Revenue Estimation: Sponsored by

CHAPTER 3
Revenue Estimation
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CHAPTER CONTENTS
Mineral production, markets and prices 32

Net revenue calculations 35
Realisation costs 36
Transport costs 36
Insurance costs 37
Superintendence costs 37
Assaying costs 37
Marketing costs 37
Assaying and sampling 37
Concentrate sales – general considerations 38
Feed mix 38
Integration with concentrate producers 38
Payment terms 38
Reliability of supply 38
Smelter contracts 38
References 40
CONTRIBUTORS
First edition text by: P J Lewis
Revised and updated text by:
Philip Maxwell FAusIMM, Emeritus Professor in Mineral Economics, Western Australian School of Mines, Curtin
University
Revenue Estimation
Accurate and realistic estimation of a mine’s revenue

stream is a key component in assessing its profitability.
This forms part of the project evaluation for any new
or expansion project. It is also necessary to appreciate
the nature of the relevant mineral markets and the
associated marketing processes. Operating successfully
requires appreciation of important concepts at the
interface between the science of mineral processing and
the business of mineral economics. Important elements
on the mineral processing side include issues of process
plant recovery and product quality, while product prices,
commercial sales terms and the transport costs of getting
product to the market (into the hands of the buyer)
reflect the key economic issues. The authors have built FIG 3.1 - Newly mined minerals in 2009 as a proportion of
on the foundations of chapter 16 of the first edition of production in 1960.
this handbook (Lewis et al, 1993) to develop this chapter expansion rate of lead production reflects movement
on revenue estimation. away from its use in applications in paint and as an
In building the foundation for its revenue and additive to petroleum products, while tin’s similar low
marketing focus, this chapter begins with a discussion expansion was due to substitution because of cartel
on the level and growth of mineral production (and activity1.
consumption) over the past 50 years. It discusses The entries on the right hand side of Figure 3.1
mineral prices, the value of production and the nature reflect comparatively shorter periods. The numbers
of mineral markets. This sets the stage, in later chapters next to alumina through hard coal represent the year
of this handbook, for specialist authors to review against which present-day production is compared.
revenue estimation of selected minerals produced in The increases in use of lithium and tantalum seem
Australia. comparable to those of nickel and iron ore over the
longer period.
MINERAL PRODUCTION, MARKETS AND PRICES It is also instructive to reflect on the nature of mineral
Among more than 100 minerals analysed by major markets. Mineral supply is complicated because
organisations such as the United States Geological minerals have to be discovered. Also, they are non-
Survey (USGS), about 50 are metals, 50 are non- renewable, although some can be recycled. Some are
metallic minerals and about six (including oil, natural produced as joint products and some as individual
gas and coal) are energy minerals. As many mineral products. Where there is joint production a mineral
economists like to remind us, the world has produced may be a main product, co-product or by-product2.
more of each of these minerals in the past century than Mineral demand is made more complex because it is
in all previously recorded economic history. Indeed, derived from the demand for final goods. Upswings and
since 1960, the production of new mined (and refined) downswings in the business cycle bring exaggerated
minerals has increased on average by several hundred movements in mineral use.
per cent. Table 3.1 and Figure 3.1 highlight this point. There are wide variations in the size of mineral
Bauxite production in 2009 was more than seven times markets. The total size of mineral-based gross domestic
its level in 1960. Magnesium, nickel, iron ore (though product (GDP) in the world in 2009 was more than
at reduced grades) and titanium mineral production US$3 trillion (around five per cent of world GDP). The
all exceeded four times their 1960 amounts. Copper,
phosphate rock, zinc and antimony were each being 1. A useful reference is Hillman (2010).
2. A main product is so important to the economic viability of a mine that its price
mined at more than three times their levels of 50 years
alone determines the mine’s output. A by-product is so unimportant that its
earlier. Expanded production of gold, tungsten, tin, price has no influence on mine output. Minerals are co-products when each of
lead and manganese was less dramatic. The lower their prices affects the output of a mine.
32 Cost Estimation Handbook

