Impact of Royalties on a Mine—Quantitative Analysis 173
imposed by the host government that is depending on the underlying viability of the project. The mining world does not always provide such straightforward approaches as optimizing the life of a mine. In the case of South Africa, the goal of many jurisdictions is to maximize a mine’s life rather than to economically optimize the mine. Mining companies face this issue frequently in both developing and developed countries. In other regions, local communities and indigenous peoples do not want their territory “optimized.” Instead, they may want to minimize the environmental impact and maximize the mine life so that the mine will support employment in the region over the longest possible time.
Copper Model and Cutoff Grade To illustrate the cutoff grade economics, the copper model introduced in the first part of this chapter was adjusted to reflect a declining average annual grade for copper (also see Appendix A2.4). The initial grades were increased to an average of 1.8 percent contained copper, and the recovery parameters previously described were maintained. The price was held constant at $1.05 per pound. Cutoff grade could be a focus of at least three different measures, including the following: marginal revenue and marginal costs, financial net income, and after-tax cash flow (basis for first analysis and Tables 4.13 and 4.14 and Figure 4.1). Ultimately, in the development of a project, the economic objective is to maximize NPV to the investor. An NSR royalty has been used for a range of royalty rates, from 0 percent up to the breakeven rate (5.445 percent) that caused the project NPV to equal zero at the minimum rate of return of 18 percent for the leveraged model. In addition, a 6.0 percent NSR royalty rate is included to demonstrate the negative economic impact of royalty percentages on NPV at this level and beyond. Table 4.13 demonstrates how value diminishes to the producer (through NPV) as the royalty rate and subsequent revenues to the government increase. The transfer of wealth in Table 4.13 really tells only part of the story. Examination of several measures, including annual operating profit, net income, and after-tax cash flow, would suggest that, depending on the magnitude of the NSR royalty imposed on the project, the mine is highly unlikely to remain economically viable for its expected life of 22 years. This is demonstrated in Table 4.14, which tracks project economic data for various NSR percentages up to the breakeven at 5.445 percent. The table also measures lost tonnage resulting from a shortened economic life.