BOOKMARKS Case 4.4 Proposed Gold Mine in Canada: Phased Project Planning tion ho

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BOOKMARKS Case 4.4 Proposed Gold Mine in Canada: Phased Project Planning tion holes to learn more about the general geology of the area. Peter summarizes: July 12, 2006: Peter's firm acquires the rights to an ore body in the Canadian Shield region. The firm is considering developing a new mine there, and Peter is responsible for proposing a project plan to the board in September. The mine will take a few years to reach full production, and there is much uncertainty as to the price of gold when that hap- pens. Peter includes in his proposal a history of gold prices (Figure 4.11). August 2, 2006: Peter meets with Bruce, a mining engineer with two decades of experience in Australian gold mines, and Sam, a geologist who, a few years back, did exploratory work on gold deposits in the Canadian Shield region. They discuss known facts about the ore body, the likelihood of unforeseen geological phenomena that could jeopardize mine development, pro- duction figures that might be achieved, and pro- duction costs and technical problems that might be experienced in extracting gold from the ore. A quick calculation shows that 300,000 ounces of gold per year at $700 per ounce would be very lucrative, but a figure of 150,000 ounces at $400 per ounce, 3 years from now, would lead to large losses that could ruin the company. Current information about the ore body is inadequate, however, and it will be necessary to drill explora- To the best of our knowledge, we could produce anywhere between 150,000 and 300,000 ounces a year. The capital cost for developing the shaft will be US $150 million to $260 million, and annual oper- ational costs could be $60 million to $100 million. Exploration to provide infor- mation on the ore body would require drilling 200 exploration holes at a cost of somewhere between $1.2 million and $1.6 million. Rock samples from these holes will be analyzed in a laboratory to determine the gold content. Peter instructs Sam to review the data from his previous exploration work and to prepare a report of his recommendations concerning the future exploration. He is authorized to spend no more than $25,000 on this paper exercise." They agree that, should the exploration holes yield good results, a "demonstration shaft" will be sunk to haul out a sample of 30,000 tons of ore to be processed to extract gold. Results from this demo would increase confidence about the amount of

Explanation / Answer

6) In independent projects evaluation, results of internal rate of return and net present value always lead to same decisions, since the Internal rate of return is a discount rate that makes the net present value of all cash flows from a particular project equal to zero.

The net present value method and the internal rate of return method will yield the same result because, this is a single project (gold rates) that is being evaluated, it has mutually exclusive project phases that are being evaluated (that is phases over years) and a limited number of projects are being selected from a large number of opportunities. Therefore, i would trust either of them at this time.

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