ANALISIS INVESTASI TAMBANG

22 OCTOBER 2014

Hendra Harisman, S.T., M.Eng.Sc

CASH FLOW ANALYSIS
• THEFORMAL FEASIBILITY STUDY INCLUDES AN ECONOMIC ANALYSIS OF
THE RATE OF RETURN THAT CAN BE EXPECTED FROM THE MINE AT A
CERTAIN RATE OF PRODUCTION.
• SOME OF THE FACTORS CONSIDERED DURING SUCH AN ECONOMIC
ANALYSIS ARE:
• TONS IN THE DEPOSIT
• GRADE OF THE MINE PRODUCT
• MILL RECOVERY
• SALE PRICE OF THE METAL OR MINERAL
• COST OF MINING PER TON
• COST OF MILLING PER TON
CASH FLOW ANALYSIS

• SOME OF THE FACTORS CONSIDERED DURING SUCH AN

ECONOMIC ANALYSIS ARE: (CONTINUED)
• ROYALTIES
• CAPITAL COST OF THE MINE
• CAPITAL COST OF THE MILL
• EXPLORATION AND DEVELOPMENT COST
• MINING RATE, TONS PER DAY
• DEPRECIATION METHOD USED
• DEPLETION ALLOWANCE
• WORKING CAPITAL NECESSARY
CASH FLOW ANALYSIS

• SOME OF THE FACTORS CONSIDERED DURING SUCH AN

ECONOMIC ANALYSIS ARE: (CONTINUED)
• MISCELLANEOUS COSTS OF OPERATION

• TAX RATE

• RATE OF RETURN:
THE GAIN OR LOSS ON AN INVESTMENT OVER A SPECIFIED PERIOD,
EXPRESSED AS A PERCENTAGE INCREASE OVER THE INITIAL
INVESTMENT COST.
CASH FLOW ANALYSIS

• MINING IS A VERY RISKY BUSINESS.

• THE MOST SERIOUS RISKS IN ANY MINING PROJECT ARE:
• GEOLOGY FACTORS (THE ACTUAL SIZE AND GRADE OF THE MINABLE
PORTION OF THE DEPOSIT)

• METALLURGICAL FACTORS (HOW MUCH OF THE OREBODY CAN BE

RECOVERED)

• ECONOMICS FACTORS (METAL MARKETS, INTEREST RATES, MINING,

PROCESSING, ETC.)
CASH FLOW ANALYSIS

• IN ORDER TO COMPENSATE FOR RISK, A MINING ORGANIZATION WILL

REQUIRE A MINIMUM ACCEPTABLE RATE OF RETURN ON INVESTMENT.

• THE COST OF BORROWING CAPITAL FOR THE MINE OR OF GENERATING

THE NEEDED CAPITAL INTERNALLY WITHIN THE COMPANY MUST BE
CONSIDERED.

• IF A COMPANY HAS A NUMBER OF ATTRACTIVE INVESTMENT

OPPORTUNITIES, THE RATE OF RETURN FROM THE PROPOSED MINE
VENTURE MAY BE COMPARED WITH THE RATE EXPECTED ON A DIFFERENT
MINING VENTURE ELSEWHERE, OR WITH SOME OTHER BUSINESS
OPPORTUNITY UNRELATED TO MINING.
CASH FLOW ANALYSIS

• EVERY ORGANIZATION HAS A LIMIT TO THE AMOUNT OF FUNDS

AVAILABLE FOR NEW CAPITAL INVESTMENTS.

• MANAGEMENT HAS AN OBLIGATION TO ITS STOCKHOLDERS OR

INVESTORS TO SELECT PROJECTS WITH THE BEST RATE OF RETURN.

