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Article history: Artisanal mining (AM) activities are generally seen as a source of concern owing to their illegality and the
Received 19 May 2015 environmental pollution that they cause, but in recent years it has been demonstrated that gold mining
Received in revised form can be performed on a small-scale mining (SSM) in a responsible way outside of the artisanal dimension.
10 March 2016
A previous study by the same authors demonstrated how mineral resources and reserves can be
Accepted 29 March 2016
Available online 14 April 2016
managed to achieve a sustainable form of SSM, based on the concepts of proving a minimum reserve
and working with replication of the operation on subsequent small reserves. It was shown that SSM
can be viable with 1/100 of the reserves necessary to prove the feasibility of a large-scale mining
Keywords:
Artisanal mining
business. However, that work made some simplications in terms of value of money over time and
Small-scale mining taxation.
Cash ow analysis The present work continues by undertaking a realistic analysis of economic feasibility through a cash
Mining business ow analysis (CFA) on various scenarios of investment strategy for the SSM business, considering the
minimum reserve approach along with the traditional mining business strategy. The results show that
the minimum reserve approach is always more attractive from an economic point of view, in terms of
value of the project, rate of return of investment, and payback time. Finally, the most suitable prole for
investors in the SSM business is discussed, and it is shown how small-scale investors and large corpo-
rations can t into this approach.
2016 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.jclepro.2016.03.161
0959-6526/ 2016 Elsevier Ltd. All rights reserved.
532 T. Marin et al. / Journal of Cleaner Production 129 (2016) 531e536
This lack of methodology creates very high levels of uncertainty and A business must be protable to exist. Prot is determined by a
hence leads to a lack of credibility and a negative image for rate of return on the initial investment that is attractive to those
investors. who invest in the business. The future prot gures have a deter-
To overcome this impasse, Seccatore et al. (2014a) conceived a minable value at the beginning of the business. This value is the net
new approach for mineral reserves in the context of SSM. In this present value (NPV). It is the sum of the cash values of the various
new approach, there is no requirement for a large investment for a periods of the project at a discounted rate of return. The NPV is
large-scale campaign of mineral exploration; instead, only a determined by the following equation:
minimum reserve is needed as proof for the project start-up. The
minimum proof reserve is the one that pays back the capital
expenditure (CAPEX) and operational expenditure (OPEX) of the X
T
Ct
NPVT; r (1)
mining business, plus the desired prot and the cost of future t
t0 1 r
geological exploration. This requires little investment and reduces
the investment at risk to a minimum. A proportion of the prots where T is the total number of periods, t is the analysis interval of
from the production of this rst minimum reserve are designated to the CF (generally considered as one year), Ct is the CF in the period t,
pay for the exploration of the next minimum reserve. Therefore, and r is the discount rate.
only the initial investment is at risk. Future exploration to conrm The minimum reserve of a production cycle may be dened as
the feasibility of the operation is paid for with the revenues the one that generates an NPV equal to zero throughout its pro-
generated by the operation itself. The results of Seccatore et al. duction. This concept is expressed by the following equation:
applied to a real case, showed that the reserves required to prove
the feasibility of a small-scale operation are of the order of 1/100 of
that required for large-scale mining. Xn
Texp Xn
Tdev Xn
Tcap Xn
Tpro
EXPnt DEVnt CAPnt PROnt
The large mineral companies invest a lot of time and money on t
t
t
t
exploration before starting to produce. The differential of this tIn 1 r tTexpn 1 r tTexpn 1 r tTdevn 1 r
proposal is to produce as fast as possible to pay off the initial Xn1
Texp
EXPn1t Xn1
Tdev
DEVn1t
investment. t
0
Nevertheless, the work by Seccatore et al. was preliminary, and, tIn1 1 r tTexpn1 1 rt
to simplify the discussion, it was kept taxless and timeless: the (2)
original proposition considered neither cash costs over time nor
taxes and nancial costs. The present work continues from where where n is the productive cycle, PRO is the prot obtained with the
the previous study left off, in undertaking a realistic analysis of production of the mineral reserve (it has a positive value), EXP is
economic feasibility. This requires the use of a method for evalu- the investment in mineral exploration with a feasibility study to
ating mineral projects. The state of the art in the evaluation of determine the next minimum reserve (it has a negative value), DEV
mineral projects includes sophisticated techniques such as decision is the investment in development to mine the next minimum
tree analysis, Monte Carlo simulation, and real options analysis reserve (it has a negative value), CAP is the investment in new
(Slade, 2001; Topal, 2008). Nonetheless, the most widely used equipment and operation improvement, In is the beginning of
method is still cash ow analysis (CFA), because of its simplicity operation of the next minimum reserve, and In 1 is the beginning
(Samis et al., 2012). The mining sector is conservative, and tradi- of the exploration for the next-plus-one cycle, Texp is exploration
tional options are often more readily accepted. Also, from a didactic period, Tdev is development period, and Tcap is investment period.
