To commit a billion dollars or more to a venture which might only show a return on investment 10 years from now is a tough decision which prompts tough questions:
How great is the mineral deposit?
Once exploration has found a mineral deposit worth mining, the questions start. How rich is the deposit? Is it high-grade or low-grade? How accessible is it? Is it close to the surface or deep underground, requiring expensive shafts? What is the estimated value at current market prices? What is the life-of-mine – how many years will the reserves last?
How great is the country risk?
Country risk can be an issue. How politically stable is the country? What is the quality of governance and administration? How strong are the country’s institutions? Is corruption an issue?
What will my costs be like?
Then there are questions relating to the ease or expense of running a mine. Is there a proper skills base, or will you have to rely on expatriate labour while you develop local skills? Is there a strong, diversified industrial base, or will you have to import most of your machinery and equipment? Does the country have the infrastructure, such as ports, roads and railways – or will you need to plough money into this too?
“Uncertainty is the enemy of investment”
And given that mining is one of the world’s most energy-intensive industries, is there a sufficient and reliable source of electricity, at a reasonable and consistent price?
Mining companies often have to make massive investments in infrastructure – building the roads and railways, power lines or power stations necessary for their operations, which also benefit the country and wider population.
Ideally, the mineral you want to mine is close to the surface, rich in grade and in a country with great infrastructure, an industrial base, domestically available skills and an efficient administration. This translates into a mine relatively cheap to build and operate. However, such conditions rarely exist, and one or more factors will conspire to raise operating costs. The higher your costs, the lower your profit – and the longer it will take to recoup your investment.
How stable is the policy and regulatory environment?
When you’re making long-term financial assumptions – for example, on anticipated tax rates or social/environmental obligations – you need assurance that they won’t suddenly change drastically, when you are fully committed. Unexpected adverse changes increase costs, push out profitability, sometimes by many years, and can substantially lower the return on investment. Such changes could make you reluctant to commit to subsequent financing to extend the life of the mine; in extreme cases, they might even force you to scrap your investment.
These and other questions come down to trying to reduce uncertainty, which is said to be the greatest enemy of investment.