Dennis L Buchanan Imperial College London, UK

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1 METALS AND ENERGY FINANCE Advanced Textbook on the Evaluation of Mineral and Energy Projects Dennis L Buchanan Imperial College London, UK

2 Contents Acknowledgements List of Abbreviations xi xv Chapter 1. Extractive Industry Finance and Mineral Economics Introduction Financial Engineering Role of Finance in Society Minerals Hydrocarbons 6 Management and Business 9 Chapter 2. Cash Flow Modelling and Financial Accounting Introduction Principles of DCF Modelling Valuation of Mineral Projects Based on Technical and Financial Modelling Introduction Treatment of sunk capital Analysis of Risk and Uncertainty Project Finance and the Cost of Equity Discount rate and cost of capital Optimisation of gearing Petroleum Fiscal Regimes Generation of Financial Models 34

3 vi Contents Chapter 3. Strategie Management Introduction Exploration Stage Drivers Introduction Commodity prices Resource Base and Asset Life Mineral resources Petroleum resources Funding Options Synergies and Portfolio Optimisation Value Creation in Mineral Projects Funding Options for Mineral Projects Pre-initial public offering (IPO) Listing JV Agreement Project finance Discussion 52 Chapter 4. Management of Projects, Markets and Supplies Constraints on Mineral Resource Development Environmental impact assessment Sustainable development and the moral case for mining Occupational health and safety Cost of Environmental Compliance and Closure Provision Site Visits and Due Diligence Petroleum Fiscal Models Petroleum Resource Management System Valuing Oil Companies Natural Gas and Oil Pricing Real Option Valuation 66

4 Contents vii Mineral and Petroleum Geosciences 69 Chapter 5. Mineral Deposits Introduction Lithogeochemistry Diversity of Mineral Deposits Volcanic-hosted (Volcanogenic Massive Sulphide) Mafic and Ultramafic Magmatic Sulphide Hosted (Metal Group: Ni and Cu; Platinum Group Elements Pt, Pd, Rh, Ir, Ru, Os) Introduction Fractionation Sulphur solubility Hydrothermal Precious Metals (Au and Ag) and Base Metals (Cu-Mo-Au) Epithermal gold Porphyry copper Archaean greenstone gold deposits Granitic-hosted (Sn and W) and Nb-Ta Sedimentary-hosted (SEDEX and Carbonate) Pb, Zn, Ba Geochemically Abundant Elements Cr, Fe Spineis in mafic magmatic rocks Iron formations Marine Minerals 90 Chapter 6. Petroleum and Coal Introduction Wessex Basin Petroleum System Unconventional Hydrocarbons Coal Coal versus Gas 111

5 viii Contents Project Evaluation 113 Chapter 7. Resource Evaluation Introduction Sampling Process Mineralogy Concepts Around Geological Continuity Polygons of Influenae and Inverse Distance Inverse Distance Geostatistical Methods Reserve and Resource Definitions Evaluation Versus Production 126 Chapter 8. Metals and Energy Project Appraisal and Finance Introduction Role of Stock Exchanges Preliminary Feasibility Study Elements and characteristics Cost estimation Asset optimisation Joint Venture Feasibility Studies Introduction Elements and characteristics Engineering design stages Project Finance Parameters Gase Histories Goal washing plant optimisation Iron ore Transition from open pit to underground Discussion 147 Chapter 9. Minerals Engineering Introduction 151

6 Contents ix 9.2 Metal Reconciliation Management Mining Methods Open pit versus underground mining Mine operating cost estimation Coal Mining Strip Mining Long wall mining Extractive Metallurgy Mineral processing Extractive metallurgy Coal beneficiation Capex Estimation 171 Quantitative Finance 173 Chapter 10. Quantitative Finance and Financial Engineering Introduction Decision Tree Real Option Valuation Funding Tax and Company structure Gearing optimisation Base Metals Case History Longwall Coal Case History and Role of Infrastructure Petroleum Case History Final Thoughts 195 Bibliography 197 Index 199

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