The mining industry is involved in the extraction of precious minerals and other geological materials. The extracted materials are transformed into a mineralized form that serves an economic benefit to the prospector or miner. Typical activities in the mining industry include metals production, metals investing, and metals trading.
Mining assets can be divided into two main categories: projects and operating mines.
Projects in the mining industry can be broken down into the exploration and feasibility stage, and the planning and construction phase.
The purpose of exploration is to find ores that are economically viable to mine. It begins with locating mineral anomalies, after which discovering and sampling confirms or denies that there is a find. It can be further proven through drilling programs and resource definition.
Once a potential mine is proven to be viable, the planning and construction phase begins with applying for and obtaining permits, continuing economic studies, and refining mine plans. Infrastructure development also takes place at this stage as mines are often located in remote areas that require construction of roads and electricity.
Once the operation is ready to begin, the asset officially becomes an operating mine. During this phase, the ore is extracted, processed, and refined to produce metal. This section forms the bulk of the focus of the financial model for an operating mine. Once all the ore has been extracted, the mine closure process begins, which can last for several years. The process includes clean-up, reclamation, and environmental monitoring.
A mining company’s main assets are its reserves and resources, which are the ores that contain economic materials that are viable to mine. It is important to be able to read a reserve and resource statement and understand what information needs to be pulled from it to make the financial model. The table below contains information used to produce the annual cash flow that we build up in the financial model.
If you look at the table from right to left, you are moving in increasing geologic certainty, meaning that geologists are becoming more confident about the amount of material that is contained in the ground. Moving from the bottom to top, you are increasing the economic viability, meaning that the ore at the top is more economically attractive to mine than the ore at the bottom.
In conclusion, the inferred resource is the least geologically certain and the least economically viable to mine, while the proven resource is the most geologically certain and the most economically viable to mine.
As we build a financial model, it is important to think about which part of the table we are pulling information from. We should risk-adjust the different components of the table to reflect the risks associated with them. Typically, an inferred resource will be excluded from the economic model due to the high degree of uncertainty associated with it.
The summation of the entire table is referred to as the company’s total resources.
Here are some key terms and definitions you should know before building a mining financial model:
Learn more about the mining industry and how to value a producing asset in CFI’s Mining Financial Modeling & Valuation Course.
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