PCDEP User Guide

PCDEP Version 2.
Mineral Deposit
Evaluation Software
USER GUIDE
Copyright 2000
PCDEP Inc
ISBN 0-88757-126-3
PCDEP 2.0 has been designed to facilitate the economic evaluation of mineral deposits at an early
stage, to determine if further investment is justified. Unlike other mineral deposit evaluation
software, PCDEP does not estimate production parameters based on the specific characteristics of
the deposit being evaluated. Rather, evaluation results are based on the users single point best
estimates for market and production parameters.
Sensitivity analysis is incorporated into the program to reflect the uncertainty associated with the
single point values. This enables the answering of what if questions as well as the determination
of breakeven conditions. In addition, a simulation model is included which allows the user to
incorporate risk analysis in deposit evaluations and to determine the probability of economic loss.
While PCDEP is not intended to be used for detailed feasibility studies, it has many possible
applications in the fields of corporate planning and government policy. These include:
Comparing various development schemes for deposits
Comparing alternative investment opportunities
Evaluating and structuring agreements between companies.
As such, it should be of interest to a broad spectrum of mineral industry professionals including

geologists, engineers, government employees and financial analysts.
This user guide describes how to install and run PCDEP 2.0. It takes the user through the economic
evaluation techniques which underlie PCDEPs three modes of analysis. It also describes the
technical aspects of the program using a sample deposit database included with the software.
A more complex evaluation problem is provided together with outcomes and step-by step
instructions so that a user may practice with the analytical tools provided.
Table of Contents
CHAPTER 1: GETTING STARTED..................................................................................1

Installation...................................................................................................................................1
Running PCDEP..........................................................................................................................3
Creating a New File.....................................................................................................................6
Changing Screen Options............................................................................................................7
Saving your Data...........................................................................................................................
CHAPTER 2: ECONOMIC EVALUATION TECHNIQUES ..............................................11
CASH FLOW...............................................................................................................................13
Estimation of Cash Flow.............................................................................................................14

Economic Conditions...............................................................................................................................................14
Ore Reserves............................................................................................................................................................14
Reserve Categories...................................................................................................................................................15
Processing Capacity.................................................................................................................................................15
Processing Recovery................................................................................................................................................15
Net Smelter Return...................................................................................................................................................16
Annual Revenue ..................................................................................................................................... 18
Annual Operating Cost.............................................................................................................................................18
Productive Mine Life...............................................................................................................................................19
Capital Expenditures................................................................................................................................................19
End-of-Production Estimates...................................................................................................................................20
Cash Flow Criteria.......................................................................................................................20

Total Revenue...........................................................................................................................................................20
Total Cash Flow........................................................................................................................................................20
Cash Flow Ratio.......................................................................................................................................................21
Operating Margin.....................................................................................................................................................21
Payback Period.........................................................................................................................................................21
TIME VALUE..............................................................................................................................21
Discounted Cash Flow Criteria...................................................................................................22

Net Present Value.....................................................................................................................................................22
Present Value Ratio..................................................................................................................................................22
Rate of Return..........................................................................................................................................................23
TAXATION CONSIDERATIONS.............................................................................................23
Introduction..............................................................................................................................................................23
Types of Taxation.....................................................................................................................................................23
Allowable Deductions..............................................................................................................................................24
Project Basis of Taxation..........................................................................................................................................24
Integrated Basis of Taxation.....................................................................................................................................25
After-tax Evaluation Results....................................................................................................................................25
Effect of Inflation.....................................................................................................................................................25
SENSITIVITY AND BREAK-EVEN ANALYSIS....................................................................27

Sensitivity Analysis..................................................................................................................................................27
Graphical Presentation.............................................................................................................................................28
Breakeven Analysis..................................................................................................................................................29
Simultaneous Variation of Input Variables...............................................................................................................30
RISK ANALYSIS.........................................................................................................................31
Conventional Ways of Allowing for Risk................................................................................................................31
Probabilistic Concept of Risk...................................................................................................................................31
Economic Risk Criteria............................................................................................................................................32
Estimating Probabilities...........................................................................................................................................33
Choosing a Probability Distribution.........................................................................................................................33
Monte Carlo Simulation...........................................................................................................................................33
Reliability of Results................................................................................................................................................34
Assumptions About Correlations.............................................................................................................................35
Selecting the Best Alternative..................................................................................................................................36
Advantage of Risk Analysis.....................................................................................................................................36
CHAPTER 3: TECHNICAL ASPECTS..........................................................................39
Using the Sample file....................................................................................................................39
Base Case Analysis Module.........................................................................................................41

Data Input.................................................................................................................................................................41
Base Case Analysis Results......................................................................................................................................52
Sensitivity Analysis Module........................................................................................................63
Risk Analysis Module..................................................................................................................65

Results .....................................................................................................................................................................66
Setting Calculation Defaults........................................................................................................68

Economic Options....................................................................................................................................................68
General Project Options...........................................................................................................................................68
Tax Information Options..........................................................................................................................................70
Risk Options.............................................................................................................................................................71
CHAPTER 4: USING THE SOFTWARE........................................................................73
Mineral Deposit Data................................................................................................................... 73

General Economic Conditions.................................................................................................................................73
Deposit-Specific Estimates......................................................................................................................................74
Major Capital Expenditures During Production.......................................................................................................76
End of Production.....................................................................................................................................................76
1. BASE CASE ANALYSIS......................................................................................................... 77
Before-Tax Analysis.................................................................................................................................................86
After-Tax Analysis...................................................................................................................................................92
2. SENSITIVITY ANALYSIS......................................................................................................96
Break-Even Analysis...............................................................................................................993. RISK ANALYSIS
................................................................................................................................................................................100
Chapter 1: GETTING STARTED
This chapter describes the contents of the Windows version of PCDEP, the system requirements
needed to run the software and provides instructions on how to install and run the software.
Package Contents
The PCDEP package consists of this manual and CD-ROM disk labeled PCDEP version 2.0.
The label also indicates the serial number of the product. This copy of PCDEP has been registered
under your name at the time of purchase. You do not need to register the software further. Please
specify this serial number whenever you make enquiries about the software.
System Requirements
To run PCDEP, you will need:
IBM Compatible PC with 486/25 or greater
Windows 95/98, or Windows NT (Windows 3.1 is NOT supported)
16 MB RAM
3 MB free disk space
Installation
Installing PCDEP is easy with the PCDEP Setup program to guide you. Before you install, its a
good idea to ensure that you have exited all other Windows programs. Its an especially good idea
to turn off or disable any virus scanning programs, which can significantly slow down or impede
your installation process.
To install PCDEP:
Insert the CD-ROM disk into your CD-ROM drive.

Select Run from the Start menu.
A dialog box will pop up.
Browse to your CD-ROM drive and select Setup.exe
A screen will appear requesting your name and company identification.
PCDEP2.0Mineral Deposit Evaluation 1

Enter your name and company identification and click the Next button.
A screen will then ask you to name the directory where you want PCDEP installed. You can accept
the default directory or use the Browse button to choose another location.
After you confirm the name of the program group into which PCDEP will be installed, it will
complete the installation process and list PCDEP on the Start menu.

Running PCDEP
To run PCDEP:
1. Click on the Start menu

2. Click on Progams
3. Click on the PCDEP folder
4. Click on PCDEP
This will bring up the main PCDEP screen.

The major features of the main PCDEP screen are tabbed input pages and a menu bar.
Menu
bar
Tabbed
input page
The seven tabbed pages are designed to accept the following kinds of data:
Page name Contents

Project ID Project name and location, comments field
Economic Exchange rate, cost of capital, commodity price and

unit
Pre-production Total or annual capital expenditures
Reserve Category Production information by reserve category
Major Capital Expenditures Total or annual production capital expenditures
Post-production End of production information
Taxes Before-tax or after-tax analysis
The function of these input pages is described fully in Chapter 3: Technical Aspects.

The menu bar contains four items: File, Analyze, Options and Product. Each menu choice
contains a number of commands.
The File menu commands manage files:

Open an existing file
Create New file
Save file
Delete file
Close file
Print currently open file
Project Export save a single project to a floppy
Project Import-open a project from another source
DOS Import (open files created by the DOS PCDEP)
Exit PCDEP
The Analyze menu commands run the three

analysis modules. These commands are fully
described in Chapter 3: Technical Aspects.
The Options menu commands:

Set Defaults controls default parameters for
various economic, tax, and risk analysis
information. (This is fully described in
Chapter 3: Technical Aspects.)
Language allows you to switch the language of
the text on the screen
Set Colours controls the colours of input pages,
and text on field labels and buttons

Creating a New File
The first step in analyzing data is to create a new file. To create a new file:
Select New from the File menu, to bring up the New Project dialog box.
Enter project
name here
Enter the project name and click on OK.
A new file is created for your deposit data, and its first screen will display the project name. Your
file is now ready to accept data.

Changing Screen Options
Two of the commands on the Options menu control how you view PCDEP. The Language
command allows you to switch the language of the text on the screen, and the Set Colours
command controls the colours of input pages, and of text on field labels and buttons.
To change PCDEPs working language:

Select Language from the Options menu
Select English or Franais.
You can change the colour of the following five areas of the screen:
Label
font
Frame
font
Form
background
Frame
background
Graphic
button
font
You can change the colours of these areas temporarily, or save the settings as your preferred
PCDEP display colours.
To change the colour of one or all of these screen elements:
Select Set Colours from the Options menu

This will bring up the Pick Colours dialog box.

The colour
change will be
displayed here.
Select one
screen element
at a time to
change its colour.
Colour box
Select one of the elements e.g. Frame Background.

Click on a colour in the colour box.
Click on the OK button.
This will change the colour of the background.
To change the colour of another element:

Make sure only the element you want to change is selected, e.g. un-select Frame
Background, and select another, e.g. Label Font.
Click on a colour in the colour box.
Click on the OK button.
Each screen element must be changed separately. Be sure there is only one element selected at one
time, unless you want them all to be the same colour!
Those colour settings are applied only until you close PCDEP. To make your new colour settings
be the default every time you use PCDEP:
Click on the Save button to save.
Those colours will be saved and will appear the next time you run the program.
The Default button allows you to change the colours and then get back to "Normal". Normal is
either the last way you saved them, or the default Windows colours.

Saving your Data
PCDEP will prompt you to save your data whenever you exit the program or close a deposit file. If
you want to be doubly sure of saving data, you can use the Save command on the File menu at any
time during input. This will save the deposit file that is currently open. Data is saved in the
PCDEP\DATA directory.
Back-up files
You can back up your data by making a copy of the PCDEP/Data directory, either on a diskette or
elsewhere on your hard drive. The Data directory should consist of about 24 files, and contains all the
deposit data files that you have created. To use data from the back up copy, copy the back-up Data
directory over the existing Data directory, which will replace your data files.
If for some reason you have to re-install PCDEP 2.0 in the same directory, your existing data files
will not be overwritten.
Exporting a file
You can export the data on a single project by using the Export command.
To export a project:
Open the project file.
Select Export from the File menu.
Click here to
browse to the
destination
directory.
Give a name to the file, using the Browse button to indicate the directory. (Note: the
project file name does not need to be the same name as the project ID name.)
Click on OK.
PCDEP 2.0 will give your exported file the extension *.prj.
Opening a file
To open a file:
Select Open from the File menu.
Select the file by name from the drop-down from the list which appears.
The first time you run PCDEP this list will only contain the Sample file, but as you create and save
other files they will be added to this list.

Importing a file
There are two kinds of files you can import: those created by the DOS version of PCDEP and
project files exported from PCDEP.
To open a file created in PCDEP version 1.0 (DOS):

Select DOS Import from the File menu.
This will bring up the DOS Import dialog box.
Enter the name of the project file you want opened or use the Browse button to find it.
To import a project file:

Select Project Import from the File menu
Look for project files with the extension *.prj
Click on OK
You will get the message Project imported successfully, and the file will be opened for you.
(Note: the actual project ID may be a different name than the name of the *.prj that you opened.)
Where to go from here:
Chapter 2: Economic Evaluation Techniques: describes the economic concepts, analytical

techniques and procedures underlying the software design.
Chapter 3: Technical Aspects: describes the purpose of the various commands and tools, the
requirements of data fields, and the capabilities of the analysis modules, and the results they
produce. This chapter is illustrated by the sample file included with PCDEP. You might want to
open this file, and view its various screens while referring to this chapter.
Chapter 4: Using PCDEP: how to enter and evaluate deposit data. A tutorial exercise is provided
for the user to practice the application of the concepts discussed in previous chapters.

Chapter 2: ECONOMIC EVALUATION TECHNIQUES
This chapter describes the economic analysis techniques and procedures underlying the holistic
approach for the evaluation of mining projects incorporated in PCDEP 2.0. This approach includes:
cash flow and discounted cash flow criteria
before-tax and after-tax assessments
base case analysis
sensitivity and breakeven analysis
probabilistic risk analysis.
One or two economic indicators never give the complete picture, each one has a role to play. In
practice, all of the methods and criteria described should be employed to provide as complete a
representation as possible of the economic attributes of each mining project.
Economic evaluation is based on the concepts of cash flow and time value. Estimating a time
distribution of cash flows for the project provides the basis for appraising cash flow criteria
total revenue, total cash flow, cash flow ratio, operating margin and payback period.
The purpose of time value is to allow for the cost of capital. This is done by applying time
value relationships to the estimated cash flow distribution, thereby assessing discounted cash
flow (DCF) criteria net present value, present value ratio, and rate of return.
Cash flows, and associated economic criteria, should be initially evaluated on a before-tax
basis. Then, relevant tax provisions are applied to convert the before-tax time distribution of
cash flows to an after-tax basis. The effect of inflation on the determination of the after-tax
cash flows can be significant. The after-tax time distribution of cash flows is used to derive the
after-tax cash flow and DCF criteria.
The first step in the economic evaluation of a mining project is to carry out a base case
analysis. The project is thereby appraised using single-point estimates of anticipated future
conditions. These single-point estimates may be expected or most-likely values.
The single-point estimates of future conditions used in the base case are made on the basis of
limited information. Therefore, uncertainties are associated with the base case estimates and the
corresponding economic criteria. Sensitivity analysis examines the effects of possible variations
in the uncertain input variables, above and below their single-point base case values, on the
economic indicators. Also, break-even values can be calculated for each of the input variables.
Risk analysis more comprehensively assesses the effect of project uncertainties on the cash
flow and DCF criteria. The uncertainties associated with the input variables are estimated as
probability distributions around the base case values.
Then, risk analysis is applied to translate those distributions into distributions of possible
values for the economic indicators. Economic risk criteria, including insurable lower
confidence limits and the probability of economic loss, can then be determined.

A diagram of these economic evaluation techniques is set out on the following page.