point of view, CFA is more suitable for expressing the point we wish The right-hand side of this equation is zero because it is
to make in this paper. considered that the net income generated by the production cycle
The aim of this study is to analyze the economic feasibility of a of a minimum reserve should pay for the initial investment,
mining project, adopting the approach of the minimum reserve, development, and exploitation of the current cycle and the explo-
taking into account the inuence of the time value of money and ration and development of the next cycle. To simplify the mathe-
considering different strategies of geological exploration to prove matical discussion and show that the minimum reserve is the one
the replication of the reserve. that pays for its exploitation, the second term on the left-hand side
is taken to be zero. However, this does not mean that the project
has no value or that the business does not generate revenues: the
2. Methodology prots are simply embedded in the discount rate.
In this view, the minimum reserve volume is not xed; rather, it
This work is based on the concepts of minimum reserve and depends on the mineral exploration strategy. The beginning of the
replication, introduced and thoroughly described in Seccatore et al. exploration of the next cycle (In 1) is a key factor in this proposal,
(2014a). The minimum reserve is the volume of mineral whose because it denes the CF. The beginning and the duration of
exploitation allows for the payment of the initial investment (i.e., exploration may vary according to the investor's strategy, the only
CAPEX), the operating costs, the cost of mineral exploration needed restriction being that Tdevn < Tpron 1, i.e., that the development of
to extend the proven reserve, plus the desired prot. Replication is the next volume must be ready before the end of the exploitation of
the exploitation in cycles of several volumes of minimum reserves. the current one to ensure continuity of production.
To include these items and undertake an economic analysis of In this study, we analyze different mining scenarios to simulate
the minimum reserve approach, we use a method called discounted different strategies of the investors. A period of analysis of 10 years
cash ow (DCF). Cash ow (CF) is the ow of funds into a business, was chosen because it is a suitable range for CFA. This time was
and DCF is the method used to evaluate [in a business] future ow applied to the four scenarios analyzed. These scenarios are shown
of money in terms of what it is worth today (Reider and Heyler, conceptually in Fig. 1 and can be summarized as follows:
2003). DCF is standard in both literature and practice of economic
evaluation and decision-making. At this stage of research, we chose A. Traditional model. This scenario is the nearest to the approach
to use classic DCF to evaluate the minimum reserve, despite the adopted by traditional mining companies. In this case, it has to
model is deterministic. be proved that the necessary reserves exist for the whole
T. Marin et al. / Journal of Cleaner Production 129 (2016) 531e536 533
production horizon analyzed. This scenario does not consider Income tax: 22%; applies to the net income after discounting
the concept of a minimum reserve. Development is undertaken taxes and depreciation.
following the evolution of production. Value Added Tax (VAT): 0% (specically for gold).
