Mine Economic Evaluation and Financial Management - a Case Study

Thumbnail Image
Journal Title
Journal ISSN
Volume Title
Over the past five (5) years, Mpeasem Mining Company Limited (MMCL) has carried out extensive exploration program to establish a lode gold deposit with measured mineral reserves within its concession at Mpeasem in the Upper Denkyira District in the Central Region of Ghana. The intention of the company is to exploit the deposit using open-pit mining method and to treat the run-of-mine ore by carbon-in-leach processing method. The major concern of the company is whether the project will be profitable or not. Another concern is the sources of finance for the project if it is found to be economically viable. The main objectives of this thesis are to evaluate the economic viability of MMCL and also determine the most appropriate way of financing the project. To combat the problems, the established technical data of MMCL was initially collected and collated. Based on these data, the capital cost, operating cost and revenue were estimated. The capital cost estimates were gathered from MMCL itself, supply agencies in Ghana, Europe, America, and some selected Ghanaian contractors. The operating cost estimates were also gathered from mines operating under similar conditions in Ghana and service companies. The annual revenue was estimated using the annual production rate, mill head grade, mill recovery as outlined in the technical data, and the gold price. The Ghanaian investment laws were studied and information on tax rate, royalty, incentives and benefits were selected. This information together with the estimated revenue, capital and operating costs was used in the cash flow analyses of MMCL. The analyses were conducted using loan, equity and preferred stock capitals. The annual cash flows generated were used to determine NPV, IRR and DPBP. The traditional theory was used to determine the optimum capital structure for MMCL. The theory used the relationship between the weighted average cost of capital and the gear ratio to determine the minimum weighted average cost of capital and its corresponding gear ratio. The optimum capital structure for MMCL was determined as a result of the gear ratio obtained. Marginal analysis was then carried out on the optimum capital structure. The minimum average cost of capital obtained from the marginal analysis was used as the minimum rate of return and discount rate for the calculation of NPV and DPBP respectively. The project was found to be economically and financially viable since the NPV was positive and IRR was greater than the minimum weighted average cost of capital. It is suggested that the Mpeasem project should be undertaken since the minimum average cost of capital which directly relates the financial analysis to economic analysis is less than the IRR and also gives positive NPV.
A thesis submitted to the Board of Postgraduate Studies, Kwame Nkrumah University of Science and Technology, Kumasi, in partial fulfilment of the requirement for the award of the Degree of Master of Science, 1998