Economic Evaluation Techniques
CASH FLOW TIME VALUE
CASH FLOW ESTIMATION
Beforetax Estimates
TAXATION CONSIDERATIONS INFLATION EFFECTS
Aftertax Estimates
CASH FLOW CRITERIA
Total Revenue
Total Profit
Cash Flow Ratio
Operating Margin
Payback Period
DISCOUNTED CASH FLOW CRITERIA
Net Present Value

Present Value Ratio
Rate of Return
BASE CASE ANALYSIS SENSITIVITY ANALYSIS RISK ANALYSIS

CASH FLOW
The estimation of future cash flows is the starting point for the economic evaluation of a mining
project.
Cash flow is defined as the difference between the cash inflows (or benefits) and the cash
outflows (or costs) associated with a project, normally estimated on a year-by-year basis. Thus,
the economic outcome for a project is initially portrayed as a time distribution of cash flows over
its anticipated future life.
The cash inflows can include:
revenue
return of working capital1,and
tax credits.
The cash outflows can include:
pre-production capital expenditures

sustaining capital expenditures
operating costs
major capital expenditures during production
reclamation costs, and
tax payments.
Cash flows can be either positive or negative. Negative cash flows, representing an investment
requirement typify the pre-production or exploration/development period. For economic projects,
the productive mine life is characterized by positive cash flows. Reclamation costs incurred
following mine closure can then give rise to another period of negative cash flows.
For economic analysis, an end-of-year convention is commonly used to position each cash flow
in time. Annual cash flows are thereby assumed to occur at the end of their respective years.2 An
exception to this convention arises in cases where an initial lump-sum payment must be made to
implement the project. This negative cash flow is more realistically positioned at the present
point in time.3
1
When a mining project is being developed, working capital is one of the components of the pre-production capital expenditures.
It is required to finance the time lag between the payment of operating costs and the receipt of revenues. Thus, working capital
provides the liquidity required to operate the mine. After the mine closes, the working capital is returned as that part of the
subsequent sales revenue which corresponds to the operating costs that would have been incurred if the mine was still in
production.
2
For fractional years, where the pre-production period is 2.5 years or the productive mine life is 15.7 years for example, the cash
flow is assumed to occur at the end of the fractional year.
3
Or, in other words, at time 0, the start of year 1.

Estimation of Cash Flow
Economic Conditions
Cash flow estimates are normally made in the domestic currency of the country in which the
project is located. For example, a mining project in Canada would most likely be evaluated in
Canadian dollars.
However, in countries which suffer from hyper-inflation, experiencing domestic price increases
of several hundred percent or more per year, evaluations usually are carried out in a more stable
foreign currency. In these cases, it is preferable to use the currency which forms the basis for
mineral commodity price projections. Thus, cash flows are typically estimated in US dollars.
Having settled on the currency to be used for the estimation of cash flow, the money unit has to
be specified. Projects should be evaluated in constant money units. Constant money units have a
constant purchasing power, measured by the labour, goods, and services they will buy. Thus,
constant money units are defined with respect to the purchasing power of a currency in a base
year. Normally, the present year is selected as the base year for an evaluation. All of the future
cash flow estimates for a project are standardized in this way.
Market prices for each mineral commodity to be produced have to be estimated.4 If a real or
constant money trend in prices is anticipated, it can be specified in PCDEP as a positive or
negative percentage change per year.
The currency for market prices, usually US dollars, often differs from the currency specified for
evaluation. Thus, an exchange rate estimate is required to convert the currency for prices to the
currency for evaluation.
For example, consider a gold project located in Ontario and appraised in year 2000 Canadian
dollars. The anticipated gold price of $US 300 per ounce is assumed to remain unchanged over
the project life. An exchange rate of 0.70 $US per $Cdn is estimated to convert the gold price to
a 2000 $Cdn equivalent of (300/0.70) = $428.57 per ounce.
Ore Reserves
Delineation of a mineral deposit provides the basis for estimating ore reserves. Initially,
estimates of geological tonnage and geological grade are required. Then, mine recovery and
dilution factors are applied to convert the geological reserves to recoverable reserves. The
recoverable reserves estimate the tonnage and grade which will actually be extracted from the
mine and processed.
Part of the geological reserve inevitably has to be left behind in pillars and remnants. The mine
recovery factor defines the percentage of the geological reserves which actually can be mined.
4
The price units used in PCDEP are those which are most widely quoted - per pound, per ounce, or per short ton unit, depending
on the commodity. Factors are applied to link these price units to the metric units otherwise used in the evaluation process.

Also, the geological grades are diluted by the mining of barren or low-grade waste rock adjacent
to the deposit itself.5 The mine dilution factor defines the amount of waste rock as a percentage
of the geological reserves recovered.
Reserve Categories
If a project deposit has just one ore reserve category, it means that all of the production
parameters, such as grade, capacity and unit operating costs, are assumed to remain fixed over
the mine life.
Specification of more than one reserve category provides for anticipated changes in production
parameters with time. The reserve categories are mined and processed sequentially. Each
additional ore reserve category enables changes to be made to any or all of the following
parameters:
reserve type (geological or recoverable), tonnage, and grade,

mine recovery and dilution factors,
processing capacity,
unit operating costs,
sustaining capital requirements,
processing recovery factor, and
net smelter return.
Processing Capacity
The mine and processing plant capacity in PCDEP is specified in thousands of tonnes of ore per
year. Capacity can be expressed in several other ways. The linkages to three other types of
capacity are as follows:
tonnes of ore per day, based on a projected number of working days per year (250, 340, 360,
or 365, for example);
tonnes of saleable product per year, cathode copper or gold bullion, for example, based on
product grade, processing recovery factor, and recoverable reserve grade; and
tonnes of material (ore and waste) per year for open pit mines, based on the anticipated
stripping ratio (tonnes waste: tonnes ore).
Processing Recovery
The purpose of mineral processing is to upgrade the ore mined to a saleable product. Processing
results in the incomplete recovery of the metal contained in the ore feed in the concentrate or
bullion product. The percentage recovered is termed the processing recovery factor.
5
PCDEP assumes that the waste rock has no recoverable grades.

Net Smelter Return
The net smelter return provision considers those downstream costs which are not included in the
operating cost and capital expenditure estimates. Product transportation, smelting and refining,
insurance, and marketing charges can be incorporated.
The net smelter return is expressed as a percentage of the projected commodity price which
would be paid for the commodity contained in the saleable product at a specified location,
usually the mine site. For example, consider a gold project where the gold price is forecast at
$US 300 per ounce. The processing plant would produce an impure gold bullion. A charge of
$US 10 per ounce is estimated for transportation, insurance, final refining, and marketing of the
bullion. Thus, the net smelter return is:
[(300 10) / 300] (100) = 96.7%6

Next, consider the case of a heap leach, solvent extraction, electrowinning copper project. The
cathode copper product would realize the refined copper price, projected at $US 0.90 per pound.
However, an overall transportation cost of $US 110 per tonne of copper would be incurred for
delivery of the product to market. In this example, the net smelter return at the minesite is
determined as follows:
M - D P - r
NSV -T +C
100
[[(.90) (2204.6) -110] / (.90)(2204.6] (100) = 94.5%
For mineral concentrate products, the downstream charges tend to be much more onerous. In
these cases, the net smelter return is derived from the following formulation:7
where:
NSV = net smelter value of concentrate at the smelter, $/tonne concentrate
M = grade of concentrate, %
D = unit deduction %
P = metal price, $/tonne metal
r = refining charge, $/tonne metal
T = treatment charge, $/tonne concentrate
C = credits for other metals contained, $/tonne concentrate
6
Alternatively, the projected gold price for inclusion in PCDEP simply could be reduced from $300 to $290 per ounce, leaving
the net smelter return at 100%.
7
Note that penalties for contaminant metals are neglected, and that concentrate values are expressed on a dry tonne basis.

Within this general framework, the following smelter return conditions for copper concentrate
are set out to illustrate.
M D P 340
NSV 100 C
100
Unit deduction (D): function of M
M D
30% 1.0
>30% 40% 1.2
>40% 1.4
Credits (C):
Au: pay for 98% above 1 gram per tonne in concentrate
Ag: pay for 98% above 30 grams per tonne in concentrate
These copper concentrate conditions are applied to determine net smelter returns in the following
three examples:
1) If a 38% copper concentrate is produced and the copper price is 90 cents per pound8, what is
the net smelter return for the contained copper as delivered to the smelter?
38 1.2 .90 2204.6 340

NSV 100
100
= $505.04 per tonne concentrate
505.04
Net Smelter Return = .38 2204.6 .90 100

= 67.0%
2) If the cost of transporting concentrate from the mine site to the smelter is $45 per tonne of
concentrate , what is the net smelter return for the contained copper as produced at the mine site?
505.04 45.00
Net Smelter Return = .38 2204.6 .90 100

= 61.0 %
8
1 tonne = 2204.6 pounds

3) If the copper concentrate also contains 5.5 grams of gold per tonne, and the gold price is $300
per ounce9, what is the net smelter return for the gold content?
C = (.98)(5.51.0)(300/31.1034)
= $42.54 per tonne of concentrate

42.54
100
Net Smelter Return = 5.5 300

311034
.
= 80.2 %
Annual Revenue
The annual sales revenue during production can be calculated by combining seven variables:
processing capacity
recoverable grade
processing recovery
commodity price
exchange rate
constant to connect the grade and price units, and
net smelter return.
The annual revenue will have the same specifications as the net smelter return (e.g. at the mine
site, at the smelter, at the market).
If there is more than one commodity, separate calculations have to be made for each. Then the sales
contributions of the individual commodities are summed to determine the annual revenue for the
project.
Annual Operating Cost

In PCDEP, operating costs are entered as unit operating costs per tonne of ore mined and processed.
Constant money changes in operating costs with time can be provided for by specifying an additional
ore reserve category for each anticipated change.
In the case of open pit mines, unit mine operating costs per tonne of material mined have to be
converted to a per tonne of ore basis using an estimated stripping ratio (tonnes of waste : tonnes of
ore). For example, if the mine operating cost is $0.48 per tonne of material and the stripping ratio is
5.3 : 1, the unit mine operating cost per tonne of ore is: 0.48(6.3) = $3.02
The annual operating cost is determined by combining the unit operating cost and
9
1 ounce = 31.1034 grams

the processing capacity. For example, for a project with:
unit operating cost, $56.00/t; and

processing capacity, 230,000 t/yr.
the Annual Operating Cost = 56(230,000) = $12.880 million.
Productive Mine Life

The productive mine life is calculated by dividing the recoverable reserve tonnage by the
processing capacity. For example, for a project with:
recoverable reserve tonnage, 2,300,000 t10

ore capacity, 230,000 t/y.
the Productive Mine Life = 2,300,000/230,000 = 10.0 years.
When the productive mine life is an uneven number of years, the last cash flow represents the
fractional year.
Capital Expenditures
There are three main types of capital expenditure:
pre-production capital expenditures

sustaining capital, and
major capital expenditures during production.
Pre-production expenditures concern investment in the exploration and development periods.

The components of this investment include exploration expenditures, mine development, mine
equipment, processing facilities, infrastructure, and working capital.
In PCDEP 2.0, the pre-production expenditure requirements can be entered year-by-year.

Alternatively, totals can be used, assuming that they are spread evenly over the pre-production
period. In any case, the working capital component, only required when the mine comes into
production, is assumed to occur in the last pre-production year.
Sustaining capital refers to the routine expenditures needed to replace equipment and maintain
the ore capacity. For PCDEP, the sustaining capital requirement is estimated and input as an
average amount per year for each reserve category.
In addition to sustaining capital, major capital expenditures may be needed during production.
These possibly would include provision for deepening a shaft, sinking a new shaft, converting an
10
As derived in the ore reserve section of this chapter.

open pit to an underground mine, preparation of a new tailings disposal site, or one or more
expansions of capacity. In each case, the capital expenditures are estimated by component, and
the starting time and duration specified. The expenditure is assumed to be spread evenly over the
investment period.
End-of-Production Estimates
Several adjustments to cash flow are required when a mine ceases production. These can include:
partial cash flow for the final year when the mine life is not a whole number of years;
return of the working capital which was initially estimated and included as part of the
pre-production capital expenditure;
salvage value from the sale of used plant and equipment, and
mine reclamation cost including amount, starting time, and duration.

Cash Flow Criteria
Several economic criteria can be assessed from the estimated time distribution of cash flows for
a mining project. The following five measures are included in PCDEP.
Total Revenue
The size of a mining project is often a relevant consideration in corporate planning and decision-
making. Most companies apply a minimum acceptable size threshold in screening projects. The
total revenue that a mine is anticipated to generate over its life provides an economic measure of
project size which is distinct from profitability. Total revenue simply is the summation of annual
revenues estimated over the mine life.11
Total Cash Flow

Profit, for purposes of economic analysis, is measured by cash flow. The summation of estimated
annual cash flows over the project life represents the total cash flow or profit anticipated. While
this criterion makes no allowance for the cost of capital, it is nevertheless a useful indicator of
economic potential, especially because it enables us to discriminate among 50-year, 30-year, and
20-year projects.
Cash Flow Ratio

Comparing the total cash flow for a project with the up-front capital expenditure required for
development provides an initial measure of profitability. The total cash flow divided by the pre-
production capital expenditure provides this measure known as the cash flow ratio.
Operating Margin
Given the uncertainty in many of the factors which are combined to calculate revenue, it is
important to have operating costs which are substantially below revenue on an annual basis or
total project basis. Dividing the revenue by the operating costs provides an indication of the
margin or buffer. An operating margin of 2.0 for example, suggests that revenue is twice
operating costs. The difference must cover all capital costs associated with a project as well as
any profit.
11
The total revenue criterion is further defined by the way in which the project estimates are combined. For example, in the case
of a base metal deposit:
- if the transportation, smelting, and refining costs are included as operating costs, total revenue represents the sale of refined
metal in the final market;
- if the smelting and refining costs are included in determining the net smelter return, total revenue is for the sale of concentrate
as delivered to the smelter;
- if the transportation, smelting, and refining costs are considered in estimating the net smelter return, total revenue is for the sale
of concentrate as produced at the mine site.

Payback Period
The payback period is most commonly defined as the number of years required to recover or pay
back the negative pre-production cash flows or investment from positive cash flows, measured
from the start of production. For the determination of payback period, the positive cash flows are
assumed to be uniformly distributed within each year. While the payback period criterion is
widely used, it ignores the cash flow potential of projects beyond the return of the investment
itself, and is, therefore, short-sighted.
Time Value
The concept of time value is used in evaluation practice to allow for the cost of capital, the one
cost which is not incorporated in the estimation of cash flows. This financing charge is
associated with the funds required for investment in a mining project.
The cost of capital is a weighted average cost, comprising the costs of individual sources of
funds. Sources of funds may be simply grouped into two types debt and equity. The cost of
debt capital is an explicit interest cost. On the other hand, the cost of equity funds is an implicit
opportunity cost.
The financial structure of a mining company basically how much debt and how much equity it
utilizes is applied to cost estimates for the individual sources of funds to assess the weighted
average cost. Expressed as a percentage annual rate in constant money terms, the weighted
average cost of capital for investment in mining projects normally ranges from 6 percent to 12
percent.
In order to incorporate the cost of capital in an evaluation, time value functions are applied
to bring all of the cash flow estimates to a common point in time. Normally, the present point
in time, otherwise known as time zero, is utilized. Thus, future cash flow estimates are time
adjusted or discounted back to present value equivalents using the present value function:
[1/(1+i)n]
where
i = cost of capital, percentage annual compound rate in constant money terms, expressed as a
decimal,
n = number of years, measured from the present (time zero).
The main purpose of evaluating mining projects is to compare the return on investment, as
reflected by the time distribution of cash flows, on the one hand, with the cost of capital on the
other. Investment is economically justified when, in light of the evaluation carried out,
management perceives a reasonable chance that the return on investment will be greater than the
cost of capital.

