Initial estimates on the property suggest the vein might hold five "short" tons of pure/processed gold or perhaps only four short tons.  On average, there are 0.0005 ounces of pure gold per pound of gold ore, although the concentration of gold in the vein may be 50% higher than average.  At this time the best estimate is that there is a 50% chance of either the four or five short ton result.   

 Narwhal management is considering building an open pit ore extraction and processing facilities at its Sirmilik site.  While the site is just outside of the National Park, Narwhal management thinks that the Sirmilik name, which means "place of glaciers" in the Inuit language, will show respect for the people and the land.  The facilities, if built, would have a capacity of one pure short ton of gold per year, in terms of both extraction and processing.  The facilities would cost $50,000,000 CDN to get up and running and because of prior construction done on the sight, production could start almost immediately if it was decided to proceed with the project. That entire amount is to be capitalized. Half the facilities' cost could be depreciated at a 30% CCA rate and the other half at 40%.  At the end of the extraction period any salvage value from the plant and equipment will be cancelled out by the cost of disposal and any environmental cleanup (after tax) that is needed.  Labor and other variable costs will start off at 75% of revenues for the first year, based on the current price of gold, and increase by the expected rate of inflation each year going forward. For example, if revenues were $1 in year 1, variable costs will be $.75 in year one, $.75*(1+inflation) in year two and so on.  The management team understands that the current rate of inflation is very high and believes that it will return to a more historically common level in the future, although it is unclear when that will happen.

Table 1 sets out the price of gold on selected dates, although it is not up to date. While the price of gold has fluctuated dramatically over the last 30 years, gold prices have been more stable since the middle of 2013.  Fluctuations in the price of gold are driven by supply and demand including demand through speculation. The price is also affected by the policy of central banks and the International Monetary Fund, by the value of the US dollar, by the state of the global economy, by war, by invasion and by national emergency. While it is difficult to project future gold prices, Narwhal management needs to think about how to model future gold prices during the life of the mine(s).   Narwhal management also has to think about how best to adjust for potential changes in the price of gold, or whether to try and manage this risk at all.

 

An Opportunity if needed

The mine can also be shut down for a period of time or permanently once the project has been started.   In theory, it can also be reopened at a later date, if shut down at some point, however, Narwhal management, in any attempt to be conservative in its projections, assumes that once the mine is closed, it will remain closed (i.e., permanently shut down).

While the mine could be shut down at any time during the life of the mine, the expectation is that it would be shut down either at the end of the first year of operation or at the end of the second year of operation, if it were shut down at all.

If the mine were to be shut down, it would be because it was not being profitable and was not expected to be profitable for the remaining life of the mine, based on the gold price at the time of shut down.   If the mine is shut down after the first or second year, Narwhal management assume that they will be able to recover 40% and 25% of the capital costs (i.e., salvage value of plant and equipment) respectively, after the after tax cost of disposal and any environmental cleanup.

Narwhal management is not sure how to best assess the value of this option, but realizes that it could be valuable if the price of gold drops to a certain price and then stays at that price for the rest of the mine's life, regardless of whether that happens at the end of the first or second year.   Narwhal management also realizes that it would be helpful to know what that "abandonment gold price" is at both the end of the first and the end of the second year, in the event that the gold price stays constant after that.   Lastly, Narwhal management knows that their general projection for gold prices (not factoring in this option) could assume, but also may not assume that gold prices will be stable for the life of the mine, even though their option pricing model may assume it from the date of abandonment. 

 

 The current price of gold is $2710,90. Please find the total annual ounces mined and then the annual revenue.

Answer rating: 100% (QA)

Here are the steps to solve this multipart finance problem 1 Estimated gold in vein Average gold ore ... View the full answer