Clean up of Mine Waste in Papua New Guinea

 The Papua New Guinea's (PNG) Minister for Environment and Protection stated on the daily news paper dated October30, 2020 that an Hong Kong based company would be engaged to clean-up the mine waste in PNG at no cost to PNG government and the mining operators.

The company targets the river deltas where the Ok Tedi Mine and Porgera Mine dispose their mining waste. And the overseas based company is kind enough to clean up the mine waste in PNG.

The Minister may not be aware thinking that it is a good idea to get rid of the mine waste without realizing the value of the contents in it, Or he may be very well knowingly trying to get these assumed valuable residues from OK Tedi and Porgera which could be full of gold and other minerals. The Map interestingly showing the targets are Porgera and Ok Tedi river deltas. The foreign investor is not a non-sense to collect the mine waste from PNG deltas targeting Ok Tedi and Porgera tailings disposal rivers.  The tailings contain gold other gangue minerals which are unable to extract at the processing plants in both Porgera and Ok Tedi Mining.  And because both mines discharger their tailings into the river system, the sediments of these rivers (Strickland and Ok Tedi River) are rich in alluvial gold which can be extracted with improved techniques that can recover gold that are of fine particles.

 

It is good the company is interested in the mine waste disposal area and PNG should welcome the idea as it is an investing opportunity. however,  the company's approach is quite not right and must re-strategize and must make its hidden intention known by way of exploration proposal or Mining Proposal rather than saying they want to clean-up mine waste. They should apply for mineral tenement/leases and do the right thing with the PNG Mining Regulator which is Mineral Resources Authority.  

 

It must not be opposed but allow them to  progress and re-phrase to mine alluvial gold from  mine waste disposal areas rather then clean-up mine waste at the deltas. The deltas are rich in alluvial gold and industrial minerals if not known. It can only be proven with exploration and sampling.

Screen shot of The National News Paper publication..

 

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Frieda River (SMLA9) Mining Warden Hearing

Frieda River copper and gold project is located at the border of East and West Sepik. The holder of the exploration license EL58 lodged an application  for a Special Mining Lease on 24th june 2016. This date is the date at which the application was registered by the Registrar of Mineral Tenements. This process is pretty much similar to that of land lease process.

As per the process, the Registrar upon registration gives notice to the Chief Mining Warden and other officers for technical appraisal. This triggers the next procedure which is the Warden Hearing Process. the Chief Warden together with the registrar fixes a date and time and venue and notify impacted stakes holders regarding the hearing. This is a public forum for the impacted stake holders where the views of the impacted people are gauged.

As such, the above process were followed and Mining Warden hearing was conducted at several venues. The Application was not only the SML application but some other auxiliary leases as well such as lease for mining purposes (LMP), Mining Lease, Mining Easements (ME). To cater for all these leases, there were several venues fixed for hearing. the impacted communities of the Frieda River Project include but not limited to the following:

* Wabia village

*Ok Isai Air strip

*Kubkain village

*Iniok Village

*Aum 3 Village

*Wemimin 1 & 2

* Hotmine Mission Station

The Views of the people were gauged and report compiled for further deliberation. The views of the people were either supportive or objective. The the job of the mining warden is the record all good or bad comments and compile report and also give his/her view.

The other part of the technical assessment is another process which is dealt with by the technical assessment team.

Chief Mining Warden, Andrew Gunua was  Conducting Mining Warden Hearing at Ok Isai, for the Frieda River SML 9 Application in the West Sepik Province 

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Discounted Cash Flow Modeling(Simple) - Mineral Economics

PRODUCTION

·         30,000 tons copper per day for 350 days for 20 years

·         Through put recovery is 87 % for every 1 tonne mined.

·         Cu ore grade is 0.8 % tone Cu per mill tonnage produced

·         Price of Cu is projected to be US$ 1.25/lb

Now: 30,000 x 350 = 10 500 000 tonnes/year of Copper  ore

For 20 years = 10500000

Now: 87% through put recovery for every 1 tonne mined:

0.87 x 10 500 000 tonnes = 9 135 000 tonnes recovery from through put per year

0.8% tones copper per mill tonnage produced (is the Cu grade)

0.008 % x 9 135 000 = 73 080 tonnes of Cu recovered per year

Now conversion of 1.25/lb to price/tonnage

2204.62 lb = 1 tonne

1 b = x

2204.62 x = 1

x = 1/2204.62 = 4.536x10 -⁴

Price of Cu =  US $ 1.25/4.536x10 -⁴  tonnes

Now :  1.25 = 4.536x10 -⁴

x = 1

1.25 = x 4.536x10 -⁴

x = 1.25 / 4.536x10 -⁴

= 2, 733.775

Price of Cu = US$ = 2,755.775/tonnage

Therefore the value is:

