Economic evaluation and financial analysis of a mineral project in the Ghanaian environment - a case study

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The Amanfo Goldmine Project (AGP) has acquired a mineral property of considerable proven mineral reserves from the Goldberg Resources Limited, an exploration company, in the Adansi West District of the Ashanti Region of Ghana. The mission of AGP is to exploit the property using open-pit mining method and treat the run-of-mine ore by Carbon-In-Leach (CIL) processing method. The primary objective of AGP is to determine whether the project will be economically viable or not and establish the most promising capital structure as a source of finance for the project. This thesis is set out to critically evaluate the economic viability of, and establish the optimal financial policy for AGP, taking cognizance of the characteristics of the mineral investment climate and the operating environment. Established technical data was obtained from AGP and used as the basis to estimate the capital cost, operating cost and revenue. Data for capital cost estimates were collected and collated from AGP, Ghanaian contractors, equipment supply agencies in Ghana, South Africa, Australia, Europe and the USA. Quotations were gathered from the various web sites of these companies on the internet. Operating cost data were obtained from mines operating under similar conditions in Ghana and utility companies. Annual revenue was estimated from the annual production rate, average mill head grade, mill recovery and the projected gold price. The investment law of Ghana, especially the Minerals and Mining Law, 1986 (PNDCL 153) were properly studied and information on tax rate, royalty, incentives and benefits, and allowances were applied together with the capital cost, operating cost and revenue to build a cash flow model for AGP. Different levels of analyses were conducted using equity, loan and preferred stock financing. The profitability indices, Net Present Value (NPV), Internal Rate of Return (IRR) and Discounted Payback Period (DPBP) were used to judge the economic viability of the proposed project. The optimum capital structure for AGP was determined using the traditional theory. This method applied 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. Marginal analysis was then carried out on the optimum capital structure. The minimum weighted 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 IRR respectively. Sensitivity analyses were carried out, firstly to investigate the effects of a change in any of the economic parameters such as capital cost, operating cost, revenue, royalty, income tax and interest rates, and secondly using the Monte Carlo simulation approach which takes into consideration the simultaneous random variation of the economic parameters on the project’s viability. A mineral property evaluated by the conventional approach and declared viable may later turn out to be an unprofitable venture, due to the neglect of incorporating risk in evaluating mineral projects to predict realistic evaluation results. This thesis formulates a cash flow model that accounts for country risk, and applies the Monte Carlo Simulation approach that also accounts for mineral project risk. In this way, risk is quantified and probability of achieving specific returns on the investment is measured. The venture was found to be economically viable and financially sound because the NPV was greater than zero and WR greater than the minimum weighted average cost of capital. This thesis recommends that AGP should undertake the mineral venture 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 Master of Science degree in Mining Engineering, 2000