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Home Uncategorized Factors Affecting Mining Investment – Understanding the Risk

Factors Affecting Mining Investment – Understanding the Risk

Published on April 7, 2016

mining investment

Understanding the risks associated with mine investments will help one realize the negative impact of long or delayed permitting process. These processes, when delayed have a serious impact on the economic viability of a project because they make investment in a mine project much more risky. Investments become unattractive and nearly impossible when investment capital is tied up for years and years while waiting for mining permits. The explanation below is provided by It breaks down the risks associated with mining investment.

The decision to invest in a mining project is driven by a number of factors. Elements informing this decision can be classified as those “internal” and “external” to the firm.

Internal elements are those over which the company and investors have some degree of control and can plan for and design appropriate strategies to manage.

These would include the scale of operation, type of equipment used, mining and processing techniques used and the management team. By choosing to operate in a particular country, companies accept the taxation and trade regime under which they will operate.

Other factors are external, over which the mining company can exert little control. These would include the international price of the metal/commodity produced, transport and fuel costs and the state of financial markets (sources of capital).

Mining Investment Risks

An “unexpected” or “unpredictable” element in any investment decision-making process increases the level of risk that investors ascribe to a project. Increased risk can have numerous effects. First, investors will require a higher rate of return to compensate for the higher risk the project faces. Second, to achieve investor returns more rapidly, the life of the mining operations may be shortened, extracting higher-grade and more profitable ore only. Third, investors may withdraw from the project completely and pursue other less risky projects in other countries.

When higher risk perceptions become widespread in a given country, it becomes less attractive as an investment destination. These unpredictable elements, external to the mining company, are essentially related to third parties or the global economy.

Figure 1 categorizes some of these elements, including those internal and external to the firm, and shows where changes in factors can be reasonably predicted and/or controlled or are unpredictable. Mine design and equipment selection, for example, are within the control of the company and therefore are internal and predictable. Ore grade/geology, although internal, can be unpredictable, as exploration is never able to provide a complete understanding of an orebody. Permits and licenses are external to the company, and time duration can be predicted. Metal prices, on the other hand, are set by the forces of supply and demand in global markets and are therefore external and unpredictable.

The larger the number of factors in the external/ unpredictable quadrant, the greater the risk for the investment. When factors move across quadrants, for example, where the mine permitting regime becomes unpredictable, the risk profile for the project will increase and have an impact on investment decisions. Consider the process for receiving permits and licenses for a mine. Companies can facilitate the process by providing the required information in a timely manner, cooperating with federal agencies and communicating with local communities. They can allow reasonable time frames within the project schedule for the approval of these permits; however, the final decision rests with third parties, often federal agencies. When the permitting process becomes excessively long or unpredictable, it can lead to unexpected incremental costs, which have a serious impact on the economic viability of a project.



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