Discounted Cash Flow Criteria
Discounted cash flow (DCF) methods combine the two basic concepts of cash flow and time
value. Time value considerations are superimposed on the estimated cash flow profile for a
mining project in order to compare the return on investment and the cost of capital. The three
DCF criteria incorporated in PCDEP are described below.
Net Present Value

The net present value criterion converts the anticipated time distribution of cash flows for a
project into an equivalent value at the present point in time.12 To do this, each future cash flow is
discounted back to this point using the cost of capital. The present value components are then
summed to yield the net present value. Thus, net present value is the difference between the
discounted positive cash flows from production and the discounted pre-production investment.
Net present value measures the intrinsic economic worth of a project, representing the anticipated
return on investment over and above the cost of capital. Net present value is the resultant of both
the size and the profitability characteristics of a project. The minimum acceptable or breakeven
condition for an economic project is a zero net present value.
Present Value Ratio

The present value ratio criterion measures the net present value per unit of investment. It is
determined by dividing the net present value for a project by the absolute value of the discounted
negative cash flows (or, in other words, by the time-adjusted investment).13
The present value ratio appraises the profitability of a project independent of size considerations.
Since the cost of capital has been charged in time adjusting the cash flows, the break-even
condition for economic investment is a ratio of zero.
Rate of Return
The rate of return criterion is defined as the discount rate which equates the present value of the
positive cash flows from production with the present value of the pre-production capital
expenditures. In other words, rate of return is the discount rate which gives a zero net present
value.
In economic terms, rate of return is the average annual percentage return that a project is
anticipated to yield over its life. Unlike net present value and present value ratio, rate of return is
determined solely on the basis of the estimated time distribution of cash flows. Using this
criterion, the breakeven condition for economic investment is a rate of return equal to the cost of
capital.
12
In other words, at the start of the project, or, at time zero.
13
The discounted pre-production investment is included in the denominator. Whether or not to include any negative cash flows
which arise during and after production is a matter of preference.

TAXATION CONSIDERATIONS
Introduction
Once a project has been appraised on a before-tax basis, it should be evaluated after tax. From a
mining company viewpoint, tax credits are benefits and tax payments are costs in the
determination of cash flows. The effects of taxation on the time distribution of cash flows for a
mining project depend on two main factors: the provisions in the taxation system, and the tax
position of the mining company.
PCDEP incorporates the actual mining taxation systems operative in 1995 in British Columbia,
Ontario, and Quebec. Minor changes have occurred in each of these jurisdictions in the
intervening years. These changes will be incorporated in a later version of PCDEP.
This section describes the main tax considerations that underlay the determination of after-tax
cash flows and after-tax evaluation results.
Types of Taxation
Two types of taxation system are considered in PCDEP: revenue-based and profit-based.
Revenue-based taxation represents the traditional ad valorem royalty form of mining impost.
Taxation is levied at a specified percent of annual revenue.
In the case of profit-based taxation, annual profit is defined as annual revenue less allowable
deductions for operating costs and capital expenditures. Taxation usually is levied at a fixed
percentage rate of annual profit. Alternatively, the tax rate can be graduated, increasing with the
level of annual profit.
Allowable Deductions
For profit-based taxation, the allowable deductions for determining annual profit comprise costs
which can be expensed, and costs which have to be depreciated.
When costs can be expensed for tax purposes, they can be fully deducted in the year incurred,
provided that sufficient profit which would otherwise be taxed is available. The types of cost
which can be expensed depend on the provisions of the tax system but normally include
operating costs, exploration expenditures, and ad valorem royalties.
Capital expenditures normally have to be depreciated for tax purposes. In other words, capital
expenditures are deducted over a period of years, beginning in the year the expenditure is made.
The percentage annual depreciation rate, set by the tax system, normally varies with the type of
asset. Different rates usually apply for mine development, mine equipment, processing facilities,
and infrastructure.

One of two methods of depreciation normally is applicable: declining-balance depreciation or
straight-line depreciation . With the declining-balance method, the depreciation rate is multiplied
by the unwritten-off balance of capital expenditures to determine each year's allowance. As the
balance for depreciation declines with time, so does the size of the allowance. An infinite period
is theoretically required to fully deduct the capital expenditure. With the straight-line method, the
depreciation rate is multiplied by the capital expenditure to determine the annual deduction. Thus
the depreciation allowance is uniform over the finite depreciation period.
Working capital is an exception. It is not deductible when invested in a project. Neither is the
return of working capital taxed at the end of mine life.
Project Basis of Taxation

With the project basis of taxation, allowable deductions can only be taken against income from
the project itself. This restriction may be a tax policy requirement, or it may arise simply because
the mining company has no other source of income.
A further consideration with the project basis of taxation when sufficient income is not available
is the extent to which tax policy allows non-cash deductions for depreciation to be used to create
a loss to be carried forward for deduction against income in subsequent years.
The actual tax systems for Quebec, Ontario, and British Columbia incorporated into PCDEP are
restricted to the project basis of taxation.

Integrated Basis of Taxation
The integrated basis of taxation applies to companies which have existing sources of taxable
income from other projects. When government policy allows the integrated tax treatment,
allowable deductions for a project can be taken against the existing income stream. The
associated reductions in corporate tax payments represent tax credits for the project being
evaluated. Tax deductions on an integrated basis are more immediate and more complete than on
a project basis.
Either the project basis or the integrated basis of taxation can be selected for the simulated tax
system in PCDEP.
After-tax Evaluation Results

Application of these tax principles enables us to determine a time distribution of after-tax cash
flows for the project. This is used, in turn, to evaluate the after-tax cash flow indicators total
revenue, total cash flow, and payback period , and the DCF measures net present value,
present value ratio, and rate of return.
Also, several tax payment indicators are appraised by PCDEP, including tax payments, tax
shares, and effective tax rates by component on both an un-discounted basis and discounted back
to the start of the project. The un-discounted effective tax rate is defined as tax payments divided
by the total before-tax cash flow. The discounted effective tax rate is defined as the discounted
taxes divided by the before-tax net present value of the project.
Effect of Inflation
The effect of inflation on the after-tax evaluation of mining projects can be significant. This
effect results from a combination of two factors. First, all costs cannot be deducted for tax
purposes in the year incurred. Most importantly, capital expenditures have to be depreciated over
a period of years. Second, with few real-world exceptions, allowable tax deductions are based on
the actual costs incurred.
When actual costs have to be deducted in future years, and when taxable income is inflating, a
lower proportion of the taxable income each year is relieved of tax. In other words, under
inflationary conditions, the allowable deductions in constant money terms are less than the actual
cost incurred. This gap widens as a function of the inflation rate. Thus the real after-tax cash flow
and DCF indicators are not as high as would be calculated without regard for inflation.
In other words, ignoring inflation gives rise to error because depreciation allowances, based on
actual capital expenditures, do not inflate with time. By disregarding inflation we:
overestimate depreciation allowances

underestimate taxable incomes
underestimate tax payments
overestimate after-tax cash flows

overestimate after tax cash flow and DCF indicators.
This error is obviated in PCDEP by the following evaluation procedure:

1) enter an estimated general inflation rate over the project life;
2) apply this inflation rate to convert the constant money estimates of annual revenue, annual
operating cost, capital expenditures, and end-of-life parameters to current money equivalents;
3) determine the tax payments and after-tax cash flows in current money terms;
4) apply the forecast inflation rate to deflate the current money cash flows into constant money
terms; and
5) use this constant money cash flow distribution to calculate the correct cash flow and DCF
indicators.
The error caused by ignoring inflation can be illustrated as follows. Consider the after-tax cash
flow distribution and the associated cash flow and DCF indictors for a mining project, using a
projected annual inflation rate of 3%. These evaluation results are compared below with those
which would have been obtained using a 0% inflation rate or, in other words, by ignoring
inflation.
After-tax Economic Indicators Using 3% and 0% Inflation Rates

After-tax results
3% Inflation 0% Inflation
Total revenue ($million) 228 228
Total profit ($million) 30 33
Payback period (years) 4.4 4.0
Net present value at 10% ($million) 5.3 6.6
Present value ratio at 10% 0.18 0.23
Rate of return (percent) 14.2 15.1
Thus, even with only a 3% inflation rate, the correct after-tax economic indicators for this project
are significantly lower than would be calculated without regard for inflation.

SENSITIVITY AND BREAK-EVEN ANALYSIS
Introduction
Until now, our approach to the evaluation of mining projects has been based on single-point
estimates of deposit parameters and future conditions. These base case estimates provide a most
likely, or expected, view of project economics.
The single-point estimates are made with limited knowledge and information about the project.
In other words, uncertainties are associated with these single-point input estimates. For decision-
making purposes, it is essential to evaluate and analyze the effects of these uncertainties on the
economic criteria.
The first step in moving beyond the base case evaluation to examine the effects of possible
variations in the single-point input estimates on the cash flow and discounted cash flow criteria is
to carry out a sensitivity analysis for the project.
Sensitivity Analysis
Sensitivity analysis evaluates the effects of specified variations in project parameters on the
economic criteria. What if higher or lower values for the input variables are substituted for their
single-point base case estimates? How sensitive are the bottom line economic measures to these
changes?
The simplest and most common form of sensitivity analysis examines the effects of changing one
input variable at a time, holding all of the others constant at their base case values. For this
purpose, a realistic range of possible values for the input parameter is first specified. For
example, variations of +30%, +15%, -10%, and -20% from the base case estimate may be
designated. The project is re-evaluated for each of the specified changes. Thus, a range of results
for the cash flow and DCF is obtained.
By analyzing the input variables in this one-at-a-time way, sensitivity analysis enables
management to identify the variables to which the economics of the project are most sensitive.
These variables can then be given special attention in subsequent risk analysis and decision
making. Conversely, sensitivity analysis shows which parameters are not so important and, thus,
do not justify so much future attention.
The following sensitivity analysis of a hypothetical project illustrates this. For this hypothetical
project, the following possible variations in ten project variables from their base case values have
been estimated:

Variations from base case values
Major production capital -20 +15 +30 +45

Market price -25 +20 +30 +40
Mine dilution -40 -20 +30 +60
Mine recovery -10 -5 +5 +10
Operating cost -20 +15 +25 -35
Pre-production capital -15 +10 +20 +30
Processing recovery -10 -6 -3 +8
Reserve grade -20 -10 +15 +30
Reserve size -30 -15 +25 +50
Sustaining capital -20 +15 +30 +45
Note that the lower and upper end points in the percentage variations for each variable should
define a realistic range of possible values. For example, they may be subjectively thought to
represent 85% confidence limits or, in other words, a 70% probability that the actual value could
fall within the indicated range.
The sensitivities of the Net Present Value and Rate of Return for a project to these specified
variations can be calculated based on these variations.
Graphical Presentation
Sensitivity analysis results for a mining project usually are presented graphically, often in the
form of a spider diagram. For this purpose, percentage changes in the input variables from their
base case values are plotted against the associated relative changes in a particular economic
indicator.
A graphical representation of sensitivity analysis results is convenient for management

presentations. It enables what if questions to be answered concerning the impact of possible
changes in project variables on economic viability.
PCDEP presents sensitivity findings in the form of a spider diagram based on the net present
value criterion.
The sensitivity curves represent each of the ten input variables. The degree of sensitivity of net
present value to possible changes in these variables is a function of the slope of the curves. For
instance, a 20% increase in each variable above its base case value would result in the following

relative changes in net present value:
Variations in Net Present Value

Major Production Capital -4%
Market Price 232%
Mine Dilution Factor -25%
Mine Recovery Factor 47%
Operating Cost 152%
Pre-Production Capital -72%
Processing Recovery Factor 104%
Reserve Grade 232%
Reserve Size 47%
Sustaining Capital -6%
Note that the sensitivity curves are positively or negatively sloped depending on whether the
input variable impacts on the cash inflows or the cash outflows for the project.
The six key variables which individually, over their respective percentage ranges, endanger the
economic viability of the project are operating cost, reserve grade, commodity price, pre-
production capital, processing recovery, and reserve size.
What do these particular results tell us? Primarily, to concentrate on improving the reliability of
estimates for the six key variables for further economic analysis and decision-making.
Breakeven Analysis
In conjunction with sensitivity analysis, breakeven values can be determined for each of the key
project variables. The breakeven evaluation determines the value of each input variable required
to give the minimum acceptable return on investment. The breakeven values can be found by
trial-and-error evaluation. Alternatively, they can be derived in a more approximate way from a
spider diagram array of sensitivity results. In this case, the breakeven values are determined by
the points at which the sensitivity curves intersect the economic margin.
Simultaneous Variation of Input Variables

In the above analysis, we changed only one variable at a time. Simultaneous variation of two or
more variables also is possible. For example, we could change both the gold price and the ore
reserve grade and examine the impact on the rate of return for the project.
If simultaneous variation of more than two variables is considered, the number of combinations
grows very rapidly. For example, if five input variables are considered and each has five possible
values, there would be 3,125 possible combinations to be evaluated! More importantly,
sensitivity analysis results become increasingly difficult to present and interpret as more
variables are changed at the same time. We can typically find many combinations of the variables
for which a project is or is not economically justified. The more combinations of variables we

try, the less clear the economic picture of a project becomes. It soon becomes more realistic and
more productive to move on to risk analysis.
Summing Up
Sensitivity analysis is designed to provide management with answers to a wide range of what
if questions. However, in moving beyond one-at-a-time changes in the project variables, this
rather mechanical exercise becomes less meaningful.
Most importantly, sensitivity analysis plays a bridging role in the evaluation process. Starting
with the single-point estimates which form the base case appraisal, the impact of possible
variations on the economic criteria are examined and, in so doing, the key project variables can
be identified. This helps focus the resources available for subsequent information assembly and
economic analysis in the most productive way
Sensitivity analysis does not in itself assess the risk of a mining project. To evaluate risk, we
need to incorporate probability estimates for all of the what if possibilities occurring. The best
way to obtain a comprehensive picture of possible project outcomes is to move on to risk
analysis.

RISK ANALYSIS
Introduction
Mining project investment decisions are made under conditions of uncertainty. The single-point
base case estimates for a project are made on the basis of limited information. Sensitivity
analysis provides management with answers to what if questions concerning other possible
project outcomes.
Probabilistic risk analysis then should be applied to translate the perceived uncertainties for the
project variables into a probability distribution of possible outcomes for each of the economic
criteria.
Conventional Ways of Allowing for Risk

In conventional mine evaluation practice, there are two main ways of allowing for risk:
add a risk premium to the mining company's weighted average cost of capital, using the
higher risk-adjusted rate in the DCF analysis; and
build a conservative bias into the single-point base case estimates for the input variables.
These two methods of allowing for risk, often used at the same time, have serious weaknesses.
First of all, the risk adjustments tend to be arbitrary and inconsistent. Then, the mixing together
of notions of expected or most-likely values with these risk allowances to determine single-point
economic criteria, gives a set of economic indicators for the project which is not particularly
meaningful. We need a better way of assessing the economic risk of mining projects.
Probabilistic Concept of Risk

Base case values and risk measures are quite distinct types of economic criteria for a mining
project. Thus, they should be separately evaluated rather than arbitrarily combined as with the
conventional procedures.
The base case values and risk measures are distinct types of criteria in exactly the same way that
central tendency and variability are distinct types of measures used to define the characteristics
of a probability distribution. The expected (mean), most likely, and median values of the
distribution portray its central tendency. On the other hand, the variance, standard deviation, and
confidence limits characterize its variability.
Indeed, it is useful to think of risk as a probability distribution of possible values about a base
case value. A flatter distribution indicates more risk or, in other words, a greater chance that the
actual outcome could depart farther from the base case value. A more peaked distribution
indicates less risk, or, in other words, a more restricted range of values for the actual outcome.

