QUESTION FOR CASH FLOW ANALYSIS Consider a company that specializes in the operation of mature copper mines. At one mine, on-site management has presented a proposal to develop satellite reserves to replace an existing open pit that is almost exhausted. This asset will provide access to 56.8 million tonnes of additional reserves with an average grade of 0.6% copper. The planned production rate is 5.7 million tonnes of ore (75 million pounds of copper) annually at an operating cost of $0.45 per pound. The satellite reserves will require an initial capital expenditure of $100 million to develop roads to the site, remove the overburden, and complete the mill modifications necessary to handle the new reserves. There is a competing asset at another mine site that has also nearly depleted its reserves. Management at this mine is proposing to extend the life of their mine by using their milling and heap leach facilities to process several low-grade stockpiles. These stockpiles contain 159 million tonnes of material with an average grade of 0.3% copper. The annual production rate is expected to be 15.9 million tonnes of low-grade material (105 million pounds of copper) at an operating cost of $0.65 per pound of copper. The capital expenditure necessary to develop this asset is $50.0 million. Copper future prices are displayed in Table 1 and Table 2 given in the next page. The MARR used by the company is 12% per year. The company only has the engineering capability to undertake one of these projects, and the opportunity to perform the other will be lost due to site remediation. The development decision must be made immediately. Complete Table 1 and Table 2 and decide which asset should be developed? question for cash flow analysis mining example.pdf (sayfa 2/2) Ara 4 9 3 1.005 5 0.999 6 0.999 7 0.996 1.001 8 0.995 10 0.995 0.995 Table 1. Cash flow calculations for satellite reserve Year 0 1 2 Copper prices, $/1b 1.005 1.006 Copper production, Million lbs Operating revenue, $ Million Operating cost, $ Million Operating profit, $ Million Capital Investment, $ Million Net cash flow, $ Million Discounted cash flow @12% NPV, $ Million IRR, % Table 2. Cash fow calculations for low grade stock pile asset Year O 2 Copper prices, S/lb 1.005 1.006 Copper production, Million lbs Operating revenue, $ Million Operating cost, $ Million Operating profit, $ Million Capital Investment, $ Million Net cash flow, $ Million Discounted cash flow 12% NPV, $ Million IRR, % 1 3 6 9 10 4 1.001 5 0.999 7 0.996 8 0.995 1.005 0.999 0.995 0.995