental
Review
Production
Exploration
Construction
Closure
Peter.Clevenstine@state.mn.us
218-231-8443
mndnr.gov