B. Pre-payback. This scenario considers the concept of a minimum Conservation of mineral rights: 2% of the unied base pay per
reserve. In this strategy, the second cycle of mineral exploration mineral hectare (10,000 m2).
starts before payback of the initial investment. The interval
between the beginning of exploration and payback should be Detailed denitions of the scal charges described above can be
sufcient to allow determination of the second minimum found in textbooks such as Peroni et al. (2008).
reserve and the development needed so that production of the The gross income for a CFA period is equal to the production of
second cycle starts immediately after payback. ore in the period t multiplied by the selling price, represented by
C. Post-payback. This scenario also considers the concept of a the following equation:
minimum reserve. In this strategy, the second mining cycle
starts after the payback of the initial investment, but before the Gross Income Productt p (3)
end of production of the minimum reserve, in order to ensure
continuity of production. where Productt is the amount of product produced in period t and p
D. Continuous exploration. This scenario considers the concept of is the price of the mineral product. The nal product of the mine is
minimum reserves. In this strategy, mineral exploration is the amount of ore mined reduced by the mining and processing
conducted continuously over the whole lifetime of the mine. recoveries, which are always inefcient (always < 1). The details are
explained in Seccatore et al. (2014a). The concept is expressed by
the following equation:
3. Example of application Productt Vpt *gA Vpt *gN *hR =hD (4)
The example of the application of the cash ow analysis was where Vpt is the volume actually processed by the plant in the time
developed for the same mine as described in Seccatore et al. period t, hR is the processing recovery (hR < 1), gA is the average
(2014a). It is a small underground gold operation located in Por- mineral grade in the material processed by the plant, gN is the
tolevo in southern Ecuador, a place with a long mining history and average natural mineral grade of the ore in place, and hD is the
with a high incidence of AM (Cortazar, 2005; Cortazar and Lavanda, mining dilution (hD 1).
2008). In Ecuador, AM and SSM are quite common, and the gov- The volume of ore processed depends on the installed capacity
ernment has created a specic tax model for SSM (Ecuador, 2013). of the plant and on its availability (the proportion of time during
The classication is by size, based on the ROM (run of mine: which the equipment is under operating conditions) and its use
Hartman and Mutmansky, 2002) as presented in Table 1. factor (the ratio between the time of actual use of the equipment
The mine used for the application example falls into the cate- and the total time during which it is available). This is expressed by
gory Metallic minerals/underground mining. Therefore, the daily the following equation:
production is kept below 300 tpd to benet from the special tax
regime. The features of the tax regime for small-scale mining are as Vpn;t Vinstalled;t kW kD kU (5)
follows (Ecuador, 2013):
where Vinstalled is the installed capacity of the plant, kW is the ratio
Royalties: 3%; applies to the nal products for sale. between the working hours during the period t and the total
Labor liabilities: 15% of the percentage of the prots (10% for number of hours in the period (1), kD is the availability of the plant
employees and 5% to the state); applies to the net income. (<1), and kU is the use factor of the plant (<1).
534 T. Marin et al. / Journal of Cleaner Production 129 (2016) 531e536
Table 1
Classication of mine size based on ROM production in Ecuador.
Type of mining Artisanal mining Small-scale mininga Medium-scale mining Large-scale mining
Metallic minerals, underground mining ROM < 10 tpd 10 tpd < ROM < 300 tpd 300 < ROM < 1000 tpd Exceeding the upper limits
Metallic minerals, open pit mining ROM < 1000 tpd 1000 < ROM < 2000 tpd of medium-scale mining
Metallic mineral, alluvial mining ROM < 120 m3/d 120 m3/d < ROM < 1500 m3/d 1500 m3/d < ROM < a 3000 m3/d
Non-metallic minerals ROM < 50 Tpd 50 < ROM < 1.000 tpd 1000 < ROM < 3000 tpd
Construction minerals, alluvial mining ROM < 100 m3/d 100 m3/d < ROM < 800 m3/d 800 m3/d < ROM < a 2000 m3/d
Construction minerals, open pit mining ROM < 50 Tpd 50 tpd < ROM < 500 tpd 500 tpd < ROM < 1000 tpd
a
This limit is established per operator of the mineral concession. A mine could be the junction of more mineral concessions.
Source: Ecuador (2013).
The calculation of the free CF of the project in the case of the into small responsible mines (Seccatore et al., 2015; Veiga et al.,
Ecuadorian tax system is shown in Table 2. 2015), and this is to be undertaken in collaboration with miners
The procedure described in Table 2 is carried out for every already operating in the areas considered. Therefore, for these
analysis period. To match the periods of analysis with the annual projects, the risk of deposit discovery is minimized because the
taxation, the analysis period chosen in this study was 12 months. miner is already exploiting the area (the rst phase of exploration,
The project CF was calculated for a production period of 10 years. the more risky, has already been started).
