Valuing a project: NPV, discount rate, IRR and payback
How a mine's future cash is turned into a value today, and the measures studies use to judge whether a project is worth building.
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A mine's value today is its future cash, reduced for time and risk, minus what it costs to build.
Why time matters
A dollar earned in ten years is worth less than a dollar today: today's dollar could be invested, and the future one might not arrive. Mines spend heavily for years before earning anything, so time has a large effect on their value.
Discount rate
The converts future cash into today's value. A higher rate means future cash counts for less.
| Situation | Typical discount rate used |
|---|---|
| Gold projects in studies | Often 5% |
| Base-metal projects in studies | Often 8% |
| Riskier jurisdictions or early projects | Higher, often 10% or more |
Net present value (NPV)
adds up every year's cash flow, each discounted back to today, after subtracting the build cost.
A positive NPV means the project earns more than the discount rate. Studies usually quote NPV after tax, at a stated metal price and discount rate, for example "NPV8% of $103M". How much to trust that figure depends on the study behind it: see mining studies.
Internal rate of return (IRR)
The is the discount rate at which NPV is exactly zero: in effect, the project's yearly return on the money invested. In the example above, the IRR is about 15%. Developers and lenders often look for IRRs well above their cost of capital, commonly 15–20% or more after tax for a new mine.
Payback
The is how long the mine takes to repay its build cost from its cash flow. In the example: $300M ÷ $60M a year = 5 years. Shorter is safer, because less can go wrong before the money is back.
From study value to market value
A study's NPV assumes the mine gets built as planned. Investors pay less than that for projects that are not yet built, because many never are. The market price of a developer is often a fraction of its study NPV, rising as the project moves through permitting, financing and construction.
One simple way to see this is to multiply value by the chance of reaching production, as the stage guide and the deal calculator on the Karoo-12 page do.
Sensitivity
Studies show how NPV changes with metal price, grade, recovery, operating cost and build cost. Price and grade usually matter most. A project whose NPV turns negative with a 10–15% lower price is fragile.
Terms and ranges are indicative and vary by market, jurisdiction and project. This is educational material, not investment advice.
Key terms
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Educational material only. Nothing here is investment advice or an offer to buy or sell any security or mineral interest.