The role of probabilistic risk analysis is to translate perceived uncertainties for the project
variables, which are estimated as probability distributions above and below their respective base
case values, into probability distributions of possible values for the economic criteria.
Economic Risk Criteria

Using this approach, the economic attributes of a project are portrayed by probabilistic profiles
of outcomes around the base case values, including both upside potential and downside risk.
Since mining companies and decision-makers tend to be risk averse, they are especially
concerned about the downside if-worst-comes-to-worst possibilities. Therefore, the following
two types of economic risk criteria are of particular interest.
Lower Confidence Limit. This value is determined so that there is a reasonable degree of
assurance of achieving a result of equal or greater value. For example, the 90 percent lower
limit net present value or present value ratio can be derived from the respective probability
distributions of outcomes.
Probability of Economic Loss. The probability of economic loss is defined as the

probability that a project will fail in economic terms by yielding an outcome lower than the
minimum acceptable condition required to justify investment. For example, the probability of
a negative net present value result or, in other words, the probability of the rate of return
falling below the cost of capital. The probability of economic loss and its complement, the
probability of success or economic profit, are particularly germane. These measures directly
address the fundamental question which management has to answer each time an investment
decision is taken, namely in light of what we know about this project, do we think there is a
reasonable chance that the return on investment will be at least as high as the cost of capital?
Estimating Probabilities
The first step for this type of risk analysis is to estimate a probability distribution for each of the
key project variables singled out in the sensitivity analysis.
Objective probabilities can be estimated when actual information is available for the variable
concerned. This may be the case for the geological variables when appropriate statistical or geo-
statistical techniques are applied to surface drilling and underground sampling data. Objective
probability distributions can thereby be estimated for deposit tonnage, grade, and other relevant
geological characteristics.
Otherwise, subjective probabilities must be assessed, based on the more limited information at
hand concerning the project and the more general professional experiences, knowledge, and
opinions of the expert providing the estimate. The information required to determine a subjective
probability distribution includes the possible range of values for each variable, the expected or
most-likely base case value, and some ideas as to the relative likelihood that the various possible
values could in fact be realized. This information is obtained by probing and questioning each of
the experts involved.

The estimation of subjective probabilities is the most important factor determining the realism
and effectiveness of the risk analysis process.
Choosing a Probability Distribution

The choice of a probability distribution to represent the uncertainty of a project variable should
be a function of the level and reliability of information available. When actual sample data is
utilized, as may be the case for the geological variables, there is an objective basis for the
selection of an appropriate distribution. Otherwise, the distributions are based essentially on
subjective judgement.
For subjective estimates, the type of probability distribution used should be the one which best
suits the judgement of the expert involved. The options available in PCDEP are:
uniform distribution
normal distribution
split-normal distribution
triangular distribution, and
lognormal distribution.
The uniform distribution is used in cases where judgement is so vague that the estimator is
unable to differentiate between the chances of any two values occurring within the estimated
range of the variable. Subjective probability distributions are usually defined by three point
estimates an expected or most-likely base case value bounded by upper and lower
confidence limit estimates. Then, a particular type of probability distribution is assumed to
be described through the three points.
If the upper and lower limits are equidistant from the base case value, the distribution is
symmetrical and the normal distribution can be conveniently employed. When the estimates
are skewed, the split-normal distribution or the triangular distribution can be used. With
respect to objective probabilities, the lognormal distribution in some cases provides a good
representation of the uncertainty of geological variables.
Except for the uniform distribution, these distributions reflect a judgement that lower
probabilities are associated with values closer to the limits of a distribution, and higher
probabilities are associated with values closer to the base case value.
Monte Carlo Simulation

From a mathematical point of view, risk analysis consists of translating the probability
distributions estimated for the uncertain project variables into probability distributions of possible
outcomes for the economic criteria. Of the various ways in which this can be done, the one which
is best suited for economic evaluation is the Monte Carlo simulation technique.

The idea underlying the Monte Carlo technique is straightforward. Sets of random samples taken
from the probability distributions for the input variables are combined to approximate or simulate
probability distributions for the economic criteria.
In order to make sure that the distribution of the values for each of the input variables, as it
emerges from the random selection, is consistent with the distribution for that variable
estimated for the evaluation, the process is repeated many times and the results are statistically
analyzed.
Each value for each of the uncertain variables is chosen by random sampling. In the Monte
Carlo technique, these values are simulated by means of random numbers. The random
numbers are used to obtain random samples for the input variables in accordance with the
estimated probability distributions. Each set of random samples then is evaluated to determine
the cash flow and discounted cash flow indicators. When the process has been repeated a
sufficient number of times, the results can be analyzed and appropriate economic risk criteria
assessed.
Reliability of Results
The number of sets of random samples and iterations of the analysis required to obtain reliable
economic results depends on the nature of the project being evaluated and the complexity of the
uncertainties included. Usually, at least 200 iterations are required. Generally, a particularly large
sample size is required to obtain good representation of the extreme values in the distributions of
economic results. This is relevant because the economic risk criteria of most interest lower
confidence limits, and the probability of economic loss represent extreme values.
We can practically test the reliability of results as follows: select a particular criterion of interest,
the probability of economic loss, for example. Successively run the simulation for an increasing
number of iterations 500, 1,000 and 10,000. Also, repetitively run the risk analysis at each
sample size. The variability in results indicates the approximate nature of the simulation. The
reduction in variability with increasing sample size indicates the improvement in reliability. This
type of procedure provides a good insight into the reliability of results and the selection of an
appropriate number of iterations for the project evaluation.
To illustrate, we have appraised the economic risk associated with investing in the gold project
described previously.
First, subjective probability distributions are estimated for each of the six key project variables.
Consistent with the ranges previously defined for sensitivity analysis, the following estimates,
indexed to the base case values, represent 85% confidence limits.

Estimates of 85% Confidence Limits for Risk Analysis
Lower-limit Upper-limit
estimate estimate
Commodity price 0.75 1.40
Operating cost 0.80 1.35
Pre-production capex 0.85 1.30
Processing Recovery 0.90 1.08
Reserve grade 0.80 1.30
Reserve size 0.70 1.50
The split-normal probability distribution is used to represent the perceived uncertainties

associated with these six input variables.
Based on the Monte Carlo simulation technique, PCDEP translates these estimated distributions
for the uncertain project variables into distributions for the economic indicators. Economic risk
criteria then can be derived from these output distributions.
For example, based on 10,000 iterations, the following economic risk measures were obtained.
Economic Risk Measures

Most likely value Mean value Median value
Total cash flow 30.452 34.286 30.971
Net present value at 10% 5.273 3.956 4.593
Present value ratio at 10% 0.184 0.282 0.157
Rate of return 14.174 0.952 13.524
Probability of economic loss .44
How reliable is the simulation of economic risk results? To get a feeling for how the reliability of
results depends on the sample size, successively run the simulation ten times for each of the
following sample sizes: 200, 500, 1,000, 5,000, and 10,000 iterations, noting the variability in the
probability of economic loss.
Assumptions About Correlations

The Monte Carlo simulation procedure as incorporated in PCDEP assumes that the uncertain
input variables are independent of each other. In other words, no correlations exist among the
variables. Thus, random samples are drawn independently from each of the estimated probability
distributions.
On the other hand, the project components that are represented by a single probability
distribution - ore grades or metal prices, for example - are considered to be fully and positively
correlated. In other words, one sample from the distribution fixes the sample values for all the
components.

These assumptions about correlations, embodied in PCDEP, are considered to be appropriate
because the software is designed for a low level of dis-aggregation. Since the degree of detail in
the project estimates is low the chance of correlations existing among the input variables should
not normally be great.
If two variables are positively correlated, the effect of the variation in one will always be
aggravated by the variation in the other. Ignoring this type of correlation results in the
underestimation of economic risk. Correlations can also be negative, that is, the variables can
systematically compensate for each other. In this case, neglecting the correlation would result in
the overestimation of economic risk.
If correlations can in fact be measured, they can be incorporated in the simulation procedure
which has been outlined. The practical problem in most cases is that the information is not
available to detect and evaluate correlations in such an exact manner.
Selecting the Best Alternative

When mining project alternatives are being evaluated and compared, it is not uncommon to find
that one alternative has a higher base case value while another alternative indicates a lower
economic risk. Which is the best alternative?
In this type of situation, the choice of a best alternative is not obvious or absolute. It depends on
the mining company's risk preference, or, in other words, relative preference for a higher base
case economic value or a lower economic risk. In terms of statistical decision theory, the best
alternative is the one which maximizes the company's utility.14 The choice also depends on the
size of the project in relation to the size of the company. In other words, to what extent does the
project risk endanger the survival of the company?
Advantage of Risk Analysis

The major advantage of probabilistic risk analysis is that it incorporates more useful information
in the economic evaluation of mining projects than is otherwise possible. In so doing, decisions
can be based on a more complete and objective representation of possible economic outcomes.
There are four types of mining project for which the evaluation of economic risk criteria is
particularly essential:
Marginal Projects. Base case values are close to the economic margin. Thus, the probability
of economic loss is significant and may be prohibitive.
Unusual Uncertainties. Base case values are satisfactory but the uncertainty of one or more
of the input variables is high enough that there is a significant probability of economic loss.
Mining projects are characterized by unusual geological and market uncertainties.
14
Utility is essentially a psychological concept. To say that some combination of base case value and economic risk has a "greater
utility" than some other combination simply means that the company prefers the first combination to the second. Thus, the
combination of values which the company prefers to all others maximizes its utility. Combinations of equal preference, among
which the company is indifferent, can be represented by a "utility curve".

Optimization of Project Specifications. In considering the optimization of capacity, cut-off
grade, sequence of mining, and other specifications for the development of a mineral deposit,
there typically are important trade-offs between base case economic values and economic
risk criteria.
Exploration Projects. Mineral exploration comprises investment in information. The purpose

of this investment is to reduce economic risk through the discovery and delineation of
economic deposits. Thus, assessment of the lowest-cost way to reduce risk and the economic
limit of exploration is fundamental.
Holistic Evaluation
A holistic approach for the economic evaluation of mining projects, described in this chapter, is
incorporated in PCDEP. This approach includes:
cash flow and discounted cash flow criteria
before-tax and after-tax assessments
base case analysis
sensitivity and breakeven analysis, and
probabilistic risk analysis.
One or two economic indicators never give the complete picture. Each one has a role to play. In
practice, all of the methods and criteria described should be employed to provide as complete a
representation as possible of the economic attributes of each mining project.

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Chapter 3: TECHNICAL ASPECTS
Introduction
This chapter describes in detail the technical aspects of PCDEP 2.0. It describes the information
requirements of each input page, the analytical capabilities of the commands and the results
obtained from each PCDEP analysis module, using the Sample file as illustration. The technical
implications of setting of various values and parameters are also described.
The economic analysis techniques that underlie PCDEPs analytical capabilities are described
in Chapter 2, Economic Evaluation Techniques.
Step-by step instructions on entering and analyzing data, with an example deposit to evaluate,
are presented in Chapter 4, Using the Software.
Using the Sample file

A data file called Sample is included with PCDEP to help you become familiar with
PCDEPs features. The descriptions in this chapter are illustrated with the screens generated
by data analysis of this hypothetical gold deposit. This deposit is located in the province of
Ontario, and the evaluation uses constant 2000 Canadian dollars.
To open the Sample file:
Select Open from the File menu.
Select Sample from the list which appears.
That will bring up the Sample file main screen, displaying the seven tabbed input pages
containing data fields.
Analysis Modules
PCDEP was designed to perform the economic evaluation of mineral deposits. PCDEP
accepts and displays input data on a series of tabbed pages. Data analysis in three modules:
Base Case Analysis, Sensitivity Analysis and Risk Analysis, is controlled by commands in
the main PCDEP menu.
The Base Case Analysis module allows the specification of relevant geological, technical,
and economic information in the form of point estimates, and provides detailed evaluation
results. These include various undiscounted and discounted indicators assessed on a before-
or after-tax basis, a breakdown of tax payments, tax shares and effective tax rates, a detailed
tabulation of the time distributions of cash flows and tax components, and finally, a
breakdown of the quantity and value of the various metals produced.

The Sensitivity Analysis module enables the study of the impact of specific variations in
project parameters on the economic potential of projects. Parameters of interest are
selected from a fixed set of choices, and the analysis is limited to variations of one
parameter at a time. The results of this module are not as detailed as those of the Base Case
Analysis module, but include the essential economic indicators for mining projects. The
relative degree of sensitivity among variables is examined using a spider diagram.
Lastly, the Risk Analysis module provides a probabilistic approach to project evaluation.
The module is based on a simulation technique, where the level of detail is such that
independence among project parameters can be realistically assumed. The point estimates
specified in the Base Case Analysis module are considered the most-likely estimates in the
context of risk analysis. Lower and upper confidence limits as well as distribution types
associated with a set of project parameters are specified by the user. The results of this
module are first presented as distributions of total cash flow, net present value, present
value ratio, and rate of return. Then, economic risk criteria, including insurable lower
confidence limits and the probability of economic loss, are displayed.

Base Case Analysis Module
The first step in the economic evaluation of a mining project is to carry out a base case
analysis. This allows the appraisal of the project using single-point estimates of anticipated
future conditions. These single point estimates may be expected or most-likely values.
The Base Case Analysis module in PCDEP consists of an input phase, used to specify
information relevant to the project evaluation, and a results phase that provides detailed
evaluation of the data.
Data Input
1. Project ID data input page

The first set of data is, logically, that which identifies the project, such as project name and
location. The Project ID page also contains a comment field.
2. Economic data input page
This page contains information on currency, cost of capital and commodities.
The currency fields specify the monetary units used in the evaluation, for example, Canadian
dollars, the base year for evaluation, (in this case 2000), and the currency for commodity prices
(in this case $US). The exchange rate converts the currency for prices into the currency for
evaluation, and is defined as units of price currency per unit of the evaluation currency. These
currencies can be the same, in which case the exchange rate is 1.0. Our deposit example uses an
exchange rate of 0.70 $US per $Cdn.

The real rate of change in prices is specified next. This constant money rate is exclusive of the
general rate of inflation, reflecting the projected percentage rate of change in prices over the
evaluation period. This one rate affects all commodities and applies from time 0. It can be
either positive or negative. Our example assumes that market prices remain unchanged over the
life of the project.
The Currency fields and the Base Year field are limited to four characters. The Exchange Rate
and Rate of Change fields will only accept numerical values, however, the fields are unlimited
with respect to number of characters.
Currency
fields
Cost of
capital
fields Use to select
commodities to
include in analysis.
Commodities
information
Use to set one
selected commodity
as primary.
The Cost of Capital fields specify the discount rate per year for the base case, in this example,
8%. If required, two variants can also be entered. In the example 6% and 12% have been
entered. Values entered in these fields will be used to evaluate time-adjusted cash flow and
taxation indicators and must be between 0 and 100.
The Commodities section of the page identifies commodities contained in the ore reserves.
These commodities are selected from a customizable drop-down list. A maximum of 10
commodities can be specified for one deposit. The selected commodities with their market
price and market price units, are displayed in the bottom portion of the page.
Our example assumes only one commodity, gold, would be recoverable from this deposit, and
forecasts the gold price at $US300 per ounce.
Commodities are selected and their variables modified using four buttons: Add, Edit, Delete
and Primary.