The analysis period is greater than the production time because it We have shown that the minimum reserve and replication
includes the stages of exploration and early development, during approach is always more attractive, from the economic point of
which there is no production. view, than the traditional approach of large-scale mining. In
particular, the most striking parameter is the NPV of the project,
which was more than double the NPV for a project developed ac-
4. Results of the application example
cording to the traditional approach. This is due to the fact that the
revenues, in the traditional approach, enter the CF very late: the
The CF results are presented in Fig. 2. The analysis is annual, but
production starts in the fourth year, while for the strategies
the graphical representation of the DCF and of the gold stock is
adopting the minimum reserve, the revenues begin in the second
displayed monthly to show the month in which the CF becomes
year.
positive. Table 3 shows the general characteristics of the strategies
The NPV and the IRR are currently among the most commonly
and the CF results.
used parameters for the evaluation of mining projects (Topal,
By applying the minimum and replication reservation approach,
2008). Both parameters are more advantageous in the scenario
in comparison with the classical mining company approach, it is
where the minimum reserve strategy is adopted. This makes it
evident that:
attractive for investors to participate in upgrade projects of small
AM operations.
The NPV is always greater.
Among the three strategies adopting the minimum reserve, the
The internal rate of return (IRR) is also always greater.
ideal one seems to be that with continuous exploration, because if
The payback is always faster.
the replication of the reserve is not conrmed for the next cycle,
The initial investment in exploration, the one of higher risk, is
there is more time to plan for the closure of the mine.
always lower.
The main reasons why the minimum reserve approach is not
commonly applied are as follows:
5. Discussion
Large corporate companies also aim to speculate on the mineral
This work was developed in the context of small responsible
asset and not just on the production itself.
mining. In this approach, the goal is to transform AM operations
Table 2
Steps for the determination of the CF according to the scal regime of Ecuador.
1 The Net Operating Revenue is the Gross NOR net operating revenue
Income discounted by every sales tax NOR GI*1 Roy (6) GI Gross Income
(just the royalties in this case) Roy Royalties
2 The Earnings before interest, taxes, EBTIDA earnings before interest, taxes,
depreciation and amortization are EBTIDA NER tm Cf Cv (7) depreciation and amortization
determined discounting the NER tm tax for preservation of the mineral rights
(sse above) of the operating costs, Cf total xed operational costs
conservation of mineral rights CV total variable operational costs
3 The Earnings before income taxes are EBTIDA EBT earnings before income taxes
discounted for worker's tax and depreciation EBT EBTIDA*1 WT D (8) WT worker's tax
D depreciation
4 The Operational net income after income tax NOPAT Operational net income
is EBT with income tax applied NOPAT EBT*1 IT (9) after income tax
IT Income Tax
5 Finally, the free cash ow of the project FCP free cash ow
includes the operational income (positive) FCF NOPAT IDEV IEXP D CAPEX WC: (10) IDEV investment in mine development;
plus all the investments, the CAPEX and IEXP investment in mineral exploration;
the working capital CAPEX Capital Expenditure;
WC working capital.
T. Marin et al. / Journal of Cleaner Production 129 (2016) 531e536 535
Table 3
Results of the exploration scenarios.
Scenario Discount rate NPV IRR Initial gold Initial Payback Beginning of the second Beginning of
stock (oz) investment cycle of exploration production
Traditional (years of 20% $1,477,757 26.73% 91,973.96 $1,827,661 Month 101 Realized at the Year 4
mineral exploration) beginning
Pre-payback 20% $3,272,308 34.21% 34,002.50 $675,681 Month 67 Year 5 Year 2
Post-payback 20% $3,172,127 33.42% 43,664.41 $867,678 Month 68 Year 6 Year 2
Continuous exploration 20% $3,120,535 33.26% 36,232.17 $719,988 Month 69 Year 3 Year 2
536 T. Marin et al. / Journal of Cleaner Production 129 (2016) 531e536