CHAPTER 3 – REVENUE ESTIMATION
TABLE 3.1
New mine production of selected minerals and metals 1960 to 2009 a.
Mineral Production in 1960 Production in 2009 2009 production
1960 production
Alumina (Mt) (1968) 17.2 81.6 4.74
Bauxite (Mt) 27.6 201 7.28
Antimony (kt) 53.3 187 3.51
Coal (hard) (Mt) (1980) 3795 6969 1.84
Copper (Mt) 3.94 15.8 4.01
Gold (t) 1190 2350 1.97
Iron ore (Mt) 522 2300 4.41
Lead (Mt) 2.39 3.90 1.63
Lithium (t) (1984) 7300 23 000 3.15
Magnesium (kt) 93 570 6.13
Manganese (Mt) 6.12 9.60 1.57
Nickel (kt) 320 1430 4.47
Phosphate rock (Mt) 41.8 158 3.78
Silver (kt) 7.3 21.4 2.93
Tantalum (t) (1969) 388 1160 2.99
Tin (Mt) 183 307 1.68
Titanium (Mt) 2.1 9.6 4.58
Tungsten (kt) 31.2 58 1.86
Uranium oxide (kt) (1970 - 2007) 18.9 43.03 2.28
Zinc (Mt) 3.09 11.1 3.59
a. Commencement dates for some minerals later than 1960 are noted by a number at the end of the entry in the first column (eg Lithium (t) (1984)).
Sources: USGS (various years), Raw Materials Group (2010) database. See also World Bureau of Metal Statistics (various years).
energy minerals are the most valuable in monetary adjusted for the effects of inflation) over an extended
terms, with oil dominant3, followed by coal, natural period. Rising real prices reflect growing scarcity,
gas and uranium. The most valuable metals in terms while falling real prices indicate greater abundance.
of world production are iron, copper, aluminium, gold Although mineral prices are volatile, Barnett and
and nickel, followed by zinc, lead, tin and the platinum Morse (1963) and Sullivan, Sznopek and Wagner (1998)
group minerals. Annual world production of iron ore argued that real prices of most major minerals (in terms
and copper has recently each exceeded US$100 billion. of real US$) followed a downward trend between 1850
Larger mineral sectors, especially those where there and the late 1990s. Since 2000, real mineral prices have
are many producing mines, tend to be more competitive generally risen, certainly in terms of US dollars.
and this keeps prices lower. By contrast, greater market When examining trends in real (deflated) metals and
power (monopoly power) typically restricts output, mineral prices, care is needed when choosing a deflator.
drives up mineral prices and increases profits. High The Consumer Price Index (CPI) is not as good as a
mineral prices stimulate greater exploration and this wholesale price index.
eventually brings new mineral production. Adoption of
Additionally, metal prices were not always terminal
new technology on both the demand and supply sides
market prices (London Metal Exchange (LME) or
of mineral markets also places downward pressure on
equivalent). Nickel, gold, aluminium, zinc, uranium
prices.
and tin prices have had periods of manipulation (like
One test of the functioning of mineral markets over tin by the International Tin Council), of being fixed
time is the behaviour of real mineral prices (ie prices (like gold at US$35.00/troy oz from 1934 to 1971) or of
3. Oil has accounted for as much as 75 per cent of the value of world mineral being sold at a producer price (aluminium, nickel and
production in times of high oil prices. zinc to some extent).
Cost Estimation Handbook 33