The Add or Edit button on the Economic page brings up the Commodities dialog box.
This box contains the drop-down list from which a commodity can be selected and its market
price entered. Then these values appear in the list on the Economic page. The Delete button on
the Economic page removes a commodity from this list. The Primary button sets one of the
listed commodities as the primary metal for base case analysis. (Selected results will be
presented based on converting other commodities into dollar equivalents of the primary metal
selected here.)
A new commodity can be added to the Commodities drop-down list by clicking the Add button
on this Commodities dialog box. The Edit button on the Commodities dialog box brings up a
series of variables: Grade Unit, Price Unit, Price Factor, Grade Factor and Normal Units.
A commodity is specified by its mineralogical symbol (e.g. Au, U3O8, Zn). The Grade Unit is
the usual unit used to specify the amount of a particular commodity in the mineralization (e.g.
g/t, %), and the Price Unit is the usual unit used to quote the price of that commodity (e.g. $/oz,
$/t).

The Grade Factor is used to scale the grade of the commodity, and the price factor to scale its
price. The Grade Factor is used in the computation of the amount of commodity produced,
which is the product of the recoverable grade (i.e. geological grade adjusted for dilution), the
ore capacity and the processing recovery, divided by the Grade Factor. The Price Factor is used
in the computation of the revenue, which is a function of the amount of commodity and its
price. The factor converts the price of the commodity, given in terms of the price units
specified, into its value per unit produced, as determined by the use of the grade factors.
3. Pre-production data input page
This page contains information on expenditures during the pre-production period. The
Duration field specifies the number of pre-production years. (Part years are allowed to two
decimal places.) Two Input Mode choices control the level of detail used in the specification of
pre-production capital expenditures. In the Total mode, only the total by component is
specified. In the Annual mode, the expenditures are displayed by year and by component.
The components included in the Pre-Production Capital Expenditures fields are :

Exploration, Mine Development, Mine Equipment, Processing Facility, Infrastructure and
Working Capital.
In Total mode, the capital expenditure components are assumed to be uniformly incurred over
the pre-production period entered. (The exception is the working capital which is assumed to be
incurred during the last full year of pre-production.) If the pre-production period is not a whole
number of years, the fractional part of the year is allocated a proportional amount of the
uniform annual expenditure. Capital expenditures can be entered for any or all components and
a total is generated.

The Annual mode shows annual Pre-Production Capital Expenditures for the six components.
It allows the specification of a non-uniform capital expenditure schedule over the pre-
production period. Note that the first column in annual mode indicates Year 0 investment, i.e.
lump sum expenditures made at the present time.
If the pre-production period is not a whole number of years, the fractional part is displayed at
the beginning of the expenditure schedule. In this instance, capital expenditures can be
specified for Year 0, for the fractional part of the year that follows, and thereafter for the whole
years of the pre-production period. If the capital expenditure schedule extends beyond four
years, the scroll bars can be used to reveal the data for following years.
Our example assumes that the pre-production capital expenditures will be evenly spread over
the two year of pre-production period, and entered as a two-year total. However, for the
purpose of illustration, the expenditures are presented above as annual.
Note: The change from Total mode to Annual mode is preceded by a message to confirm the
users choice. Once Annual mode is selected it cannot be switched back to Total mode without
losing any Pre-Production data already entered.

4. Reserve Categories data input page
The Reserve Categories page lists the number and types of reserve categories. Our example
has only one reserve category, that of geological ore reserves of 2.5 million tonnes. Specifying
more than one reserve category provides for anticipated changes in production parameters over
time.
The reserve categories are evaluated sequentially in the order in which the information is
entered. Overlapping of reserve categories is not possible. Any overlapping, i.e. blending of
reserves, must be handled manually, by creating a new reserve category in which estimates are
weighted averages of the individual reserve category estimates. Each additional reserve
category enables changes to be made to any or all of the production parameters.
The Reserve Type field indicates whether the estimates of size of reserves and associated
grades are Geological (i.e. in situ) or Recoverable. In the case of geological reserves, estimates
of Mine Recovery (%) and Mine Dilution (%) must be provided. Our example uses a mine
recovery factor of 80% and a mine dilution factor of 15%, to convert the geological reserve
estimates to recoverable tonnage and grade equivalents. (Note: the Mine Recovery factor
cannot exceed 100 percent.)
The Reserve Size estimate (million t) and the annual Processing Capacity (000 t/year) for that
particular reserve are specified next.
The lower left part of the page displays the estimates of annual Sustaining Capital and unit
Operating Costs. These can be specified by component, and totals will be generated. In our
example, annual capital expenditures totaling $400,000 sustain the 230,000 tonne per year
operation, and three operating costs components total $56 per tonne of ore mined and
processed. For each commodity previously selected on the Economic page, the lower right side
of the page displays Grade, (either Geological or Recoverable), Processing Recovery and Net
Smelter Return.
Our example uses a processing recovery of 92% of the gold content in the recoverable reserves
and a 96.7% net smelter return to allow for a $US 10 per ounce charge for final refining,
marketing, insurance and transportation of the impure bullion product.
Notes: At least one commodity must be present in each reserve category. Grades must be
entered in the units indicated. (These units, customized by the user, are a function of the
commodities selected.) Those entries which are specified as a percentage cannot exceed 100
percent and must be positive values larger than zero. Inconsistencies are detected and must be
corrected before results are calculated.
5. Major Capital Expenditures data input page
The Major Capital Exp. page specifies estimates of major capital expenditures during the
productive life of the mine. Such expenditures include costs to deepen the shaft, to develop ore
reserves in an underground mine, to convert open pit to an underground operation or to expand
an on-going operation. These production capital expenditures exclude any sustaining capital,
which is specified with each reserve category. A maximum number of six major capital
expenditures may be entered.

Our example provides for a $3.0 million capital expenditure for a new shaft in the fifth year of
production. In other words, the investment would be initiated four years from the start of
production and would require one year to complete.
For each major expenditure, a Starting Time and a Duration must be given. The starting time
indicates when the investment of funds begins and is measured from the start of production. For
instance, a starting time of 2.0 indicates that the investment of funds begins two years after the
start of production, i.e. at the beginning of the third production year. Starting times to one
decimal place are accepted. Thus, a starting time of 1.5 indicates that the investment of funds
begins one-and-a-half years after the start of production, i.e. at the beginning of the last half of
the second year.
The Duration indicates the number of years over which the funds are invested. A duration of
0.0 indicates a point investment. Fractional periods are accepted to one decimal place. If a
duration of more than one year is specified, the major expenditure is assumed to be uniformly
incurred over the period (i.e. an equal amount is allocated to each complete year and a
proportional amount is allocated to a fraction of a year). A non-uniform capital expenditure
schedule for a particular production phase project can be specified using several columns of the
table. In this case, the starting time of a subsequent column is the sum of the starting time and
the duration of the previous column. Obviously the use of several columns for one particular
production phase project reduces the number of projects that can be specified.
Major production expenditures should not occur beyond the end of the life of the project, which
includes the reclamation period.
6. Post-production data input page
The Post-production page is used to specify end-of production information. A Salvage

Value associated with the pre-production and production period capital expenditures can be
specified. Provision is then made for a mine Reclamation cost and the associated reclamation
period. The reclamation period is specified by a Starting Time and a Duration. The Starting
Time indicates when the expenditure of funds begins and is measured from the end of
production. Duration indicates the length of time over which the funds are spent.
An example of this input page follows.

If the reclamation period begins prior to the end of production, the starting time is indicated as
a negative value. For instance, if the reclamation period begins six months before the end of
production, a starting time of -0.5 would be entered. A starting time of 0.0 indicates the
reclamation period begins at the end of production. When the starting time and/or duration are
such that the reclamation period extends over an interval of more than one year, the expenditure
is assumed to be uniformly incurred over the period ( i.e. an equal amount is allocated to each
complete year and a proportional amount is allocated to the fraction of a year).
The Salvage Value is treated as a revenue. It is therefore taxable. Reclamation costs are treated
as operating costs. Thus, they are expensed for tax purposes. When the reclamation period
extends beyond the end of production, expensing results in the creation of tax credits. As the
treatment of salvage value and reclamation costs depends on the specifics of tax systems, this
procedure is intended to approximate the effects of taxation on such items.
Our example shows a salvage value of $1.8 million from the sale of used equipment and a
reclamation cost of $4.0 million for mine site rehabilitation incurred over a two year period
immediately following mine closure.

7. Taxes data input page
The Taxes page is used to specify whether the project is to be assessed on a before-tax or
after-tax basis. Our example is evaluated on an after-tax basis.
If a deposit is assessed on a Before Tax basis, no further information is required and the
evaluation can proceed by selecting the Base Case command from the Analyze menu.
However, when the assessment is on an after-tax basis, additional information must be
provided.
First, an estimate of the General Rate of Inflation, expressed as an annual rate over the project
life, must be specified to correctly calculate the after-tax cash flows. The rate can either be
positive or negative. The maximum absolute value that can be entered is 100 percent. Our
example projects a 2% annual inflation rate to calculate after-tax cash flows.
The Jurisdiction field relates to the taxation system to be applied. Four possible tax
jurisdictions are available on a drop-down list:
1 Combined federal-Quebec provincial taxation

2 Combined federal-Ontario provincial taxation
3 Combined federal-British Columbia provincial taxation
4 Simulated taxation model

Each of these jurisdictions requires the specification of a set of mining tax variables:
Jurisdiction Mining Tax Variables

Quebec Ore treatment scenarios:
Ore concentrated in Quebec
Concentrate smelted and/or refined in Quebec
No treatment
Ontario Ore treatment scenarios:
No treatment
Ore concentrated in Ontario
Concentrate smelted in Canada
Concentrate refined in Canada
Concentrate refined or fabricated in Northern Ontario
British Columbia Average Annual Bank Rate :
Used to determine the investment allowance (maximum 100%)
Our example applies the Canadian federal and Ontario income and mining tax systems, with the
further detail that the gold is refined and /or fabricated in northern Ontario. (Note that the Ontario
Mining Tax system used here does not incorporate proposed changes in the 2000 Ontario Budget.)
PCDEP 2.0 also offers the choice of analysis based on a Simulated tax jurisdiction. This is designed
to capsulate the tax system in the jurisdiction where the project is located. The series of tax variables
allows some degree of creativity with respect to the design of a hypothetical model. A Project or
Integrated Basis of Taxation can be specified. An Ad Valorem tax rate and Profit tax rate can be
specified, a declining balance or straight-line Depreciation Method can be selected, and depreciation
rates for each of the capital expenditure components (except working capital) can be specified. The
depreciation method applies to all capital expenditure components. Depreciation rates cannot exceed
100 percent.
This completes the input phase of the analysis.

Base Case Analysis Results
The information provided through the tabbed data pages is analyzed by selecting either Before
Tax or After Tax on the Taxes tab and then selecting the Base Case command from the
Analyze menu. This generates a series of tabbed report pages, which can be printed by
clicking on the Print button. The contents of these results pages are summarized here. (Details
of the pages follow.)
Base Case Analysis Results pages
Tab label: Results Applies to:

Indicators Cash Flow indicators and Both Before and
Discounted Cash Flow indicators After Tax
Components Cash Flow components by unit Both Before and

of ore and metal, and total After Tax
Taxes Undiscounted and Discounted After Tax

Payments, Share and Effective
Tax Rate by Component
Cost of Capital Cost of Capital variants and tax Both Before and
payments After Tax
Cost of Capital Taxes Tax share and effective tax rate After Tax
Cash Flow Cash Flow by item, year and Both Before and
total. After Tax
Taxes Cash Flow By type of tax, year and total After Tax
Metals By all metals, revenue and years Both Before and

After Tax
Primary Metal By metal set as Primary and by Both Before and
year and total After Tax
Note that pages containing only tax payment indicators are not displayed when the evaluation is
carried out on a Before Tax basis.

Indicators report
The results displayed show two groups of main indicators. These are the Cash Flow
Indicators, consisting of the Total Revenue, Total Cash Flow, Cash Flow Ratio, Operating
Margin, and Payback Period, and the Discounted Cash Flow Indicators, consisting of Net
Present Value, Present Value Ratio, and Rate of Return. These reports will be generated on
both a Before and After Tax basis.

Components report
This page illustrates undiscounted Cash Flow Components on a total basis and on the basis of
per tonne of ore and a per unit of primary metal.
The components consist of Revenue, Operating Cost, Capital Expenditures broken down into
Pre-Production, Sustaining and Major Production investments, Total Tax Payments (for After
Tax analysis), Reclamation Cost, Return of Working Capital and Salvage Value. The unit values
reflect averages over all the reserve categories. These reports will be generated on both a
Before and After Tax basis.

Taxes report
This page reports main Tax Payment Indicators. It is only displayed in the case of an after-tax
analysis. The indicators are Undiscounted and Discounted Payments, Share and Effective Rate
by Component, evaluated at the base case Cost of Capital. The tax components shown depend
on the jurisdiction specified. Actual Canadian taxation systems comprise Federal Corporate,
Provincial Corporate and Provincial Mining tax components.
PCDEP also provides for analysis on a simulated taxation model and results show Ad Valorem
and Profit Tax components. The Effective Undiscounted Tax Rate is determined by dividing the
total tax payments by the total before tax cash flow. Similarly, the Effective Discounted Tax
rate is determined from the total discounted tax payments and the before-tax net present value.
In particular circumstances, one or more of these values may be negative. When this occurs,
the effective tax rate is meaningless and therefore not displayed.

Cost of Capital report
This page shows the main Discounted Cash Flow criteria as a function of the Cost of Capital.
Shown are Net Present Value ($millions), Present Value Ratio and Rate of Return, evaluated at
the base case Cost of Capital and the two variants specified on the Economic input page. The
Rate of Return is independent of the cost of capital and remains unchanged.
The results for After Tax analysis also show discounted Tax Payments by component.

Cost of Capital Taxes report
This page reports the variants of Tax Share and Effective Tax Rate by the base case Cost of
Capital and the two discount rate variants. This is shown only for After Tax analysis. The
results associated with the actual Canadian taxation systems comprise Federal Corporate,
Provincial Corporate and Provincial Mining tax components, while the simulated taxation
model shows Ad Valorem and Profit components.

Cash Flow report
This page displays the distribution over time of Cash Flow components. These are Revenue,
Operating Costs, Capital Expenditures, Reclamation Costs, Tax Payments and Cash Flow, by
year, from the beginning of pre-production. The first line of the displayed table represents any
expense component that occurs at the very beginning of pre-production, i.e. at year 0. The
following lines represent the components associated with every subsequent year of the projects
life. These results can be exported in Microsoft Excel format, by clicking on the Excel button.