• AS A GENERAL RULE OF THUMB, A PROJECT MUST HAVE BETTER THAN A

15 PERCENT RATE OF RETURN TO BE CONSIDERED BY A MAJOR
COMPANY.

• AN INDIVIDUAL COMMONLY EXPECTS A 30 TO 50 PERCENT RATE OF

RETURN TO CONSIDER INVESTING IN A MINING VENTURE.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• WHEN A BUSINESS CHOOSES TO INVEST MONEY IN A PROJECT -- SUCH
AS AN EXPANSION, A STRATEGIC ACQUISITION OR JUST THE PURCHASE
OF A NEW PIECE OF EQUIPMENT -- IT MAY BE YEARS BEFORE THAT
PROJECT BEGINS PRODUCING A POSITIVE CASH FLOW. THE BUSINESS
NEEDS TO KNOW WHETHER THOSE FUTURE CASH FLOWS ARE WORTH THE
UPFRONT INVESTMENT. THAT'S WHY THE TIME VALUE OF MONEY IS SO
IMPORTANT TO CAPITAL BUDGETING.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• THE TIME VALUE OF MONEY IS THE IDEA THAT A PARTICULAR SUM OF MONEY IN
YOUR HAND TODAY IS WORTH MORE THAN THE SAME SUM AT SOME FUTURE
DATE.

• MONEY HAS A TIME VALUE.

• THE FUTURE VALUE OF AN INVESTMENT CAN BE CALCULATED BY:
F = P(1+ I)N
WHERE:
P = PRESENT VALUE OF INVESTMENT
F = FUTURE VALUE OF INVESTMENT
I = INTEREST RATE
N = NUMBER OF YEARS
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• FOR EXAMPLE $100 INVESTED AT 10% INTEREST FOR 1, 2, AND 3
YEARS WOULD YIELD:

• F = 100(1 + .10)1 = $110.00

• F = 100(1 + .10)2 = $121.00
• F = 100(1 + .10)3 = $133.10
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• CONVERSELY MONEY RECEIVED IN THE FUTURE IS NOT AS VALUABLE
AS MONEY RECEIVED TODAY. IF MONEY IS RECEIVED IN THE FUTURE:

• P = F/(1+ I)N
• USING THE SAME EXAMPLE:
• P = 110.00/(1 + .10)1 = $100.00
• P = 121.00/(1 + .10)2 = $100.00
• P = 133.10/(1 + .10)3 = $100.00
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

FOR EXAMPLE, GIVEN THE CHOICE BETWEEN RECEIVING $1 TODAY
OR $1 A YEAR FROM NOW, YOU SHOULD TAKE THE MONEY TODAY.
YOU COULD INVEST THAT $1, AND EVEN IF YOU ONLY EARNED A 2
PERCENT ANNUAL RETURN ON YOUR INVESTMENT, YOU STILL WOULD
HAVE $1.02 A YEAR FROM NOW -- MORE THAN THE $1 YOU'D HAVE
GOTTEN IF YOU WAITED. IF YOU DIDN'T INVEST THAT $1 AT ALL BUT
SIMPLY SPENT IT, YOU'D STILL BE BETTER OFF; BECAUSE OF INFLATION,
THE $1 USUALLY WILL HAVE MORE BUYING POWER TODAY THAN IN
THE FUTURE.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• TO MAKE CAPITAL BUDGETING DECISIONS USING THE TIME VALUE
OF MONEY, A COMPANY FIRST ESTIMATES ALL THE CASH FLOWS
INVOLVED WITH THE PROJECT, POSITIVE AND NEGATIVE.

• IT THEN CONVERTS ALL OF THOSE CASH FLOWS INTO THEIR PRESENT

VALUE -- HOW MUCH THEY'RE WORTH IN TODAY'S DOLLARS.

• THE DISCOUNT RATE REFERS TO THE INTEREST RATE USED IN

DISCOUNTED CASH FLOW (DCF) ANALYSIS TO DETERMINE THE
PRESENT VALUE OF FUTURE CASH FLOWS.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• THE DISCOUNT RATE REFERS TO THE INTEREST RATE USED IN
DISCOUNTED CASH FLOW (DCF) ANALYSIS TO DETERMINE THE
PRESENT VALUE OF FUTURE CASH FLOWS.