It is also misleading to consider trends in real prices The dramatic emergence of the Chinese economy
in A$ because of the exchange rate effect. The A$ after 2000, as well as the stronger economic growth
(previously £A) has ranged from around parity 50 years and development performance of India, have been the
ago down to US$0.50 and back to parity, with real A$ key to the rise in real mineral prices in the past decade.
metal prices moving accordingly. The A$ price is, of World mineral supply struggled to keep pace as China
course, important to local producers. in particular made major expenditures on construction
When exchange rates vary widely between currencies, and other infrastructure. With one-fifth of the world’s
as they have between the US and Australian dollars population experiencing such a profound economic
since the Australian dollar was floated on 12 December development experience, authors such as Heap (2005)
1983, these trends are not necessarily so apparent. This stimulated a healthy debate about a ‘supercycle’.
seems to be the situation when the real price of minerals Associated with this, Heap (2005) saw ‘trend rises in
is plotted in terms of Australian dollars. Table 3.2 shows real commodity prices, reversing the trend decline’
estimates of real Australian prices (using 2008 as the of the preceding three decades. There had also been
base year), using the Australian CPI as a deflator4. They supercycles associated with the emergence of the US
compare mineral prices in 1960, 2000 and 2009. The economy at the end of the 19th century, and with post-
real prices of major minerals such as iron ore, bauxite, World War II reconstruction in Europe and Japan. Even
copper, lead and zinc (and coal) did fall in terms of real the GFC and its aftermath since 2008 have apparently
Australian dollars between 1960 and 2000. This trend failed to dampen the phase of stronger mineral prices
was reversed for iron ore, coal and copper after 2000, and growing output.
although the downward movement continued for It is important to complete this introductory
bauxite, lead and zinc. The real price of gold increased discussion with a few comments on the status of
over the entire period, although this was a reflection in mineral markets. Some are very large and others
part of a controlled low price for gold in 1960. quite small. Where there are significant numbers of
producers or available substitutes for specific minerals,
4. Following the findings of the Boskin Commission in the United States, there or both, markets tend to be more competitive. Where
has been a lively recent debate about the most suitable way to deflate prices.
For two discussions of that debate see Svedberg and Tilton (2006) and major mineral deposits are located in specific nations
Cuddington (2010). and owned by a few companies, markets are usually
TABLE 3.2
Estimated 2008 real prices ($A) of selected minerals in Australia for 1960, 2000 and 2009.
Mineral 1960 real price 2000 real price P2000/P1960 2009 price P2008/P1960
Bauxite 93.72 54.45 0.58 30.87 0.33

Antimony 7357 3394 0.46 5590 0.76
Copper 7890 4275 0.54 5591 0.71
Gold (oz) 373 658 1.76 1047 2.81
Iron ore 89 38.6 0.43 80 0.90
Lead 2804 2265 0.81 1677 0.60
Lithium 17 380 10 536 0.61 6416 0.37
Manganese 1013 1372 1.35 1412 1.39
Nickel 17 380 20 379 1.17 16 474 0.95
Phosphate rock 72.72 60.11 0.83 55.13 0.76
Silver (oz) 9.7 11.8 1.22 14.74 1.52
Tantalum (kg) 177 239 1.35 127 0.72
Tin 23 884 19 234 0.81 14 973 0.63
Tungsten 33 160 19 500 0.59 31 500 0.95
Uranium oxide (lb) 74.8 10.71 0.14 61.75 0.83
Zinc 16 470 2734 0.17 1895 0.12
Source: USGS (various years).

Note: The global financial crisis of 2008 - 09 saw substantial fluctuation in prices, with prices generally settling higher than before due to sustained
Chinese demand.

less competitive; that is, producers have more market by value (tungsten, magnesium, antimony, lithium
power to influence prices. Some indicative estimates and tantalum) all had ten or fewer producers. Each
of the value of sales (in US$) of key minerals in 2009 member of this final group has markets where there is
appear in Table 3.3. considerable market power.
This discussion illustrates that mineral markets vary
TABLE 3.3
in size, structure and degree of competition within
Value and nature of markets for selected minerals in 2009.
them. When evaluating a project, a project analyst must
Mineral Value % Market Market Traded appreciate the nature of the mineral market relating to
of sales share of power in that project.
(US$ bill) ten largest terminal
producing markets NET REVENUE CALCULATIONS
companies
The net revenue received by a typical mine is the
Coal (hard) 484 24 Low No payment made by the buyer less the realisation costs,
Iron ore 184 45 Medium No which include freight, insurance, marketing and other
selling costs. Following Vogel and Grey (1990), a
Copper 88 56 Low Yes
common way of expressing this is:
Aluminium 81 56 Medium Yes
Gold 77 43 Low Yes AMV = NSR – RLZ
Nickel 24 69 Medium Yes where:

Zinc 21 44 Low Yes AMV is at-mine value, the actual value of the product
after all deductions are made
Silver 9.8 38 Low Yes
NSR is net smelter return, which is the payment
Phosphate rock 8.7 50 Low No
received by the mine after the smelter, refiner
Lead 6.5 32 Low Yes or buyer has deducted all their charges
Tin 4.6 N/A Low Yes RLZ is total realisation costs
Tungsten 2.7 ≈100 High No In some cases the mined material is not smelted and
is simply used as a direct input to the production of
Magnesium 1.5 ≈100 High No
another material or energy source (eg iron ore used
Manganese 1.3 50 Medium No in steelmaking, or coal used for electricity production
Antimony 1.0 ≈100 High No or steelmaking). In other cases, mining company
managers sell their ore directly to a concentrator,
Lithium 0.2 100 a
High No
smelter or refinery5.
Tantalum 0.2 100a High No The calculation in Tables 3.4 and 3.5, based on an
example by McIsaac (2010), illustrates the nature of the
a. Fewer than ten producing mines.
calculations that project analysts make in estimating
N/A = not applicable. revenue flows6. This example refers to a small- to
Sources: USGS (various years), Raw Materials Group (2010) database. mid-sized sized copper mining company that sells its
concentrate to a smelter owned by another company.
The market shares (concentration ratios) of leading The smelter produces copper and gold metal from the
producers also appear in Table 3.3. When minerals concentrates delivered to it.
are traded in terminal markets such as the LME, the A mine’s profitability depends on the values of
New York Mercantile Exchange, the Shanghai Metals metal grades (and impurities), process plant recovery,
Market and the London Bullion Market, it indicates average mineral prices, commercial sales terms
that their markets are more competitive. In industries and transport costs. There were around 40 mines in
such as lithium, tantalum and diamonds, accurate Australia in 2009 that produced copper. In about half
information about prices is often difficult to obtain of these mines, it was either the main product or a
because producers sell on the condition that contract co-product and analysts would have undertaken a
prices remain confidential.
revenue calculation similar to this in their feasibility
From the 17 minerals listed in Table 3.3, only in three assessments.
cases (coal, lead and silver) did the market share of
the ten largest producers fall under 40 per cent. In five 5. For example, several Kambalda nickel mines sell their ore to the BHP Billiton
other cases (gold, zinc, iron ore, phosphate rock and concentrator in Kambalda. BHP Billiton then either processes the concentrate
at its nearby Kalgoorlie nickel smelter and its Kwinana nickel refinery, or sells
manganese), it stood between 40 and 50 per cent. the concentrate to nickel refineries outside of Australia.
The ten largest nickel producers accounted for 69 per 6. Another useful reference which outlines the calculation of a mine’s net smelter
cent of the market, and five of the smaller minerals returns in a systematic way is Wellmer, Dalheimer and Wagner (2008).

