Case Study 1

Cost-Benefit Analysis of a Copper Mine Project.

Your group is required to undertake a cost-benefit analysis of Copper Mine project for the Government. This is a hypothetical project.

Assume that a copper deposit has been discovered on the island of Zanadu by an international company that now is seeking the approval of the Government to develop and operate the mine. The landowners have given their approval based on receiving royalties of 5% of annual revenue from the mine. The mining company plans to export all the copper produced and processed at the mine site.

Basic Information and Assumptions

The Copper mine has a life of 10 years.

The capital cost of establishing the mine is $300 million and the construction period is two years at $150 million per year.

Annual revenue from the mine is estimated to be about $500 million based on the current world market price of copper. A high estimate is $650 million per annum and a low estimate based on low copper price is $350 million per annum.

Annual total operating costs including salaries and wages are $250 million of which $50 million will be in new employment creation.

In the 5^th year of operation the processing plant will require a major upgrade at an estimated cost of $50 million.

At the completion of the project the company will be required to restore the mine site and demolish the processing plant and other buildings as well as plant trees on the mine site. This restoration is expected to cost $ 30 million in 2028 dollars.

The mine is an open-cut mine and the ore is processed at the mine site then transported to Port for export.

The environment damage from the mine is estimated to be $680 million for the life of the mine. There are complex environmental impacts

The mine will have substantial social impacts and social costs are estimated to be $450 million for the life of the mine.

The mine will generate 500 new jobs at the mine-site and provide $100 million secondary benefits to the economy each year.

The mining company will pay company tax, all other taxes and government charges worth $50 million.

If the project goes ahead, the Government will need to upgrade the roads at a cost of $40 million and heavy mining truck use of the road will require extra road and bridge maintenance cost estimated to be about $25 million per year.

Land owners will receive a royalty of 5% of mine revenue.

A mine workers camp/village will be constructed close to the mine at a cost of $4 million.

Government has not yet approved the project and has asked you as an economist in the Ministry of Finance to prepare a cost-benefit analysis on the project and to make recommendations to the Government on the desirability of the project.

In preparing your report you should undertake the following tasks.

Draw up a table of costs and benefits of the project.

Undertake a financial analysis of the project from the point of view of the mining company using a 10% discount rate.

Undertake an economic cost-benefit analysis from the point of view of the whole economy.

Explain the difference between the financial and economic analysis of the project.

Calculate the benefits cost ratio and the net present value of (4).

Prepare your report and provide a recommendation.