Taxes Cash Flow report
This page displays the tax payments year by year by federal and provincial tax components. It
is generated only in the case of an after-tax analysis. In the case of the simulated system, Ad
Valorem and Profit Tax components are displayed.
These results can be exported in Microsoft Excel format, by clicking on the Excel button.
This format can be imported into most common spreadsheet packages.

Metals report
This page shows the amount of each metal recovered from the project along with its associated
revenue on a year-by-year basis. As defined in Chapter 2, the revenue shown is determined at
the mine site after deduction of the smelting, refining and transportation costs. These results
can be exported in Microsoft Excel format, by clicking on the Excel button.
Only the after-tax results are shown here as the Metals report produced is the same on a before
or after-tax basis.

Primary Metal report
This page illustrates the annual production of the primary metal as designated on the Reserve
Category input page. All other metals are converted to equivalent units of the primary metal
that was designated on the Economic page. These results can be exported in Microsoft Excel
format, by clicking on the Excel button.
Only the after-tax results are shown here as the Primary Metals report produced is the same on
a before or after-tax basis.
In the Sample file, there is only one metal (gold), thus, it is the primary metal by default. More
generally, the following formula is used to convert a by-product metal to equivalent units of the
primary metal:
where,
SRBP = Sales Revenue of By-product Metal
UPPM = Unit Price of Primary Metal
NSRPM = Net Smelter Return Percentage of Primary Metal
EUPM = Equivalent Units of Primary Metal

Consider a deposit with a 1.0 million tonne per year processing capacity with a mill head
grade of 2.0% copper and 2.0 g/t gold. What is the equivalent annual copper production given:
Copper Gold
Processing Recovery 90% 80%
NSR 65% 75%
Market Price $0.80/lb $300/oz
Annual copper production

= grade x tonnage x processing recovery x unit conversion factor
= 0.02 x 1Mt x 0.90 x 2204.6 lbs/t
= 39,628,800 lbs Cu
By product Annual Sales Revenue

= grade x tonnage x processing recovery x net smelter return x price x unit conversion factor
= 2 g/t x 1 Mt x 0.80 x 0.75 x $300/oz x 0.032 oz/g
= $11, 574, 297
Equivalent units of copper

=
=
= 22,258,264 lbs.
Total Annual Copper Production

= Annual copper production + equivalent units of by-product
= 39,628,800 lb + 22,258,264 lb
= 61,887,064 lb

Sensitivity Analysis Module
The single-point estimates of future conditions used in the Base Case Analysis are made on the
basis of limited information, resulting in uncertainties in the estimates and the corresponding
economic criteria. Sensitivity Analysis examines the effects on the major Cash Flow and
Discounted Cash Flow Indicators of possible variations in these uncertain input variables, above
and below their single-point base case values.
The sensitivity variables are:

Major Production Capital
Market Price
Mine Dilution
Mine Recovery
Operating Cost
Pre-production Capital
Processing Recovery
Reserve Grade
Reserve Size
Sustaining Capital
In the Sensitivity Analysis Module input and results are displayed on the same page. Each of the
ten variables can be selected from a drop-down menu, and up to four specific variations in the
value of that variable entered. When the Recalculate button is pressed, the page will show the
effects of the variations on a series of economic indicators.
The sensitivity analysis results are limited to a few important indicators and are thus not as
extensive as the Base Case Analysis results. Cash Flow, Discounted Cash Flow, and Discounted
Tax Payment indicators are given. The results associated with each variation from the base case are
computed.
The simplest analysis would be to examine the effect of changing one value at a time, holding all
others constant, however, PCDEP can recalculate up to four variations at once.
Variations are specified as relative deviations (in percent) from the value entered on the Base Case
input pages. A variation applies to a parameter globally. For instance, a 10% increase in Major
Production Capital applies to all production-period capital expenditures. Similarly, variations in
mine dilution, mine recovery, operating costs, processing recovery, reserve grade, reserve size, and
sustaining capital apply to all reserve categories. Variations in production capital apply equally to
all capital expenditure components given. Variations can either be positive or negative. The
maximum negative and positive values that can be entered are 200.0 and 200.0 respectively.

No variation from
base case.
If more detailed results of variations in a particular parameter are required, they must be obtained
through changing the input values in the Base Case analysis module.
Three
variations
from base
case
Results can also be printed, either in tabular or graph form, for any or all variables.

Risk Analysis Module
Mining project investment decisions are made under conditions of uncertainty. The single point
base case estimates for a project are made on the basis of limited information. Sensitivity analysis
provides answers to what if questions concerning other possible project outcomes.
Risk analysis more comprehensively assesses the effect of project uncertainties on the cash flow
and DCF criteria. The uncertainties associated with the input variables are estimated as probability
distributions around the base case values.
Then risk analysis is applied to translate those probability distributions into distributions of
possible values for the economic indicators. Economic risk criteria, including insurable lower
confidence limits and the probability of economic loss, can then be determined.
Changes to variables are made on the Risk Analysis main input page. When the Calculate button
is pressed, results appear on a screen from which graphs may be created.
The information required consists of the number of iterations to be performed in this simulation, as
well as details quantifying the uncertain nature of the point estimates specified in the Base Case
Analysis pages.
The # of Iterations parameter controls the sample size of the simulation. This value is specified in
the first field of the page. The maximum number of iterations is 9999.

The Confidence Limits parameter specifies the degree of confidence associated with the lower
and upper limits of the probability distributions used to quantify the uncertainty of the estimates.
The value relates to each limit individually and indicates the probability associated with actually
exceeding the lower limit or falling below the upper limit. Taken together, the confidence limits
form a symmetrical probability interval. For instance, 95% confidence limits correspond to a 90%
confidence interval. The value specified applies globally to all relevant distributions, i.e. different
confidence limits cannot be used for each distribution.
The list of variables for which probabilistic estimates can be specified is identical to that used in
the Sensitivity Analysis module. For each of these variables, a Distribution Type, Lower Limit
Index and Upper Limit Index are specified. The distribution type is selected from a drop down list.
The distribution type choices are:
None
Uniform
Triangular
Normal
Split-Normal
Lognormal.
The upper and lower limit indices apply to all distribution types except the first. A choice of
None signifies that the parameters estimate is not of a probabilistic nature. This implies that
during the simulation process, the parameter is held constant, its value equal to the point estimates
specified in the Base Case Analysis input pages. Both limits are specified as values relative to the
point estimate of the parameter, and are entered as indices reflecting the ratio of the actual limit
and the point value. Thus, the lower limit index must be below 1, and the upper limit must be
above 1. For symmetrical distributions, only one limit needs to be specified. The other is
automatically calculated and displayed.
Results
The results of the risk analysis are displayed on a series of four tabbed pages, which contain the
distributions associated with the Total Cash Flow, Net Present Value, Present Value Ratio and Rate
of Return indicators.
The contents of each page can be printed, and a graph showing results can be generated from the
page. The colour scheme of the graphs represents the economic and uneconomic cases.15 The red
area represents uneconomic cases while the black represents economic cases. The green line
represents the most likely value as determined in the base case analysis.
15
For the total cash flow, the black area represents cash flows in excess of zero. There may be uneconomic cases on a discounted
basis which have positive cash flows.

A graphical representation of the distribution appears when the Show Graph button is pressed.
This graph can be printed.

Setting Calculation Defaults
PCDEP provides a way to set default values for various general, economic, tax, and risk analysis
information. The Set Defaults command on the Options menu can be used to set the initial values
to which particular parameters are set when PCDEP is started. The parameters illustrated below are
associated with the Base Case analysis module and the Risk Analysis module.
As in the input pages of the analysis modules, parameters that are specified as values must be
entered, while parameters that are specified as options are chosen from a drop-down list. When
default settings are changed, they do not take effect (i.e. the current entries of the input pages
remain unchanged), unless the OK button is clicked.
Economic Options
The Economic Options page has fields to enter values related to currency and cost of capital.
General Project Options

The General Project Options page has a list of defaults which can be selected to be included in
analyses. These defaults control the Capital Expenditure Input Mode (Total or Annual). They also
control whether to include working capital in spreading of capital expenditures, whether negative
cash flows during production are included in the determination of present value ratio, and whether
to expense royalties or allow carried non-cash losses. Other options are to defer depreciation until
the start of production, and to choose between the tax formats.

Include Working Capital
When Capital Expenditure Input Mode is set to Total, the capital expenditures are assumed to be
uniformly incurred over the pre-production period. With this option selected, the total capital
expenditure, including the working capital is spread uniformly over the pre-production period.
Even though the annual capital expenditure is determined with the working capital, it is still
assumed that the working capital occurs in the last pre-production year. The proportions of the
other capital expenditure components associated with that year are decreased accordingly. When
this option is not selected, the total capital expenditure, excluding the working capital, is spread
uniformly over the pre-production period. In this case the working capital is added to the amount
associated with the last pre-production year.
Include Negative Cash Flows

This setting refers to a variant associated with the Present Value Ratio calculation. A negative cash
flow during the production period represents a net investment of funds. This investment can be
included or excluded from the denominator for the Present Value Ratio, which represents the sum
of discounted capital expenditures. When selected, the discounted negative production period cash
flows are added to the sum of discounted pre-production cash flows. When not selected, only the
sum of discounted pre-production cash flows are considered.

Expense Royalties
Selecting this option causes PCDEP to expense Ad Valorem tax payments in the calculation of
profit tax payments. Thus the royalties are deducted before calculating profit tax. If it is not
selected, Ad Valorem taxes are not considered as expensable items for determining profit tax.
Allow Carried Non-Cash Losses

Selecting this option signifies that losses created through depreciation allowances (i.e. capital
losses) are allowed. In this case, the maximum allowable depreciation is always taken in any given
year and any surplus above the amount required to reduce the taxable income to a level of zero is
carried forward to subsequent years. Not selecting this option signifies that losses created through
depreciation allowances are not allowed. In this case only allowances required to reduce the
taxable income to a level of zero are taken. Any unwritten off balances are carried forward.
Note: You must select either Defer Depreciation or Allow Carried Non-Cash Losses. If you
dont select either one, the analysis will assume that depreciation is deferred. .
Defer Depreciation until Start of Production

Selecting this option causes depreciation allowances to be taken only from the beginning of
production onwards. If not selected, depreciation allowances will be taken from the start of pre-
production. In this case, it is assumed that the depreciation allowances during the pre-production
period can be fully absorbed by other sources of income within the corporation. This gives rise to
tax credits.
Note: You must select either Defer Depreciation or Allow Carried Non-Cash Losses. If you
dont select either one, the analysis will assume that depreciation is deferred.
Tax Information Options

The purpose of this page is to set initial values to which taxes fields are set when PCDEP is run.
If After-tax Analysis is set to No, there are no further options fields to set. If set to Yes, fields
for inflation rate and jurisdiction information are opened. General rate of inflation is entered as a
percentage per year. Jurisdiction is selected from a drop-down list.

Depending on the Jurisdiction selected, these are various ore treatment scenarios and exploration
expenditures options which can also be selected from drop-down lists.
Risk Options
This page allows you to set default values for risk analysis: number of iterations, confidence limits
and type of probability distribution.
Number of iterations
This option sets the default number of iterations to be performed during a risk analysis. The
maximum number of iterations is 9999.
Confidence limits
This option specifies the degree of confidence associated with the lower and upper limits of the
probability distributions.
Distribution type
One of five types of probability distribution can be set to represent the uncertainty of a project
variable. The choice can be a function of the level and reliability of information available. Except
for the uniform distribution, these distributions reflect a judgement that lower probabilities are
associated with values closer to the limits of a distribution, and higher probabilities are associated
with values closer to the base case value. A choice of None signifies that the parameters
estimate is not of a probabilistic nature.

Where to go from here:
For a complete description of the underlying economic evaluation techniques and evaluation
procedures incorporated into PCDEP, go to:
Chapter 2: Economic evaluation techniques
For step-by-step instructions on how to use PCDEP, and an exercise using sample deposit data, go
to:
Chapter 4: Using PCDEP

Chapter 4: USING THE SOFTWARE
Now that youre familiar with the underlying evaluation techniques and the technical aspects of the
program, heres a chance to put this knowledge to use. In this chapter, you are presented with and
asked to evaluate a mineral deposit development opportunity. Step-by-step instructions will guide
you to enter all appropriate information, and then to perform the various analyses. You can
compare your results with ours to confirm your command of the PCDEP software.
The analyses you will do are:

Base Case Analysis
Before-Tax
After-Tax
Risk Analysis.
Your assignment: carry out the evaluation using the three PCDEP analysis modules, and justify a
go/no go decision as to development of the project after each stage of analysis.
Mineral Deposit Data

A massive sulphide base metal deposit has been discovered as the result of follow-up drilling
of target anomalies in the Republic of Mushaboom. Deposit-specific characteristics, reflecting
the geological setting and nature of the deposit, have been estimated in relation to current
outlook conditions.
General Economic Conditions

The following conditions form the basis for the economic evaluation of the project.
money values unless otherwise indicated are in constant 2000 Mushaboom dollars (Mbm$);
an 8% discount rate is selected as our best estimate of the weighted average cost of capital
(in constant money terms) for investment in this base metal mining opportunity. Variants of 5%
and 12% are also examined;
a general rate of inflation of 1.5% per year is anticipated over the project life;
an exchange rate of 1.14 US$/Mbm$ is anticipated over the mine life; and
expected long-term refined metal price projections over the project life (2000 US$):
Copper $0.85 per pound
Zinc $0.50 per pound
Gold $300 per ounce
Silver $5.00 per ounce
Deposit-Specific Estimates
Mineral processing consists of crushing, grinding, differential flotation, and drying to produce
copper and zinc concentrates with associated precious metals for sale to a custom smelter.
The pre-production period required for the development of the deposit is estimated at 3 years.
The pre-production capital costs are projected to total Mbm$ 163.7 million. These costs cover
the development of the initial open pit phase of mining, infrastructure costs, and the
establishment of a 1,000,000 tonne per year processing facility. Pre-production capital costs are
as follows:
BaseDep Pre-production Capital Costs ($Million)
Time 0 Year 1 Year 2 Year 3 Total
Exploration 0 5.0 5.0

Mine development 5.5 6.3 11.8
Mine equipment 5.8 18.4 24.2
Processing facilities 6.9 41.0 33.0 80.9
Infrastructure 4.8 17.0 15.5 37.3
Working capital 4.5 4.5
Total 0 16.7 69.3 77.7 163.7
Other deposit-specific estimates are dependent on the phase of mining. It is proposed that the
deposit be mined in three phases open pit mining, followed by shallow underground mining
using shrinkage stoping, and, ultimately, deep underground mining using cut and fill stoping.
The final depth of the open pit will be 80 metres, after which the open pit will be converted for
shallow underground mining. This conversion process would start 2.5 years from the start of
open pit production and would last 1.5 years.
In order to access the remainder of the ore, it is necessary to convert from shallow to deep
underground mining. This process would occur during the last two years of the shallow mining
phase, starting 13 years from the start of open pit production.
Details on each of the three mining phases follow.