73080 x 2755.77 = US$ 201, 392, 037.00

CAPITAL COST

Real escalation = 4/Inflation in 2010 = CPI Dec. 2010     – 1      = 219.2   -1    = 0.6832 =    68.32 %

                                                                      CPI Dec. 1990                  133.8

Nominal escalation

(1+0.6832) (1+0.04)²⁰ - 1

= 2.589 = 258.9 %

Cost (Capital Cost 2010) = 600 M x (1+2.589) = 2 153 400 000

Working Capital 2010 = 70 M x (3.589) = 251 230 000

Salvage Value = 2 153 400 000 x 20% = 430 680 000

Now: 60% of Capital Cost is Debt = 1 292 040 000

(Debt Life = 10 years)

A = 0.12 (1 +0.12)¹⁰ x 1 292 040 000 = 228 670 619.5 (annual repayment

       (0.12 +1)¹⁰ - 1

Equity: 2 153 400 000 – 1 292 400 000 = 861 360 000

So now: 1 292 040 000/ 10 yrs = 129 204 000 (principal)

228 670 619.5 – 129 204 000 = 99 466619.5 (interest expense)

Total Capital COST = 2 153 400 000

Equity = 861 360 000

Working Capital = 251 230 000

Salvage Value = 430 680 000

Interest Expense = 99 466 619.5

Principal (Repayment) = 129 204 000

                                                                                           

OPERATION COST

Cost Projected From two cost parameters

Ø  Mining Operations Cost Involving disposal of waste and ore extraction and handling

Ø  Mining, Severance and Adminstration Operation Cost

1.      Total Ore and Waste tonnage is 90000 tonnes mined/day for 350 days and its costs $1 /tone to remove both waste and ore.

Calculate 1990 values and convert to 2010 value

Now: Nominal escalation ( OF 20 years from 1990 -2010) = 258.9% 

Cost (1990) For mining $1 /tone x (1+ 2.589) = 3.5.89/tone (2010 value)

Mining Cost = 90, 000 x 350 x 3.589 = 113 053 500 (2010 value)

2.      Milling, severance and administration

Milling Cost for 2010 = 1.6 x 3.589 = 5.7424 /tone

Severance cost 2010 = 0.1 x 3.589 = 0.3589 /tone

Administration Cost in 2010 = 0.2 x 3.589 = 0.7178 /tone

Therefore the total is give as:  6.8191

Now: 6.8191/ 0.87 = 7.838

NOW: 7.838 x 30 000 x 350 = 82 299 482.76 (milling cost)

Total operation cost = 113053500 + 82 299 482. 76

= US$195, 352, 982.80 per year

ECONOMIC FUNCTIONS

Ø  Royalty is 2% plus MRA levy of 0.25 % from year 2 to 12  and next 10 years PNG Government intends to remove MRA levy starting year 13 at the production years.

Ø  Income Tax Rate = 30% of the corporate income

Ø  In high production periods, year 2 – 14, apply double Declining Balancing method (1/2 year convention) and then switch to straight line depreciation starting year 15 to mine closure in year 22.

Ø  Real escalation = 14 years

Ø  Risk free rate of return = 4 %

Ø  Beta = 1.0%

Ø  Global Mining Industry rate of return is 6%

NB: The initial inflation is applied in year 2 to year 12 will increase by 2.5% from year 13 to 22

Now: the expected rate of return on stock investment

ECRi = Rf + I [Rm –Rf]

         = 5% + 1% (6%-5%)

         = 6%

Weight Average cost of capital

=WACC = E (Ri) x D/(D+E) + D/(D+E)X (1-t)X i

=6% x 60/(60+40) + 60/(60+40)x (1-0.3)x 12%

=8.64% (nominal Discount Rate)

Inflation 2010 = CPI (Dec.2010)   -  = 219.2  -1  = 0.6382 = 63.82%

                              CPI (Dec. 1990)       133.8

 

Average Inflation =   219.2     1/20     - 1 = 0.024989 = 0.025

                                     133.8

Therefore the inflation rate to be used is:  2.5 %

Summary of the Discounted Cash Flow Model

Discounted Cash Flow (DCF) analysis provides useful techniques to assess in terms of value maximization and cost minimization which addresses financial efficiency objectives.

The DCF analysis is a techno – economic technique applied to convert Profit Lost statement to evaluate financial viability of a new project/investment options. The criterion for decision making are not limited to NPV,IRR/ROR,DPP & KE but must also consider other risk such as environment impacts, political and socio – cultural conditions.

Gross revenue increases over the period beginning at year 2 to 22 as seen from our calculation.

Depreciation during Double Declining Balance Method of depreciation, it decreased slowly over the period from year 2 to year 14. In year 15 to year 22, straight-line depreciation method is used and so the depreciation value is constant. During the exploration stage, in year 0 to 1, there was only cash out-flowing only but from year two and upwards, there is cash in-flow.

