Behind every mining project lies much more than ore veins and heavy machinery. There are financial models, price projections, sensitivity analyses, and technical estimates that define its true viability. In this complex process, economic valuation becomes the key tool for deciding whether to proceed, pause, or abandon an investment.
Stages of Economic Evaluation
The valuation of a mining project begins in the early exploration phases with the Preliminary Economic Assessment (PEA). This study provides an initial snapshot of the deposit’s economic potential, based primarily on inferred resources. Although the level of certainty is around 50%, it allows for the definition of a conceptual operating structure, estimating costs, recovery rates, and benchmark prices.
If the project shows potential, it progresses to a Pre-Feasibility Study (PFS), where the uncertainty is reduced to 25%. Here, proven and probable reserves are used, more precise metallurgical tests are incorporated, operating and capital costs are refined, and cash flows are modeled. From this, key financial indicators such as Net Present Value (NPV) and Internal Rate of Return (IRR) are calculated.
The final step is the Feasibility Study (FS), which offers the greatest technical and financial precision. It serves as the basis for the final construction decision, as it integrates detailed engineering, preliminary contracts, and comprehensive risk analyses.
Key Economic Variables and Complementary Analyses
Among all the variables, commodity prices are one of the factors with the greatest impact on project viability.
A striking example is the case of the Brazilian mining company Vale, which in 2013 decided to abandon the Potasio Río Colorado project in Mendoza, Argentina. The estimated investment exceeded US$6 billion, and the project was already under construction. The decision was primarily due to the sharp drop in the international price of potassium—which fell below US$100 per ton—coupled with increased costs and the required infrastructure. This case illustrates how a fluctuation in the commodity price can completely reverse the prospects for a mining development, even in advanced, large-scale projects.
Therefore, the models incorporate sensitivity analyses that show how exposed a project is to variations in prices, fuel costs, or metallurgical recoveries. A small change in the mineral price can make a marginal project profitable or cause an attractive one to lose its appeal.
Within this framework, two complementary methods stand out: book value (how much a company would be worth if all its assets were liquidated and its debts paid) and peer comparison, which allows for determining whether a company is overvalued or undervalued relative to its competitors. The latter requires selecting similar companies based on their level of development, mineral type, and operating environment.
Using realistic assumptions and reliable public sources for prices and costs is key to generating models that serve as the basis for high-impact decisions. Furthermore, geographical factors such as altitude, access to water, and energy availability also directly affect capital and operating costs, and therefore, the project’s economic viability.
Beyond the Numbers: A Strategic Tool
A rigorous mining valuation is not only useful for attracting investors; it also helps manage expectations, prioritize portfolios, and establish the true value of a natural asset. In a context where critical minerals are central to the energy transition, having accurate tools to value projects is not just a competitive advantage; it is a strategic necessity.
The content of this article is based on the presentation “Valuation of Mining Projects,” given at the 2024 Sustainable Mining Summit in Mendoza, Argentina, by Dale Mah, geologist and Vice President of Corporate Development at Endeavour Silver Corp. The full video is available at: https://www.youtube.com/watch?v=1RW2miokb78
Specialized training in mining finance
A valuable opportunity to complement these economic analysis tools will take place from August 6-8 in Mendoza, through official London Metal Exchange (LME) training on metal prices, futures, and hedging strategies. The training will be led by Jorge Dyszel, an international expert in risk management and training in futures and options markets, with over 42 years of experience in commodities and base metals, and an official trainer for the London Metal Exchange.
The objective of this activity is to train local professionals in metal price risk management and the use of derivative instruments to optimize the profitability of mining projects through financial hedging strategies.
Impulsa Mendoza and the Mendoza Stock Exchange (BCM) invite professionals, companies, and organizations interested in operating with greater financial efficiency to participate in this fee-based activity, which offers international certification. For more information and registration: https://www.teach4life.net/lme
As a prelude, the final edition of the free webinar on the copper market will take place on July 31st at 3 pm. The activity is free but requires prior registration.