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MEF811S - Mineral Economics and Financial Valuation - 2nd OPP - JUN 2023 |
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nAm I BIA un IVERSITY
OF SCIEn CE Ano TECHn OLOGY
FACULTY OF ENGINEERING AND THE BUILT ENVIRONMENT
DEPARTMENTOF Civil, Mining and Process Engineering
QUALIFICATION : Bachelors of Engineering in Mining Engineering
QUALIFICATION CODE: 08MEG
LEVEL: 7
COURSE CODE: MEF811S
COURSE NAME: MINERAL ECONOMICS AND
FINANCIAL VALUATION
SESSION: JUNE 2023
DURATION: 3 HOURS
PAPER: THEORY
MARKS: 100
EXAMINER(S)
MODERATOR:
SECOND OPPORTUNITY QUESTION PAPER
Dr Lawrence Madziwa
Dr Victor Mutambo
INSTRUCTIONS
1. Answer all questions.
2. Read all the questions carefully before answering.
3. Marks for each questions are indicated at the end of each question.
4. Please ensure that your writing is legible, neat and presentable.
PERMISSIBLEMATERIALS
1. Examination paper.
THIS QUESTION PAPER CONSISTS OF S PAGES (Including this front page)
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1. A sum of$ 2,500,000 was spent on purchasing and developing a mine with an
estimated reserves of 230,000 tonnes of ore. During the first year, 20,000 tonnes of
ore were extracted. A re-estimate of the remaining reserve was then revised to
170,000 tonnes. During the second year 18,000 tonnes were extracted. Compute the
depletion allowance for the first and second years.
[1O]
2. A company plans to install a labour saving equipment, and it has a choice of two
models A and B. Each model is expected to last four years and to be worthless at the
end of its life. The cost data associated with each model are recorded in table 1 and
the models are alike in all other respects. If this firm earns 12.6 % per annum, which
model is more economical? Discuss your results,
[l O]
Table 1: ModeI and B eqm. 1ment showm. e m. 1"fIa I cost and annua I cost
Item
Model A
ModelB
Initial Cost, $
80,000
65,000
Estimated Annual Costs,
$
Year 1
7,000
8,100
Year2
8,000
8,700
Year3
9,100
10,200
Year4
9,500
11,300
3. An individual seller's monthly supply of downloadable e-books is given by the
equation
Q=-64.5 +37.5P- 7.5W
where Q is number of e-books supplied each month, P is price of e-books in euros,
and W is the hourly wage rate in euros paid by e-book sellers to workers. Assume that
the price of e-books is €10.68 and the hourly wage is €10.
a. Determine the number of e-books supplied each month.
[2]
b. Determine the inverse supply function for an individual seller.
[2]
c. Determine the slope of the supply curve fore-books.
[2]
d. Determine the new vertical intercept of the individual e-book supply curve if the
hourly wage were to rise to €15 from €10.
[4]
4. Elaborate and briefly discuss five outcomes of a feasibility study. [10]
5. Name the four mining risks and possible mitigating actions normally used. [10]
b. Five investment alternatives have the following returns and standard deviations of
returns. Using the coefficient of variation, rank the five alternatives from lowest risk
to highest risk.
Returns-
Standard
Alternative
Expected
Value Deviation
A ......... .
$5,000
$1,200
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B.......... .
c .......... .
0 ..........
.
E ..........
.
4,000
4,000
8,000
10,000
600
800
3,200
900
Using the coefficient of variation, rank the five alternatives from lowest risk to
highest risk.
6. i Name the three different mining costs. Which techniques are used to estimate the
costs in feasibility studies.
(6)
ii. What is the capital cost for a planned 35,000tpd mine given that a similar
operation of20,000tpd capacity has a capital cost of R250 million given p
=0.7? [4]
7. Discuss the key segments of feasibility studies?
[20]
8. A mining company is evaluating its cost of capital under alternative financing
arrangements. In consultation with investment bankers, the company expects to be
able to issue new debt at a cost of 8% and to issue new preferred stock with a $2.50
per share dividend at $25 a share. The common stock of the company is currently
selling for $20.00 a share. The company expects to pay a dividend of $1.50 per share
next year. Market analysts foresee a growth in dividends in Invest stock at a rate of
5% per year. The company' marginal tax rate is 35%.
[IO]
Below is a summary of a balance sheet of the company.
Cash
Equipment
Total Assets
5,000
5,000
10,000
LT Debt
Pref. Stock
Stock
Total Debt and
Equity
3,000
1,000
6,000
10,000
9. A mining company Tate, Inc. listed on the stock exchange last year by issuing I million
shares of common stock @ $25 per share. The shares are currently trading at $30 per
share. Current risk-free rate is 4%, market risk premium is 8% and the company has a
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beta coefficient of 1.2. During last year, it issued 50,000 bonds of $1,000 par paying
l 0% coupon annually maturing in 20 years. The bonds are currently trading at $950.The
tax rate is 30%. Calculate the weighted average cost of capital.
[IO]
(End of Exam)
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FV =
FV =
PV(eyt
PV(l +1)11
FORMULAE LIST
PVA=
A[(l+i)"-ll
i(l + i)"
l PVA [ i(l + i)"
(1+ i)" -1
BEV= TFC
UR-UVC
TR= UR* V
TC=TFC+ UVC
Re = Rr + (Rm- Rr)
EVA= [NOPA T - Cost of Capital * Invested Capital]
PV Ratio = PV of returns / PV of investments
PI Ratio = PV Ratio - 1
Current Ratio = current assets I current liabilities
Total Debt Ratio= total debt/ total assets
Debt to Equity Ratio = total debt/ total equity
Net Profit Margin = Profit after interest and tax/ sales
Return on Equity= profit after tax/ shareholders' equity