It is seen from our results that, the NPV is $ 8,058,113,286.68. So the project is viable because NPV is greater than zero (>0). The IRR is 56.29% which exceeded the discount rate, as such it gives and impression that Frieda Copper Project is viable.

Capital Efficiency (KE) is a measure of project profitability on the capital invested. It must be greater than zero (>0) to meet the condition to be viable. Since our calculated KE is 3.74 > 0, it is better.

Scenario analysis applies DCF model variables to investigate likely scenarios if changes occur in the future. These scenarios could be increase or decrease in these variables with respect to DCF model. It is seen from the Scenario Analysis Spider Chart and we conclude that NPV is more sensitive to both positive and negative changes in revenue or price. Therefore if there is a positive increase in price, the NPV improves proportionally and vice versa if decreases

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Calculations of Inflation/Escalation/Interest Rates - Mineral Economics Questions and Answers

1.      If inflation in 2009 is 6% and NASFUND’s net profit after tax is A$150 million. What is the real net profit?

Nominal profit  = A$150 million

Profit when inflation occurred = $150M  x 6%  = $9M

 Real profit is when the inflated amount is removed.

So, Real net profit = A$150million – A$9M = A$141million.

2.      What is the real interest rate if inflation is 7% and interest rate is 15%?

 Data: inflation = 7%; interest rate = 15%

 Real interest rate = (1+ nominal rate)/ (1+ inflation rate) – 1

                             = (1+ 0.15)/ (1+ 0.07) – 1 = 7.48% real interest rate.

3.      Given the Australian CPI for years 1990 to 2000, (i) calculate its inflation rate, (ii) average inflation over the period, calculate nominal annual escalation and annual escalation if real escalation is 5%.

Data: use CPI for yrs 1990 to 2008.

        i.            Inflation rate in 2008   = (CPI Dec 2008/ CPI Dec 1990) – 1.

                                                  = (166/106) – 1 = 56.6% nominal inflation in 2008.

      ii.            Average inflation over the period (1990 – 2008).

Average inflation  = (CPI Dec 2008 / CPI Dec 1990)^1/n – 1, i.e. n = 18

                                           = (166/106)^1/18 – 1 = 2.5%/ yr for 18 years

    iii.            (a).nominal annual escalation   = (1+inflation 1990 – 2008)*(1+real escalation)ⁿ – 1.

                                                              = (1+0.566)*(1+0.05)¹⁸ – 1

                                                              = 276.9% escl. Over the 18 years.

            (b). annual escalation (1990 – 2008) = (1+ 2.769)^1/18 – 1

                                                                       = 7.65 %/ yr escl. Over 18 years.

                         

4.      Cost of a drill rig was A$1 million in 1990 in Australia. What could be the price in 2000 if equipment was escalated by 5% per year in real terms?

(i). inflation in 2008 = (CPI Dec 2008/ CPI Dec 1990) – 1    =166/106 – 1   = 56.6%

(ii). Nominal escalation = (1+ infl.1990 – 2008 )*(1+real escl)ⁿ – 1

                                        = (1+0.566)*(1+0.05)18 – 1

                                        = 276.9% escalation over the 18 year period.

(iii). Price in 2008 = Cost (Dec1990)A$1M*(1+2.769) = A$3.769million(Dec 2008)

Therefore the price of equipment in December 20008 was A$3.769 million. This shows prices of goods and services increase but standard of services or consumption could eventually decrease, if serviceability is standardized.

5.      Banks A, B and C offer the following interest rates on A$10,000 loan. Which bank offers the lowest interest rates?

Loan = $ 10000, lowest interest rate =?

A)    A nominal interest rate of 12% compounded monthly.

              E = (1+i/n)ⁿ – 1 = (1+0.12/12)¹² – 1 = 0.1268 or 12.68%

B)    A nominal interest rate of 12% compounded quarterly.

              E = (1+i/n)ⁿ – 1 = (1+0.12/4)⁴ – 1 = 12.55%

C)    A nominal interest rate of 12% compounded continuously.

              E = e^r – 1 = e^0.12 – 1 = 12.75%

Therefore, nominal interest rate compounded quarterly has the lowest interest rate so bank B offers the lowest interest rate.

6.      A mining engineer wants to determine the discount rate. He does a research and finds the following details listed below. What is the discount rate?

-          Risk free rate of return is 5.5%(R_f) and beta is 1%.