TABLE 3.4 TABLE 3.5

Metallurgical balance of copper and gold in copper concentrate Estimation of value of metals in copper concentrate sold to smelter.
sold to a hypothetical refinery.
Copper Gold
Tonnes Copper Gold (g/t)
Tonnes of concentrate 24 488 t
(%) (t) (ounces)
Metal in concentrate 5143 t 16 459 oz
Mill feed
Metal per tonne of concentrate 0.21 t 0.67 oz
Amount 275 000
463 lb 20.90 g
Grades 2.20% 2.55
Metal deduction 0.011 t 2.5 g
Contained metal 6050 22 546
Payable metals 0.199 t 18.40 g
Copper concentrate
439 lb 0.592 oz
Tonnes of concentrate 24 488
Long-run metal price (say) 6500 $/t 1300 $/oz
Mill recovery 85% 73%
Value of metal 1294 $/t conc 769 $/t conc
Tonnes of ore per tonne 11.23
of concentrate Deductions and charges
Grades 21% 20.90 Treatment charge (TC) 100 $/t conc
Metal contained 5143 16 459 Penalties (As, Sb, Bi, Hg) 0 $/t conc
Price participation 0 $/t conc
As Lewis et al (1993) noted:
Refining charges (RC) 45 $/t conc 20 $/oz
… the payment (NSR) received from a buyer varies
considerably in terms of the gross value of the valuable 12 $/t conc
constituent and often can be surprisingly low. For Subtotal deductions 145 $/t conc
example, the NSR for base metal concentrates can
Transport 50 $/t conc
vary from 95 per cent to as little as 40 per cent of the
gross value of metal contained in the concentrates, Insurance 10 $/t conc
depending on the metal involved and the grade of Loading and representation 10 $/t conc
the concentrate.
Total realisation costs 70 $/t conc
In the example below, the NSR is $1149/$1294 or
88.8 per cent of the gross value of metal. Value after deductions and refining 1149 $t/conc 757 $t/conc
After realisation costs are taken into account, Tonnes of ore per tonne conc 11.23 11.23
the percentages for AMV can be considerably less, Value per tonne of ore 102.27 $/t ore 67.45 $/t ore
particularly for mines in remote locations. We now
discuss realisation costs and general matters related to Grade of ore 2.32% 2.55 g/t
smelter terms and the sale of products. This is followed NSR factor 44.08 $/% 26.45 $/g
by short sections, arranged alphabetically, on how to
calculate the net smelter returns for various mineral as gold, silver and base metals such as copper attractive
products listed in Tables 3.1, 3.2 and 3.3. to export7.
Because transport costs from the mine gate to the
REALISATION COSTS final destination may be a large part of the total costs of
Total realisation costs are the sum of all transport, bulky, less-processed mineral products, it is important
insurance, superintendence, assaying and marketing to clarify whether the buyer or seller is liable for these
costs. costs. The International Chamber of Commerce (ICC)
(www.iccaustralia.com.au) specifies a set of standard
Transport costs
international sales terms (so-called ‘Incoterms’), which
Transport costs include all freight costs associated with companies use widely in conducting international
the delivery of the product to the buyer, whether by trade transactions. There are currently 11 Incoterms.
road, rail, sea or air. They are commonly the main part Three of these – ex-works (EXW), free on board (FOB)
of total realisation costs. Over the past two centuries and cost insurance freight (CIF) – are widely used by
bulk transport costs have fallen dramatically. As a mining companies8.
result, it has become possible to trade minerals such
as coal and iron ore, with low value-to-weight ratios, 7. For an excellent historical discussion of bulk shipping costs see Lundgren
very profitably. This contrasts with the situation at the (1996).
8. Definitions of the other eight terms are readily available from the ICC web site,
time of the Australian gold rushes in 19th century when and there are a number of useful diagrams freely available on the Internet that
higher transport costs made only precious metals such illustrate the meaning of all of these terms.

