Today’s dollars sell it short

The viability of a mine is simple to calculate. If the revenue is greater than the cost of producing then it’s viable. We work out the mine life by adding up the quantity of product that is viable. This is usually done in today’s dollars as it is assumed that both commodity prices and costs will inflate equally with time.

Often this is not a valid assumption. Commodity price inflation tends to outstrip cost base inflation. The finite nature of resources means that as the better, more profitable resources are mined first, future mining will occur in lower quality resources. This provides commodity price support over and above what you would predict based on cost base inflationary pressures. On the cost side, productivity tends to increase over time through more advanced machines, automation and better control system efficiency.

To measure long term resource viability, we should allow the commodity price assumptions to diverge from the cost assumptions by the difference between the global rate of decline in resource quality and the local rate of mining productivity increase.