-          Global mining industry rate of return is 8%

-          Assume finance is sourced from 60% commercial loan with 12% interest rate and the other 40% capital is sourced from equity financing

-          Effective tax rate is 30%.

i.                    Expected rate of return on stock investment;

                  E (Ri) = R_f + β [E (R_m - R_f)] =  5.5% + 1%[8% – 5.5%] = 8%

ii.                  Weighted average cost of capital;

                 WACC = E(Ri)*[D/(D+E)] + [D/(D+E)]*(1-t)*i

                              = 8%*[60/(60+40)]+[60/(60+40)]*(1-0.3)*12%  =9.84%

Normally mining industry discount rate is 10% to 15%. Thus WACC discount rate is widely accepted because it is highly risk weighted rate.

7.      A company purchases 10 fleets of haul trucks for a mine operation at total cost of US$15 million. If the lives of the equipment are 10 years,(i) what is the aggregate depreciation per year,(ii) written down value(WDV) on year 7 applying Straight Line method. (iii) Apply Double Declining Balance method for the same and discuss which method is favorable to the company in terms of recovering the capital cost.

Data: 10 fleets of haul trucks – cost = US$15million

Equipment life = 10 yrs. Cost of 1 truck =US $1.5M

i.                    Depreciation = $15M/10yrs =$1.5M/yr for 10 haul trucks.

                                          =$1.5M/10yrs = 0.15M/yr for 1 haul truck

ii.                  Written down value (WDV)  on year 7 applying straight line method;

                    

                WDV  = cost – annual Depr * No. of years

                             = $15M - $ 1.5M/yr * 7 yrs   = $ 4.5 M for 10 haul trucks.

   WDV for 1 haul truck = $1.5M - $0.15M*7yrs = $0.45M

iii.                Using Double Declining Balance method.

DB = (150%/n) * original cost – Depr.amount)

Year	Method	Rate  * Adjusted value	Depreciated amount
1	1.5DB	1.5/7  x15,000,000x(1/2)	1607142.857
2	1.5DB	1.5/7  x13392857.14	2869897.959
3	1.5DB	1.5/7  x10522959.18	2254919.824
4	1.5DB	1.5/7  x8268039.356	1771722.719
5	1.5DB	1.5/7  x6496316.637	1392067.851
6	1.5DB	1.5/7  x5104248.786	1093767.597
7	1.5DB	1.5/7  x4010481.189	859388.8262

$4010481.189 is the written down value after depreciation deductions in 7 years. Therefore, $4.0M is the written down value after depreciation deduction in 7 years.

NB: Double Declining Balance method enhance fast and early recover of initial capital investment and it improves net present values, rate of return and payback period and project operates on profit in later years.   Declining balance ensures depreciation value is greater in the first year and progressively decreases over successive years.

8.      Would you rather have a savings account that pays 5% annual interest rate compounded semi-annually or one that pays 5% annual interest compounded daily? Explain why?

I would have a savings account that pays 5% interest daily or continuously compounded because I could have a fortune if interest is compounded daily. That is, by continuously adding the interest onto the existing one, the amount also increases.

9.      What is rate of return?

Is the amount of income generated in a year by capital invested, expressed as a percentage of the total sum invested?

10.  What is risk and averse person?

Risk is the possibility of loss in an investment or speculation and risk averse person is someone who seeks to avoid risk as much as possible.

  

11.   What are the effects of high interest rate and low interest rate? What is interest rate?

During high interest rate sparked by high inflation, people tend to save money in the bank because cash – holding has low buying power which results in people buying few good with more cash.

Whereas fall in interest rate encourage investment, attributed to low cost of production.

 Interest rate concepts are complex but there are two main types:

i.                    First, interest rate is the return on the bond investment, commonly known as financial security. E.g. interest added to one’s account periodically. 

ii.                  Second, interest becomes a cost if you borrowed money from a bank or often referred to as cost of capital borrowed from the bank.

12.  What are the effects of high inflation and low inflation?

High inflation lead to increasing the interest rate that in turn discourage investments, especially small business sector, which is the single largest employer in an economy of the world.

 Whereas, when inflation is low, it induces interest rate to fall and encourage investment, attributed to low cost of production which is beneficial to consumers.

However, deflation is bad when there is rapid asset price decline, real estate, manufacturers close and hard to negotiate for low labor wages.

13.  What is weighted average cost of capital?

Weighted average cost of capital is a risk – weighted rate, which takes into consideration percentage of debt to equity proportion of financing a project.

14.  What is the purpose of Government adopting a depreciation rate?

The sole purpose of Government in imposing depreciation is to allow mining companies to recover their capital cost before imposing tax on net income.

15.  Why does the Government impose taxes?

Tax is an amount of money levied by a government on its citizens. The Government imposes taxes because this money collected is then used to run the government, the country, a state, a county, or a municipality.

Definitions:

Levy - use government authority to impose or collect a tax

county - : a unit of local government and one of the administrative subdivisions that the states of the United States and, excepting major cities, all of England and Wales are divided into

Municipality - the appointed or elected members of a local government

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