Shallow Deep Underground
Open Pit Phase Underground Mining Phase
Mining Phase
Estimated recoverable ore Geological ore reserves of: Geological ore reserves of:
Ore reserves reserves of: 10,000,000 tonnes averaging 6,800,000 tonnes averaging 1.8%
4,000,000 tonnes averaging 2.2% Copper, Copper,
2.9% Copper, 6.8% Zinc, 8.8% Zinc,
4.7% Zinc, 1.8 g/t Gold, 1.1 g/t Gold,
2.1 g/t Gold, 23.2 g/t Silver 30.1 g/t Silver
15.5 g/t Silver
Mine recovery and A mine recovery factor of A mine recovery factor of 88%,
dilution 92% and a mine dilution and a mine dilution factor of 15%
factor of 12% have been have been estimated.
estimated.
Start time 2.5 years Start time 13 years
Production phase Duration 1.5 years Duration 2 years
capital
Mine Development 38.0 Mine Development 12.0
expenditures Mine Equipment 11.5 Mine Equipment 4.8
Working Capital 1.6 Working Capital 0.4
Total 51.1 million Total 17.2 million
Operating costs (Mbm$/tonne ore): (Mbm$/tonne ore): (Mbm$/tonne ore):

(based on mining Mining 7.00 Mining 13.50 Mining 15.00
and processing of Processing 6.20 Processing 6.20 Processing 6.20
Overheads 2.30 Overheads 2.30 Overheads 2.30
1,000,000 tonnes per
Total 15.50 Total 22.00 Total 23.50
year)
Sustaining capital (Mbm$ millions/yr) (Mbm$ millions/yr) (Mbm$ millions/yr)

expenditures
Mine Equip. 1.5 Mine Equip. 1.5 Mine Equip. 1.5
Processing Facil. 0.8 Processing Facil. 0.8 Processing Facil. 0.8
Infrastructure 0.4 Infrastructure 0.4 Infrastructure 0.4
Mineral Copper 88% Copper 88% Copper 88%

processing Zinc 84% Zinc 84% Zinc 84%
Gold 82% Gold 82% Gold 82%
recovery factors Silver 80% Silver 80% Silver 80%
Net smelter Copper 64% Copper 64% Copper 64%

return Zinc 52% Zinc 52% Zinc 52%
Gold 90% Gold 90% Gold 90%
Silver 82% Silver 82% Silver 82%
End of Production
At the end of productive mine life, the working capital associated with the project is returned.
Furthermore, a salvage value of Mbm$ 25.0 million arises from the sale of used equipment.
Offsetting these revenues are costs associated with the reclamation and rehabilitation of the
mine site. It is estimated that these costs will total Mbm$ 38.0 million. Reclamation will begin
at the end of production and last for 3 years.
1. Base Case Analysis
The first steps in the economic evaluation of the Mushaboom deposit are to determine its
beforetax and aftertax values. By applying certain general economic conditions, mineral
market projections, and deposit-specific estimates, you can determine the total revenue, cash
flow ratio, operating margin, total undiscounted cash flow, payback period, net present value,
present value ratio, and rate of return for the BaseDep mine development opportunity. Based
on these before-tax results, you can then judge the overall economic viability of the project.
Base Case Analysis is done in two parts: first you enter the data and then you run the analysis,
once for before-tax evaluation and once for an after-tax evaluation.
Part 1: Data Input

PCDEP simplifies the entry of data, by employing seven tabbed data input pages. By
completing the appropriate fields on each page you will ensure that the necessary data have
been entered for the analysis.
Project identification data

You must enter project information before you enter any other data. In the PCDEP main screen,
select New from the File menu. This will bring up a dialog box titled New Project. Type in
the project name, (in this case BASEDEP), and click on OK. The project name will then
appear in the appropriate blank in the Project Information input page. Now you can enter the
project location and any comments. This field is linked to a full-featured text editor, which is
opened when the Edit button is pressed, or when you double-click inside the comment field.
Economic data input
The next step is to enter data on currency and commodities.
Click on the Economic tab.
This will bring up the Economic Information input page.
To include a
commodity in the
analysis, or to
change its values,
click here.
Enter the monetary units of currency used and the base year for evaluation.
Enter the currency for prices and the exchange rate. (Note that in the field label for
exchange rate, PCDEP automatically enters the two units of currency being
compared.)
Enter the real rate of change in prices.
Then enter the cost of capital base case and variants.
(Note that where a percentage is required, PCDEP will warn you if you have not entered a
value between 0 and 100.)
To enter commodities information,
Click on the Add button in the Economic information input page.

This brings up the Commodities dialog box.
Click here to
add a
commodity to
list for analysis.
Select a commodity
from the drop-down
list, then enter market
price..
In the Commodities dialog box;

Click on the arrow to drop down a list of commodities
Select the commodity, then enter the market price.
Click on OK.
This will enter the commodity, its market price and units into the Economic Information input
page. You can add other commodities in the same way.
You can also use this commodity dialog box to Add a commodity to the drop-down list or to
amend the commodity information. The Edit button can change the values of the commodity
grade unit, grade factor, price unit, price factor, etc.
The Primary button sets one of the commodities selected for analysis as the primary metal for
base case analysis. Selected results will be presented based on converting other commodities
into dollar equivalents of the primary metal selected here. Use this function to set Zinc as the
Primary metal. (For further detail, please refer to discussion of primary metal in the Technical
Aspects chapter.
Pre-production Expenditures
The next step is to enter pre-production information. Click on the tab labeled Pre-production.
This will bring up the Pre-production expenditure input page as follows:
Click here to switch
to the annual
expenditures
screen
These are the fields

for total
expenditure data.
By default the expenditure input mode is Total. To enter annual expenditure data,
Enter the number of years of pre-production
Select Annual from the Input Mode frame.
This will change the input page to one ready to accept expenditure data for the number of years
of the pre-production period, as specified in the Duration field.
NOTE: Once you have selected Annual mode, you cannot switch back to Total mode without
losing any pre-production data already entered.
In the Annual Pre-production screen;

Enter the annual breakdown of pre-production capital expenditures.
Using the Mushaboom example the screen will look like this:
Ore Reserve Categories
The next step is to enter production information for ore reserve categories.
Click on the Reserve tab to bring up the Reserve Categories input page.
Select the number of reserve categories appropriate to the analysis by clicking on the
arrow. In this case, there are 3 categories, each relating to a mining phase.
Click here to select

number of reserve
categories appropriate to
the analysis. This area
also identifies which
category is currently
being viewed.
This will open up the page with data fields for category 1, in this case, the open pit phase.
Select 1 as the active category
Select the Reserve type from the drop-down list, in this case, Recoverable
Click here to
scroll through
the list of
commodities
entered from
Economic page.
.
Enter the amount of reserves in millions of tonnes of ore
Enter processing capacity on thousands of tonnes of ore per year
Enter Sustaining Capital and Operating Costs data.
Enter Commodities data.
Use the up/down keys to bring up blank fields for each of the commodities entered. Note that the
fields for commodity grade include Recoverable Grade when you select Recoverable as the reserve
type.
To enter data on the next phase, in this case the Shallow underground mining phase:
Select 2 as the active category
Select the Reserve type from the drop-down list, in this case, Geological
The default setting for Reserve Type is Geological, in which case, appropriate mine recovery and
dilution factors must be entered so that the program can convert the geological reserve estimates
into recoverable mill feed tonnage and grades. When you choose Geological as the category type,
the fields Mine Recovery and Dilution appear.
Enter Mine Recovery and Dilution data.
Enter the amount of reserves in millions of tonnes of ore
Enter processing capacity on thousands of tonnes of ore per year
Enter Sustaining Capital and Operating Costs data.
Enter Commodities data.
Enter data on the next phase, in this case the deep underground mining phase, in the same manner.
Major Capital Expenditures
This is the page where major capital expenditures during production are recorded.
Use the keys to select the number of expenditures
Enter the Start Time for the investment measured in number of years from the
start of production
Enter the Duration of the investment period
Enter the capital expenditure amounts
Clicking here to
select the number of
expenditures will
open the appropriate
number of data
columns here.
Post-production
This is the page to record any end of production information including any realizable salvage value,
reclamation costs, starting time and duration measured from the end of productive mine life.
Taxes
Tax data are the last to be entered before proceeding to analysis. For before-tax evaluation, you do
not need to enter any further information.
Before-Tax Analysis
The first step in the Base Case analysis, is to run the before tax analysis.
To carry out a before-tax base case analysis,

Select the Taxes tab to record tax information.
Select Before Tax on the Taxes data input page, and
Select Base Case from the Analyze menu.
The results should appear as illustrated below:
Five undiscounted cash flow indicators are presented:

total sales revenue of $1199.619 million;
total cash flow over project life of $453.512 million;
cash flow ratio of 2.849:
operating margin of 2.663; and,
payback period measured from the start of production of 5.4 years.
Then, three time adjusted cash flow measures are presented:

net present value at 8 percent of $104.504 million;
present value ratio at 8 percent of 0.77; and,
rate of return of 16.6 percent.
If your results vary from those presented above, then you have made an error in the data entry. In
this case, return to data entry mode by clicking on OK to return to the main screens.
Use the tabs to view the other results pages and check them against the values shown in the Data
Input section above.
Click on the Components tab.
Here, components of the project cash flow are presented in terms of unit values (per tonne of ore
and per unit of primary metal) and total values over project life. The difference between the total
revenue of $1199.619 million and the total before-tax cash flow of $453.512 million is accounted
for by:
operating costs of $450.406;
total capital expenditures of $289.186 million;
reclamation cost of $38 million;
return of working capital of $6.5 million; and
salvage value of $25 million.
The total before-tax cash flow of $453.512 million is equivalent to $21.41 on a per tonne of ore
basis and $0.043 per pound of equivalent zinc.
Cost of Capital
The next results page displays before-tax DCF indicators as a function of the cost of capital
variants selected on the Economic information input page. As shown, the Net Present Value and
present Value Ratio decrease as the cost of capital increases while the Rate of Return is
independent of the cost of capital.
Cash Flow
This page illustrates the Time Distribution of Cash Flow Components for the project. Year-by-year
values for Revenue, Operating Costs, Capital Expenditures, Reclamation Costs, Tax Payments, and
Cash Flow are shown.
Use the scrollbar to view all the years of project life.
Metals
The metals page gives before tax results for all commodities selected through the Economic page.
Your results should appear as follows.
Primary Metal
The Primary Metal page shows annual zinc equivalent production. Because zinc was set as the
primary metal on the Economic input page, all other commodities produced have been converted
to equivalent zinc.
Printing
To print any of the deposit information or results of this before-tax base case analysis, you can
select Print from the File menu, or
Click on the Print button on any output screen
This brings up the Print dialog box, which has a tabbed page for each of the three analysis modes.
Select the input variables or results pages you want to print.

Click on the second Print button.
PCEDEP will print the report using whichever printer you have set as default. (To change printers,
use the Windows Printer Settings function.)
To cancel, or exit without printing,

Click on OK.
Note: if the analysis results include graphic representations, they are selected and printed in this
manner.
After-Tax Analysis
The second step in the Base Case analysis of the BaseDep deposit is to determine its after-tax
value. This is accomplished by applying the Mushaboom mining taxation provisions, as
summarized in the box below, to the before-tax results calculated in the previous section. It is now
possible to determine the total revenue, total undiscounted cash flow, cash flow ratio, operating
margin, payback period, net present value, present value ratio, and rate of return on an after-tax
basis.
The Republic of Mushaboom has a unified tax system with the following provisions:
Republic of Mushaboom Taxation Provisions
Ad Valorem royalty : 2.0% of sales revenue

Allowable deduction in determining income for profit-based tax
Profit-based tax : 30.0% of taxable income Individual project basis of taxation is applicable
in this case
Operating costs, royalty payments, and mine reclamation costs can be expensed for tax purposes
Salvage values realized are treated as income for tax purposes
All capital expenditures except working capital are depreciated for tax purposes
Declining-balance method of depreciation applicable
Allowable depreciation rates:
Exploration expenditures - 100%/year
Mine development capital - 30%/year
Mine equipment capital - 25%/year
Processing capital - 25%/year
Infrastructure capital - 15%/year
Depreciation allowances can be used to create a carried loss for tax purposes
Losses can be carried forward until the end of mine life
The unwritten-off balance for depreciation and any carried loss remaining at the end of mine life
are fully deductible in the last production year
Average rate of inflation over project life: 2%
Data Input
Data entered in the before-tax analysis are still applicable for after-tax evaluation.
In the Taxes data input page, select After-Tax analysis. Since the actual Mushaboom tax system is
not incorporated in the software, it is modelled by specifying appropriate values for a simulated
jurisdiction. Now you must enter the relevant tax information and inflation rate provision as
provided in the box at the beginning of the chapter.
Your page should now appear as follows:

You are now ready to carry out the after-tax evaluation for the project. On the basis of these after-
tax results, you will be asked to make a go/no go decision concerning development of the BaseDep
deposit.
Select Base Case from the Analyze menu.
This initiates the After-Tax economic evaluation.

After-Tax Evaluation Results
As shown:
Total Revenue remains unchanged at $1199.619 million;
Total Cash Flow is reduced from $453.512 before-tax to $300.572 million on an after-tax
basis;
Cash Flow Ratio decreases from 2.849 to 1.888
Operating margin remains unchanged at 2.663
Payback Period is lengthened from 5.4 to 6.4 years;
Net Present Value at 8 percent has dropped from $104.504 million before tax to $53.686
million after tax;
Present Value Ratio at 8 percent falls from 0.77 before tax to 0.39 after tax; and
the discounted cash flow Rate of Return decreases from 16.6 percent before tax to 13.3
percent on an after-tax basis.
Total Tax Payments of $152.940 million account for the difference between the before-tax and
after-tax cash flows. ($453.512 300.572 = $152.940). Similarly, the unit tax payments of $7.22
per tonne account for the difference between the before-tax and after-tax unit cash flows. ($21.41
$14.19 = $7.22), as shown on the Components results page.
Tax payments are presented on both an undiscounted and a discounted basis. In each case, overall
tax payments are divided into ad valorem and profit components. For example, of the total
undiscounted tax payments of $152.940 million, ad valorem royalties account for $23.997 million
while the remainder ($128.946 million) is attributable to profit based taxes.
Undiscounted Tax Payments of $152.940 million are equivalent to $50.818 million when
discounted at 8 percent to the start of the project. In this case, ad valorem royalties account for
18.1 percent of tax payments while profits taxes account for the remaining 81.9 percent. The
effective tax rate is shown to be 48.6 percent.
2. Sensitivity Analysis
The single-point estimates of future conditions used in the Base Case Analysis are made on the
basis of limited information, resulting in uncertainties in the estimates and the corresponding
economic criteria. Sensitivity analysis examines the effects on the major Cash Flow And DCF
Indicators of possible variations in these uncertain input variables, above and below their single-
point base case values.To carry out a comprehensive sensitivity analysis for the BaseDep project,
the following possible variations in six key project variables from their base case values have been
subjectively estimated.
Variations in Base Case Values

Market Price 20% 10% +15% +20%
Operating Cost 20% 10% +20% +40%
Pre-production Capital 15% +10% +20% +35%
Processing Recovery 10% 5% + 5% +10%
Reserve Grade 20% 10% +10% +15%
Reserve Size 20% +20% +40% +80%
This analysis will:

determine the sensitivities of the after-tax net present value, present value ratio, and rate of
return for the project to each of these specified variations;
illustrate the presentation of sensitivity analysis results, using the after-tax rates of return
obtained to construct a spider diagram; and
determine the after-tax breakeven values for each of the six project variables.
To move beyond the single point expected values for the deposit parameters and examine the
effects of their possible variation on the economic indicators, it is necessary to carry out a
sensitivity analysis for the project. With your BaseDep file open,
Select Sensitivity from the Analyze menu.
Input and results are displayed on the same page. The results for the different sensitivity variables
are displayed by selecting each variable in turn from the drop-down menu, entering up to four
variations from base case and recalculating.
In the Mushaboon project, the sensitivity analysis is carried out for the six key project variables by
entering the percentage variations specified above. To begin this process:
Select a relevant key variable, for example, Reserve Grade
Enter a value for percentage variation in the first column, for example 20
Enter values in the remaining three columns
Press the Recalculate button
The program will calculate the economic indicators for this variable based on the percentage
variations you have entered.
Your completed page should appear as follows, illustrated by the variable Reserve Grade, selected
from the drop-down list.
It should be noted that the percentage variation applies to the grades of all the metals in all of the
ore reserve categories. Thus, a 10 percent variation in grade means that the gold, silver, copper, and
zinc grades from the BaseDep example are all increased by 10 percent in each of the three ore
reserve categories.
You can change the percent of variation for this sensitivity variable and recalculate by clicking on
the Recalculate button.
Repeat the process for each of the other sensitivity variables in your analysis, pressing the
Recalculate button each time you enter variations from base case.
These results can be printed and graphed. To print any or all of the sensitivity results:
Click on the Print button.
This will open the Print dialog box.
Select the
variable(s) for Click here to
which you want send to the
printed results. printer.
Select which
graph you want
printed.
Use the check boxes to indicate the variable (s) for which you wish a report printed.
Click on the second Print button.
PCEDEP will print the sensitivity report using whichever printer you have set as default.
To print the results in graphic form, use the check boxes to select the graph, and click on Print.
Break-Even Analysis
An important aspect of sensitivity analysis is the determination of breakeven values for specific
input variables. We are interested in determining what percentage change in a variable will result
in the project becoming breakeven that is, having a net present value of $0 at the 8 percent cost
of capital, or in other words, a rate of return of 8 percent.
The sensitivity analysis section provides an easy method for calculating breakeven values by trial
and error variation of each sensitivity variable. In this way, it is possible to converge on the value
which results in the breakeven investment condition.
For example, consider the Reserve Grade shown. We know that the base case single point
estimates result in an after-tax net present value of $53.686 million and a rate of return of 13.3
percent. Furthermore, the sensitivity analysis shows that if the grade were 20 percent lower than
anticipated, the net present value would be $59.579 million, the present value ratio would be
0.44, and the rate of return would be 0.3 percent. These results tell us that the breakeven value for
Reserve Grade lies between the expected value and 20 percent less than this value. In order to
converge on the breakeven grade, we can try some intermediate values.
This trial and error process can be repeated to determine the breakeven value for each of the other
key project variables. The results of this process are shown in the following table.
Sensitivity Variable Breakeven Value (% variation)

Reserve Grade 9.0
Reserve Size 45.4
Market Price 17.0
Operating Cost + 47.5
Pre-production Capital + 51.0
Processing Recovery 17.0
Now that sensitivity and breakeven analysis has been incorporated in the project evaluation, would
you recommend the development of the Mushaboom deposit? Which project variables should be
given the greatest attention in making this decision?
3. Risk Analysis
Finally, you need to appraise the economic risk associated with investing in the development of the
BaseDep deposit. Risk analysis translates perceived uncertainties for the project parameters into
economic risk criteria. The assessment here is to be based on probabilistic risk analysis, using the
Monte Carlo simulation technique.
Subjective estimates of confidence limits are made for each of the six key project variables. The
following estimates represent 90-percent confidence limits or, in other words, an 80-percent
confidence interval between each set of limits. The confidence limits are expressed as indices
relative to the base case values.
Subjective Estimates of Confidence Limits

Lower Limit Index Upper Limit Index
Major Production Capital
Market Price 0.80 1.20
Mine Dilution
Mine Recovery
Operating Cost 0.80 1.40
Pre-production Capital 0.85 1.35
Processing Recovery 0.90 1.10
Reserve Grade 0.80 1.15
Reserve Size 0.80 1.80
Sustaining capital
In each case, assume that the split-normal distribution is used to more generally represent the
perceived uncertainty associated with the project variable.
Using 1,000 iterations for the simulation, you can:

estimate the probability of economic loss associated with the project investment on both
before- and after-tax bases;
estimate the 80 percent, 90 percent, and 95 percent confidence limits for total undiscounted
cash flow, net present value, present value ratio, and rate of return on an after-tax basis; and
determine the probability that the net present value will be less than 150 $Mbm million and
greater than 60 $Mbm million.
In the light of these risk analysis results, together with the previous base case, sensitivity and
breakeven findings, what decision would you recommend concerning investment in the BaseDep
deposit?
To run a risk analysis, open the file on the Mushaboom deposit and
Select Risk Analysis from the Analyze menu .
This will bring up the Risk Analysis screen in which you can manipulate the variables.
The first field represents the number of sets of random samples you wish to draw from the input
variables and hence the number of economic outcomes that you wish to generate.
Enter the Number of Iterations
The next field to enter the degree of confidence that the estimator is expressing in the lower limit
and upper limit estimates which are made for each of the uncertain variables.
Enter the Confidence Limits
The page gives you a list of ten input variables for which you can provide uncertainty estimates.
Note that these are the same ten parameters that were available for sensitivity and breakeven
analysis.
Click on the field for one of the six key project variables, for example, Reserve
Grade.
If you would like to describe the uncertainty of this variable with a probability distribution,
Select the desired Distribution Type from the drop-down menu
Now you must enter the upper and lower-limit index values reflecting the degree of confidence
specified above under Confidence Limits. These values are indexed to the base case values. For
example, a lower-limit index of 0.75 indicates that the specified lower confidence limit is 0.75
times the base case value. As was the case for sensitivity analysis, the estimates provided here
apply to the reserve grades and prices of all the metals in all of the ore reserve categories.
Enter the distribution types and upper and lower-limit indices for all appropriate input
variables. (The relevant information is contained in the table above.)
To begin the simulation process:

Click on the Calculate button.
The Risk Results pages will appear.
The probability distributions resulting from the simulation procedure are approximate. Therefore,
the total cash flow distribution shown will not be exactly the same as the one you have obtained.
The reliability of the results improves as the number of iterations is increased. Based on 1,000
iterations, the differences should be quite small. Using the maximum allowable sample size the
results should be nearly identical.
To generate a graph of the results,
Click on the Show graph button.
Use the tabs to view the statistical results for Total Cash Flow, Present Value Ratio, and Rate of
Return. All of these risk analysis reports and their graphs can be printed using the Print button.
How does this detailed risk analysis influence your go/no go decision concerning the development
of the BaseDep deposit? What does this result say about your level of risk aversion?
Conclusion
As discussed in the introductory chapter of this manual, there are many possible applications for
the PCDEP software. This versatility provides the user with a powerful tool in the economic
evaluation of mineral deposits. The BaseDep example illustrated in this chapter was selected to
introduce as many of the PCDEP features and techniques as possible. You should now be ready to
apply these techniques to your own project evaluations.
INDEX
A
Ad Valorem 24, 51, 59, 94 Commodities 42
After tax how to enter information 78
evaluation results 26 Primary metal 43
After-Tax Analysis (Base case) 92 Commodity price 16, 41
Analysis modules 39 Confidence limits 35, 40, 71
Annual Operating Cost 19 Risk Analysis 33, 66
Annual pre-production expenditures 44 Sensitivity Analysis 29
Annual Revenue Constant to connect grade, price units 18
variables 18 Correlations
Anticipated stripping ratio 15 assumptions in Risk Analysis 36
Cost of Capital 22, 42
before tax results 88
B report 56
Create a project file 6
Base Case Analysis 11, 39 Currency 14
Indicators report 53 fields 41
input 41
practice exercise 73
Sample file results 52 D
variations from values of 63
Before tax Data Input
how to run analysis 86 description of input pages 77
Breakeven Analysis 30 Debt capital 22
Breakeven values 11 Declining-balance depreciation 25
how to calculate 99 Defer Depreciation 70
Depreciation rate 24
Discounted Cash Flow 94
C criteria 23
Indicators 53
Calculate button 65 Discounted effective tax rate
Capacity 46 definition 26
Capital expenditures 24, 58 Distribution type 71
assumptions 20 in risk analysis 66
types of 19 Duration 44, 48
Carried Non-Cash Losses 70
Cash Flow 58
base case analysis 88 E
criteria 21
estimation of 14 Economic data input 41, 78
Cash Flow Indicators 53 Economic evaluation
Cash Flow Ratio 21 concepts based on 11
Cash Flow report 58 Economic risk criteria 33
Edit Commodity 43
Effect of inflation 26 Lower confidence limits 35, 40
PCDEP procedure for obviation 27
Effective Tax Rate 57
End-of-Production Estimates 20
M
Estimating Probabilities
Major Capital Expenditures
Risk Analysis 33
data input 84
Exchange rate 14
input 47
Expense Royalties 70
Market prices 14
Exporting a file 9
Menu bar 5
Metals 90
F Metals report 60
Mine dilution factor 15, 46
Fractional year 19, 44-45, 48 Mining Tax variables 51
Monte Carlo Simulation 34
G
N
General Project Options 68
Geological reserves 46 Net Present Value 23, 56
Grade Factor 44 Net Smelter Return 16
Graph formulas 16-17
of sensitivity analysis 29 Normal distribution 34
Risk analysis 65 Number of iterations
Risk analysis results 67 setting defaults 71
Risk analysis results 103
Sensitivity analysis 98
O
I Objective probabilities 33
Operating Costs 18, 58
Ignoring inflation Operating Margin 21
effect of, illustrated 27 Options
Importing a file 10 setting defaults 68
Include Negative Cash Flows 69 Ore Reserve Categories
Include Working Capital 69 data input 81
Indicators report 53 Ore Reserves 14
Inflation rate 50
Integrated Basis of Taxation 26
Integrated or Project basis of taxation 51
P
Iterations, number of
Payback Period 77
in risk analysis 66
assumptions 22
Post-production
J data input 48, 84
Jurisdiction field 50 Pre-production

data input 44
data input 79
L Present Value Ratio 23, 56
Primary button 43
Lognormal distribution 34
Primary button 79 S
Primary Metal 90
formula for equivalent units 61 Salvage Value 49, 54
how to set 79 Sample file 39
report 61 Sample size
Print in risk analysis 35
sensitivity analysis graph 98 Screen options 7
Printing Sensitivity Analysis 11, 28, 40, 63
Base case analysis results 91 how to 96
Sensitivity analysis results 97 simultaneous variation of input variables30
Probability of Economic Loss variables 29, 63
Risk Analysis 33 Set default values 68
Processing capacity 15 Setting Calculation Defaults 68
Processing recovery 47 Show Graph button 67
Processing recovery factor 16 Simulated tax jurisdiction 51
Productive Mine Life 19 Single point 99
Profit 21 Spider diagram 98
Project Basis of Taxation 25 Split-normal distribution 34
Project ID screen 41 Straight-line depreciation 25
Project identification: entering 77 Subjective probabilities 33
Sustaining capital 19
R
T
Rate of Return definition 23
Rate of Return 94 Tax Information Options 70
Recalculate Tax jurisdictions 51
sensitivity analysis 97 Tax Payments 58
Recalculate button 63 Tax Share 57
Reclamation cost 48, 54, 58 Taxation 24
Reclamation period 49 integrated basis of 26
Reliability of Results project basis of 25
Risk Analysis 35 Taxes
Reserve Categories 15 Cash Flow report 59
input 46 data input 85
Reserve Size 46 input page 50
Revenue 58 report 55
Risk Analysis 32, 40, 65 Time Value 22
advantages 37 formula 22
confidence limits 66 Total Cash Flow 21
graph of 103 Total pre-production expenditures 44
how to 100 Total Revenue
random sampling 35 cash flow criteria 21
results 66 Triangular distribution 34
set options 71 Types of Taxation 24
types of project where essential 37
U
Undiscounted effective tax rate
definition 26 Y
Uniform distribution 34
Year 0 45
W
Working capital 19, 25, 69

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PCDEP Version 2.

As such, it should be of interest to a broad spectrum of mineral industry professionals including

CHAPTER 1: GETTING STARTED..................................................................................1

CHAPTER 2: ECONOMIC EVALUATION TECHNIQUES ..............................................11

Estimation of Cash Flow.............................................................................................................14

Cash Flow Criteria.......................................................................................................................20

Discounted Cash Flow Criteria...................................................................................................22

SENSITIVITY AND BREAK-EVEN ANALYSIS....................................................................27

CHAPTER 3: TECHNICAL ASPECTS..........................................................................39

Using the Sample file....................................................................................................................39

Base Case Analysis Module.........................................................................................................41

Sensitivity Analysis Module........................................................................................................63

Risk Analysis Module..................................................................................................................65

Setting Calculation Defaults........................................................................................................68

CHAPTER 4: USING THE SOFTWARE........................................................................73

Mineral Deposit Data................................................................................................................... 73

Insert the CD-ROM disk into your CD-ROM drive.

A dialog box will pop up.

Browse to your CD-ROM drive and select Setup.exe

A screen will appear requesting your name and company identification.

PCDEP2.0Mineral Deposit Evaluation 1

PCDEP2.0Mineral Deposit Evaluation 2

1. Click on the Start menu

This will bring up the main PCDEP screen.

PCDEP2.0Mineral Deposit Evaluation 3

Page name Contents

Economic Exchange rate, cost of capital, commodity price and

Pre-production Total or annual capital expenditures

Reserve Category Production information by reserve category

Major Capital Expenditures Total or annual production capital expenditures

Post-production End of production information

Taxes Before-tax or after-tax analysis

PCDEP2.0Mineral Deposit Evaluation 4

The File menu commands manage files:

The Analyze menu commands run the three

The Options menu commands:

PCDEP2.0Mineral Deposit Evaluation 5

Enter the project name and click on OK.

PCDEP2.0Mineral Deposit Evaluation 6

To change PCDEPs working language:

To change the colour of one or all of these screen elements:

Select Set Colours from the Options menu

PCDEP2.0Mineral Deposit Evaluation 7

Select one of the elements e.g. Frame Background.

To change the colour of another element:

PCDEP2.0Mineral Deposit Evaluation 8

PCDEP2.0Mineral Deposit Evaluation 9

To open a file created in PCDEP version 1.0 (DOS):

To import a project file:

Where to go from here:

Chapter 2: Economic Evaluation Techniques: describes the economic concepts, analytical

PCDEP2.0Mineral Deposit Evaluation 10

PCDEP2.0Mineral Deposit Evaluation 11

PCDEP2.0Mineral Deposit Evaluation 12

CASH FLOW TIME VALUE

CASH FLOW ESTIMATION

TAXATION CONSIDERATIONS INFLATION EFFECTS

CASH FLOW CRITERIA

DISCOUNTED CASH FLOW CRITERIA

Net Present Value

BASE CASE ANALYSIS SENSITIVITY ANALYSIS RISK ANALYSIS

PCDEP2.0Mineral Deposit Evaluation 13

The cash inflows can include: