Economic risk analysis of mineral projects in Ghana - a simulation approach

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Economic evaluation of a mineral project is conventionally conducted by employing cost and revenue estimates in a conventional cash flow analysis using profit indicators like Net Present Value (NPV), and Internal Rate of Return (IRR) to assess the economic viability of the project. Sensitivity analysis is then conducted to investigate the effect of changes in variable values on the profitability of the mineral venture. Unfortunately the conventional approach techniques do not represent reality, as the techniques neglect the probability associated with variable values, and the numerous random variations of individual variable values that affects the projects profitability. There is therefore the possibility that a mineral venture investigated by the conventional approach, and considered viable can turn out to be a non-profitable venture. This mishap could partly be attributed to the neglect of incorporating risk in evaluating mineral projects to predict realistic evaluation results. In this dissertation, a cash flow evaluation model that account for country risk has been formulated. Subsequently, a Monte Carlo simulation program that account for mineral project risk has been developed. The conventional approach and the new approach are applied to evaluate the economic viability of a placer gold deposit prospected by Blue River Mining Company. Though the new approach offers lower values of NPV and IRR, the approach is found to offer the most likely values of NPV and IRR, and the probability of individual cash flows deviating from expected.
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 in Mining Engineering, 1997