4 key metrics in resources projects that investors need to be aware of

Nick Sundich Nick Sundich, November 10, 2023

There are several key metrics in resources projects that investors considering junior mining & resources stocks need to consider. However, there are a handful that are more important than others, and we thought we would highlight the 4 most important.

 

4 key metrics in resources projects that investors need to be aware of

 

NPV

The Net Present Value (NPV) metric is used to evaluate the profitability and feasibility of a mineral deposit being mined.

In simple terms, NPV is the difference between the present value of all cash inflows and outflows associated with a project. It takes into account the time value of money, meaning that a dollar today is worth more than a dollar in the future. This is due to factors such as inflation, interest rates, and opportunity costs.

To calculate NPV for a mining deposit, analysts add up all the expected cash inflows and outflows of the project over its lifetime and then discount the sum of all these cash flows using a predetermined rate.

A positive NPV indicates that the would-be project is expected to generate profits, while a negative NPV suggests that the project is likely to result in losses. Therefore, investors and decision-makers often use NPV as a key indicator when evaluating whether or not to proceed with a mining project.

Beyond this, it is difficult to determine a succinct yardstick for a good or bad NPV, although most aspiring miners and developers will have NPVs in the hundreds of millions.

 

Payback

This metric is simply how many years it’ll take for debt and equity investors to see a return on their investment. In our opinion, if it’ll be more than 5 years, then it probably isn’t a project worth investing in.

 

AISC

Now this isn’t a metric in and of itself, but specifically whether or not it is below the current price of the commodity. If it is above, the deposit (if it becomes an operating mine) will not be profitable, if the AISC is below the current commodity price, then it will be. However, the higher the margin, the more profitable the project will be.

One metric that is commonly used by mining companies to assess their costs is the All-In Sustaining Cost (AISC). AISC is a standardized cost calculation that takes into account all the necessary components of sustaining a mining project, from exploration to closure. It was developed by the World Gold Council in 2013 and has become an industry standard for evaluating mining costs.

The AISC formula includes direct production costs, sustaining capital expenditures, general and administrative expenses, exploration expenditures and reclamation costs. This comprehensive approach provides a more accurate representation of the total cost of sustaining a mine compared to previous methods that only focused on direct production costs.

The inclusion of exploration expenditures in the AISC calculation is significant as it reflects the ongoing effort to find new reserves and extend the life of a mine. Sustaining capital expenditures, which cover the replacement of equipment and infrastructure necessary for continued production, are also a crucial component in determining the true cost of mining.

AISC also takes into account corporate-level expenses such as general and administrative costs, which include salaries, legal fees, and regulatory compliance. These costs may not be directly related to a specific mine but are necessary for the overall sustainability of the company.

Reclamation costs, which cover the rehabilitation of mining sites after closure, are also factored into the AISC. This ensures that mining companies are held accountable for the environmental impact of their operations and encourages responsible practices.

By including all these components, AISC provides a more holistic view of a mine’s ongoing expenses and allows for better comparison between different projects.

 

IRR

IRR, or the Internal Rate of Return, is a financial metric that is commonly used to evaluate the profitability of potential investments. In the context of mining projects, IRR plays a crucial role in determining whether a project is economically viable or not.

In simple terms, IRR represents the annualized percentage return that investors can expect to receive from their investment in a mining project. It takes into account the initial investment, as well as the future cash flows generated by the project, and calculates the rate of return that makes these two values equal.

IRR is often used in conjunction with other financial metrics such as NPV (Net Present Value) and Payback Period, but it provides a more comprehensive understanding of the profitability of a project. It takes into consideration the time value of money, and allows for easy comparison between projects with different timeline

 

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