The test work achieved on site can be used to create a basic Cash Flow; the main components for determining the Cash Flow Operating Profit are as follows;
The result is an Operating Profit for the Project; the next step is to change the above variables by plus/minus 10% to see how it affects your Operating Profit.
Equity Finance
Equity is arguably the easiest form of project finance if you have a viable project. Equity finance can be achieved by forming a company on the local stock exchange and selling shares by means of an Initial Public offering (IPO). The main groups who would purchase the shares are:
Common Equity Investors (slang term “mums and dads”)
Institutional investors (Banks and SuperFunds)
Private Institutions (Managed through Brokers)
Equity Finance is a long term financial commitment for the company and opens the doors to Board/Company takeovers and Mergers. Also certain company decisions would require shareholder approval which can become very tedious and time consuming if you have a diverse shareholder base with opposing opinions and financial motivations.
Debt Finance
The majority of mining projects are financed by some form of debt. The debt can be obtained from a variety of providers including
Investment Banks
Private Banks
High Wealth Individuals
Other companies
Debt comes with a plethora of legal obligations, milestones and reporting requirements set by the debt provider. Any deviation from the obligations triggers a whole host of project destroying legal events. On the flip side debt can be considered the cheapest form of project finance, the debt must be properly managed and the Debt/Equity ratio optimised in line with the mine production schedule.
Debt / Equity Ratio
The debt to equity ratio was arguable the primary cause of the Global Financial Crisis with companies and individuals alike increasing their debt levels to a point where they could not even repay/service the interest on the loan (not to mention the principle). The Debt providers experienced major debt defaults at all business levels and some collapsed and drowned under the debt sending shock waves through the financial community.
WACC
The Debt to Equity ratio can be easily analysed and optimised using Production Cash Flow Analysis and techniques like WACC – Weighted Average Cost of Capital.
Black & Scholes
You can run a multitude of cash flows changing the input variables (eg Mining Dilution, Grade Recover) each time using the Black and Scholes method.
NPV
From the Black and Scholes analysis you can plot the Net Present values (NPV) and determine the “Best Case – Worst Case” scenarios.
Risk Analysis
The NPV analysis will highlight where the High Risk variables are (eg Resource Model Confidence or Commodity Prices) allowing you to engineer the High Risk variables out (eg Drill more and increase confidence of Resource Model, Hedge production).
