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Mining is a risky business, both physically and financially. You never know when a drill point is going to lead you to an abundance of ore—or turn into an empty promise. You agree to a level of risk just by entering this business, but you know that you don't have to leave everything to chance and that being prepared is essential. When you evaluate whether a particular area is worth mining, one of the models you need is the financial model.
This is a detailed look at the projected financial worth of the mine, including how much you might earn and how much you could potentially lose.
Historical Models Can Show Price Trends
Part of financial modelling for mining and exploration includes looking at current prices for the minerals or other materials you want to mine for and how those prices have changed. The consultants conducting the research can look at past trends for the material or other mines in the region, showing whether the mines succeeded and how prices for the material coincided with other events (e.g., gold prices increasing rapidly as a result of a severe recession).
If the prices of the material you're mining for have been volatile in the past, that will increase the risk that your mine could fail if prices suddenly fall so far down that you lose money by continuing to mine. If the prices have been somewhat volatile but generally trend upward over the years, that's a better sign.
Modelling of Ore Size Partly Determines Financial Risk
When your team finds evidence that there's ore in the ground that you could mine, that does not mean the area of ore is actually big enough to be worth mining. Your team may have just been extremely lucky to do some exploratory drilling in an area with a small but densely packed amount of that ore.
Part of the financial model looks at the drill points in the area to see how far out points extend—meaning how far that ore extends from the first drill point that showed there was ore there to begin with. If there's not a lot, and that ore isn't extremely valuable, mining the small amount there wouldn't be worth it financially. You'd spend more on mining than you'd get from selling the ore.
Models Should Take Geological Issues Into Account
Mining needs stable ground, and even the richest ore can be too risky to extract if the ground is too unstable for any drilling. Financial models for mining should take geological issues into account, from seismic risk to the potential for landslides in an area where the rainy season is about to start.
For more information, contact companies like Mining Strategic Value Partners.
Share21 April 2021
