Low Discount Rates Persist In Mine Development Studies

Development studies are a key tool in determining the technical and economic feasibility of a potential mining project. The published details include the net present value of the enterprise, the discount rate used on the future flow of earnings, and other metrics useful for investors and stakeholders. When analyzed together, these development studies illustrate the relationship between discount rates and the company, commodity and country of the mining project.

The SNL Metals & Mining database, an offering of S&P Global Market Intelligence, tracks individual studies in the form of preliminary economic assessments, or PEAs, pre-feasibility, full feasibility, and mine plans. The latter often apply to producing mines and are excluded from this analysis.

The SNL Metals & Mining database counts 411 unique studies completed between January 2016 and July 2017. Mining projects with multiple studies are counted individually, while outdated or revised studies are removed. If a company releases multiple studies of the same type to account for different scenarios or separate sections of the operation, these are treated separately.

About 46% of the studies that have been commissioned since January 2016 were for primary-gold projects. The average NPV among the 188 primary-gold development studies is US$250.5 million, with an average 6.4% discount rate.

An October 2016 PEA for Seabridge Gold Inc.-owned KSM had the highest NPV among gold projects at US$3.4 billion using a 5% discount rate. Seabridge Gold previously released a pre-feasibility study with an NPV of only US$1.5 billion at the same discount rate. The most recent study used a different approach to developing the project. As of February 2017, KSM hosted ore reserves containing 38.8 million ounces of gold, 4.6 million tonnes of copper and 183 Moz of silver.

Other gold studies with significant NPVs include a March 2017 pre-feasibility study for Jeanette and a February 2017 full feasibility study for Brucejack. Jeanette's NPV was estimated at US$1.6 billion using a 5% discount rate, while Brucejack's was US$1.5 billion, also at a 5% discount rate. Both projects have large gold deposits containing 7.1 Moz and 8.7 Moz in reserves, respectively, but differ in geography, with Jeanette in South Africa and Brucejack in Canada.

While gold projects are the most frequent recipient of development studies, potash projects had the highest average NPV over the past 18 months at US$2.9 billion using an average discount rate of 9.3%. U.K.-located Woodsmith released two revised full feasibility scenarios in November 2016, with NPVs of US$15.4 billion and US$7.1 billion. The former is for a 20 Mt/y scenario at full capacity, while the latter is for a 10 Mt/y scenario at initial capacity. Both studies used a 10% discount rate.

Sal de Vida and Salar del Rincon are among several lithium projects with high NPV development studies. The August 2016 full feasibility study for Sal de Vida, a preproduction lithium brine deposit owned by Galaxy Resources Ltd., used an 8% discount rate to project a US$1.4 billion NPV. The study was based on 25,000 tonnes per year of battery-grade LCE and 95,000 t/y of potash over a 40-year mine life. Meanwhile, the full feasibility study for Salar del Rincon projected a nearly US$1.4 billion NPV at a 9% discount rate.

A recent preliminary economic assessment, or PEA, for the Arrow triuranium octoxide, or U308, deposit of NexGen Energy Ltd.'s Rook 1 project indicates average annual production of 18.5 million pounds of U3O8 and an internal rate of return of 56.7% The NPV is US$2.8 billion at an 8% discount rate. A few days prior to the release of the PEA, NexGen announced the discovery of a zone of "off-the-scale" radioactivity 400 meters south of the Arrow deposit. The zone, South Arrow, will be the focus of the company's 25,000-meter program.

Other studies with notably large NPVs include Ivanhoe Mines Ltd.-operated Kamoa-Kakula copper project in the Democratic Republic of the Congo, Balamara Resources Ltd.'s Sawin North coal project in Poland and Magnis Resources Ltd.'s Nachu graphite project in Tanzania.

Kamoa-Kakula has two PEA scenarios from last December: one focusing on a single-mine plan at 4 Mt/y, and the other involved a two-mine plan at 8 Mt/y. Both studies used an 8% discount rate and projected a US$999 million initial cost.

The April 2017 full feasibility study for Balamara's Sawin North coal project has an NPV of US$2.4 billion at a 10.5% discount rate, among the highest in this analysis. The study projects a 38-year mine life with 326 Mt of minable thermal coal.

Magnis Resources' March 2016 full feasibility study for Nachu projects a US$1.7 billion NPV at a 10% discount rate. As is the case with other projects in Tanzania, the company did not take the government's 5% carried interest into account at the time of the study.

At the other end of the spectrum, there have been a significant number of development studies announced with low NPVs. The 50 lowest-value studies, based on NPV, averaged US$7.7 million at a 7.3% discount rate. Fully 70% of these 50 studies are for gold projects.

The September 2016 pre-feasibility study for U.S.-located Livengood has an NPV of negative US$552,000 at a 5% discount rate. The optimization study found that while the proposed project is technically feasible, it was not economic at a base gold price of US$1,250/oz. Livengood also has an initial capital cost estimate of US$1.8 billion.

From a geographical perspective, Australia, Canada and the U.S. are home to the largest number of projects that have undertaken development studies since January 2016. The average discount rates for the three countries is 8.8%, 6.7% and 7.0%, respectively. Meanwhile, among countries with at least eight studies completed, Tanzania has the highest average discount rate at 9.7%.

If multiple discount rates are provided in a study, the preference is to collect the rate singled out by the company as their focus. If that distinction is not given, the midpoint rate is used.