• THE DISCOUNT RATE IN DCF ANALYSIS TAKES INTO ACCOUNT NOT

JUST THE TIME VALUE OF MONEY, BUT ALSO THE RISK OR
UNCERTAINTY OF FUTURE CASH FLOWS;

• THE GREATER THE UNCERTAINTY OF FUTURE CASH FLOWS, THE

HIGHER THE DISCOUNT RATE.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• THE CRITERION MOST COMMONLY EMPLOYED IN THE MINERALS
INDUSTRY WHEN EVALUATING THE RATE OF RETURN ON AN
INVESTMENT PROPOSAL IS CALLED THE DISCOUNTED CASH FLOW
RATE OF RETURN (DCF-ROR).
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• A SIMPLE EXPLANATION OF THE DISCOUNT RATE USED IN DCF
ANALYSIS IS AS FOLLOWS:

• LET'S SAY YOU EXPECT $1,000 IN ONE YEAR. TO DETERMINE THE

PRESENT VALUE OF THIS $1,000 (WHAT IT IS WORTH TO YOU
TODAY), YOU WOULD NEED TO DISCOUNT IT BY A PARTICULAR
INTEREST RATE. ASSUMING A DISCOUNT RATE OF 10%, THE $1,000
IN A YEAR'S TIME WOULD BE EQUIVALENT TO $909.09 TO YOU
TODAY (1,000 / [1.00 + 0.10]). IF YOU EXPECT TO RECEIVE THE
$1,000 IN TWO YEARS, ITS PRESENT VALUE WOULD BE $826.45.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• CONSIDER A PROJECT THAT REQUIRES A $100,000 INVESTMENT
TODAY (A NEGATIVE CASH FLOW) AND WILL RETURN $25,000 A
YEAR FOR THE NEXT FIVE YEARS (POSITIVE CASH FLOWS). ON
PAPER, IT LOOKS AS IF THE PROJECT PRODUCES A $25,000 PROFIT.
BUT THOSE FUTURE CASH FLOWS MUST BE CONVERTED TO PRESENT
VALUE. IF THE COMPANY USES A DISCOUNT RATE OF 10 PERCENT,
THE PRESENT VALUE OF THOSE CASH FLOWS ACTUALLY COMES OUT
TO $94,769.67. THAT'S LESS THAN THE $100,000 COST, SO THE
PROJECT ACTUALLY WILL LOSE MONEY.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• HOWEVER, IF THE COMPANY IS USING A DISCOUNT RATE OF 7
PERCENT, THE PRESENT VALUE IS $102,504.94, MEANING THE
PROJECT IS PROFITABLE. THIS UNDERSCORES THE IMPORTANCE OF
ACCURACY IN SETTING A DISCOUNT RATE.
CASH FLOW ANALYSIS

TIME VALUE OF MONEY

• WHAT IS THE APPROPRIATE DISCOUNT RATE TO USE FOR A
PROJECT?

• MANY COMPANIES USE THEIR WEIGHTED AVERAGE COST OF

CAPITAL (WACC) IF THE PROJECT'S RISK PROFILE IS SIMILAR TO
THAT OF THE COMPANY. BUT IF THE PROJECT’S RISK PROFILE IS
SUBSTANTIALLY DIFFERENT FROM THAT OF THE COMPANY, THE
CAPITAL ASSET PRICING MODEL (CAPM) IS OFTEN USED TO
CALCULATE A PROJECT-SPECIFIC DISCOUNT RATE THAT MORE
ACCURATELY REFLECTS ITS RISK.
CASH FLOW ANALYSIS

STEPS INVOLVED IN CASH FLOW ANALYSIS

THE EVALUATION OF A MINING PROJECT IS USUALLY AN ITERATIVE
PROCESS USING THE FOLLOWING STEPS:

1) SELECT A MINING METHOD

2) SELECT A PRODUCTION RATE
3) CALCULATE CAPITAL AND OPERATING COSTS
4) SELECT CUT-OFF GRADE
5) CALCULATE CASH FLOW AND RETURN
CHANGE STEPS 4, 2, AND 1 AND SELECT THE ALTERNATIVE THAT
GIVES THE HIGHEST RETURN.
CASH FLOW ANALYSIS
THE STEPS INVOLVED IN THE CALCULATION OF THE ANNUAL CASH
FLOW FOR A MINING PROPERTY ARE OUTLINED IN THE FOLLOWING
TABLE: