Evaluation of new mining ventures: Average cost versus net present value

CIM Bulletin, Vol. 71, No. 789, 1978

Bernhard Schwab, Associate Professor, and Herbert D. Drechsler, Associate Professor, University of British Columbia, Vancouver, B.C.

A popular rule in the mining industry is that a property should only be developed if average unit production cost is less than a given proportion of the estimated long-run price of the mineral. This paper provides a comparative analysis of the average cost approach (ACA) with the use of net present value (NPV) as an investment criterion. It is concluded that the ACA is an easily understood and easily applied rule of thumb which may serve as a rough first screening device, for example in the early stages of deposit exploration. Its operational convenience is at the expense of accuracy and validity, and the NPV provides a sounder method of making decisions, especially in the case of marginal deposits.
Keywords: Mineral economics, Economic evaluations, Mining projects, Costs, Net present value, Investments, Exploration, Development.