METALS AND ENERGY FINANCE Advanced Textbook on the Evaluation of Mineral and Energy Projects Dennis L Buchanan Imperial College London, UK
Contents Acknowledgements List of Abbreviations xi xv Chapter 1. Extractive Industry Finance and Mineral Economics 1 1.1 Introduction 1 1.2 Financial Engineering 2 1.3 Role of Finance in Society 3 1.4 Minerals 4 1.5 Hydrocarbons 6 Management and Business 9 Chapter 2. Cash Flow Modelling and Financial Accounting 11 2.1 Introduction 11 2.2 Principles of DCF Modelling 12 2.3 Valuation of Mineral Projects Based on Technical and Financial Modelling 18 2.3.1 Introduction 18 2.3.2 Treatment of sunk capital 19 2.4 Analysis of Risk and Uncertainty 21 2.5 Project Finance and the Cost of Equity 26 2.5.1 Discount rate and cost of capital 26 2.5.2 Optimisation of gearing 30 2.6 Petroleum Fiscal Regimes 31 2.7 Generation of Financial Models 34
vi Contents Chapter 3. Strategie Management 35 3.1 Introduction 35 3.2 Exploration Stage 36 3.3 Drivers 37 3.3.1 Introduction 37 3.3.2 Commodity prices 38 3.4 Resource Base and Asset Life 39 3.4.1 Mineral resources 39 3.4.2 Petroleum resources 42 3.5 Funding Options 44 3.6 Synergies and Portfolio Optimisation 44 3.7 Value Creation in Mineral Projects 46 3.8 Funding Options for Mineral Projects 47 3.8.1 Pre-initial public offering (IPO) 47 3.8.2 Listing 47 3.8.3 JV Agreement 49 3.8.4 Project finance 51 3.8.5 Discussion 52 Chapter 4. Management of Projects, Markets and Supplies 53 4.1 Constraints on Mineral Resource Development... 53 4.1.1 Environmental impact assessment 53 4.1.2 Sustainable development and the moral case for mining 54 4.1.3 Occupational health and safety 55 4.2 Cost of Environmental Compliance and Closure Provision 56 4.3 Site Visits and Due Diligence 58 4.4 Petroleum Fiscal Models 59 4.5 Petroleum Resource Management System 61 4.6 Valuing Oil Companies 65 4.7 Natural Gas and Oil Pricing 66 4.8 Real Option Valuation 66
Contents vii Mineral and Petroleum Geosciences 69 Chapter 5. Mineral Deposits 71 5.1 Introduction 71 5.2 Lithogeochemistry 73 5.3 Diversity of Mineral Deposits 74 5.4 Volcanic-hosted (Volcanogenic Massive Sulphide) 75 5.5 Mafic and Ultramafic Magmatic Sulphide Hosted (Metal Group: Ni and Cu; Platinum Group Elements Pt, Pd, Rh, Ir, Ru, Os) 77 5.5.1 Introduction 77 5.5.2 Fractionation 77 5.5.3 Sulphur solubility 80 5.6 Hydrothermal Precious Metals (Au and Ag) and Base Metals (Cu-Mo-Au) 83 5.6.1 Epithermal gold 83 5.6.2 Porphyry copper 83 5.6.3 Archaean greenstone gold deposits 84 5.7 Granitic-hosted (Sn and W) and Nb-Ta 84 5.8 Sedimentary-hosted (SEDEX and Carbonate) Pb, Zn, Ba 85 5.9 Geochemically Abundant Elements Cr, Fe 86 5.9.1 Spineis in mafic magmatic rocks 86 5.9.2 Iron formations 89 5.10 Marine Minerals 90 Chapter 6. Petroleum and Coal 91 6.1 Introduction 91 6.2 Wessex Basin Petroleum System 93 6.3 Unconventional Hydrocarbons 101 6.4 Coal 108 6.5 Coal versus Gas 111
viii Contents Project Evaluation 113 Chapter 7. Resource Evaluation 115 7.1 Introduction 115 7.2 Sampling 116 7.3 Process Mineralogy 117 7.4 Concepts Around Geological Continuity 118 7.5 Polygons of Influenae and Inverse Distance 120 7.6 Inverse Distance 120 7.7 Geostatistical Methods 121 7.8 Reserve and Resource Definitions 125 7.9 Evaluation Versus Production 126 Chapter 8. Metals and Energy Project Appraisal and Finance 129 8.1 Introduction 129 8.2 Role of Stock Exchanges 129 8.3 Preliminary Feasibility Study 132 8.3.1 Elements and characteristics 132 8.3.2 Cost estimation 132 8.3.3 Asset optimisation 134 8.4 Joint Venture 135 8.5 Feasibility Studies 136 8.5.1 Introduction 136 8.5.2 Elements and characteristics 137 8.5.3 Engineering design stages 138 8.6 Project Finance Parameters 140 8.7 Gase Histories 141 8.7.1 Goal washing plant optimisation 141 8.7.2 Iron ore 143 8.7.3 Transition from open pit to underground 146 8.8 Discussion 147 Chapter 9. Minerals Engineering 151 9.1 Introduction 151
Contents ix 9.2 Metal Reconciliation 152 9.3 Management 154 9.4 Mining Methods 155 9.4.1 Open pit versus underground mining... 155 9.4.2 Mine operating cost estimation 158 9.5 Coal Mining 160 9.5.1 Strip Mining 160 9.5.2 Long wall mining 163 9.6 Extractive Metallurgy 164 9.6.1 Mineral processing 164 9.6.2 Extractive metallurgy 167 9.6.3 Coal beneficiation 171 9.7 Capex Estimation 171 Quantitative Finance 173 Chapter 10. Quantitative Finance and Financial Engineering 175 10.1 Introduction 175 10.2 Decision Tree 175 10.3 Real Option Valuation 176 10.4 Funding 179 10.4.1 Tax and Company structure 179 10.4.2 Gearing optimisation 182 10.5 Base Metals Case History 183 10.6 Longwall Coal Case History and Role of Infrastructure 190 10.7 Petroleum Case History 192 10.8 Final Thoughts 195 Bibliography 197 Index 199