EXW prices specify that all costs for transport and of the vessel or on delivery at the buyer’s works on
insurance beyond the seller’s gate must be met by the the mine’s behalf. Superintendence is optional, but
buyer. it helps ensure that these procedures, on which final
FOB requires the seller to deliver goods on board payment is made, are performed accurately. A number
a vessel designated by the buyer. For example, the of companies provide specialist superintendence
delivery of a shipment of 300 000 tonnes of iron services around the world. The cost-per-tonne of
ore might be designated as ‘FOB Port Hedland’. A product is usually small, typically US$0.50 per tonne
company such as Fortescue Metals will have fulfilled of concentrate.
its obligations when the iron ore, railed from its Pilbara Assaying costs
mines in Western Australia, is loaded on the buyer’s
Assaying costs are associated with the contractual
nominated carrier.
analysis of the sampled product, and are normally
CIF signifies that a seller has delivered the goods minor. Typical sampling and assaying procedures are
when they pass the ship’s rail in the port of shipment. discussed in the next section.
The buyer is then responsible for the transport of the
goods, although the seller has to pay the freight and Marketing costs
marine insurances at minimum levels. Marketing costs are associated with identifying,
Base metal concentrates are often sold on a CIF basis. securing and retaining the best customers for the full
The mine is responsible for all costs up to the berthing product output. For some mine products, which are
of the ocean-going vessel at the quay of the buyer’s port. sold into complex and competitive markets, marketing
The buyer is responsible for all subsequent costs. One costs can be substantial and the mining company may
example of such a contract is for Western Areas NL to set up its own marketing team. Marketing costs also
truck nickel concentrate from its mines at Forrestania in include the arrangement of optimal transport and all
Western Australia (WA) to the port of Esperance, WA. associated documentation, particularly for sea freight.
It is then shipped to Xingang Port in China, where the For other minerals like gold, marketing costs may be
Jinchuan Group takes delivery (see Western Areas NL, minimal.
2010, pp 2 and 4). Specialist international marketing and trading
Transport costs may include: companies provide complete marketing services as
•• documentation costs agents on behalf of the mining company. The use of
•• loading, unloading and transference costs these companies depends on the mining company’s
assessment of the market locations, the marketing
•• port and harbour dues
situation and its own marketing capabilities. The fee or
•• road, rail, air or sea freight costs commission for use of a marketing agent is negotiated.
•• special container costs The fee will depend on factors such as the nature of
•• storage costs at the rail head or the mine’s port the market, technical complexity, volume and value of
•• superintendence costs associated with rail and ship the product and the term of the agency. As a guideline,
loading. however, an agent’s marketing fee is in the range of
1.0 to 2.0 per cent of the NSR.
Transport costs are specific to each mine and its
market. Although they have fallen historically in real
ASSAYING AND SAMPLING
terms, these costs may vary considerably because
of the worldwide balance of supply and demand The sale of all mineral products and the subsequent
for freight space. This reflects the inelastic nature of calculation of NSR is based on the weighing, sampling
shipping supply and the variability in demand for bulk and assaying of each shipment either on discharge of
commodities. It is often advisable to engage consultants the vessel or as it is received at the buyer’s works. The
who specialise in the estimation of total transport costs. procedures used to determine the final assays on which
NSR calculations are based vary with the mineral
Insurance costs product. However, the standard procedure for base
Insurance costs are based on the estimated NSR that metal concentrates is as outlined below.
will be received for each shipment. For base metal The smelter contract normally specifies the tonnage
concentrates, all-risks insurance typically costs 0.06 per increments (or lots) into which each shipment will
cent to 0.12 per cent of the insured value, depending be subdivided for weighing, sampling, moisture
on the amount insured and the age of the vessel. The determination and assaying. The sample from each lot
insured value is customarily 110 per cent of NSR. is carefully divided, normally into four. One subsample
is analysed by the buyer and another by the seller or
Superintendence costs their respective nominated representatives.
Superintendence costs are associated with witnessing, Once the analyses are available they are exchanged
weighing and sampling the product either on discharge simultaneously. If any of the analyses do not agree

within predetermined limits (called ‘splitting limits’) TABLE 3.6

a third subsample is sent to an umpire for analysis. Typical cash flow for smelter payments.
Usually, several umpires are used in rotation, the
list being agreed between buyer and seller. Once the Event Date
umpire’s analysis becomes available, the final settlement Ship loads and departs. Bill-of-loading date (B/L) date. 20 March
assay is determined, usually by averaging the results
of the umpire’s assay and whichever of the buyer’s or Arrives main port of smelter. 4 April
seller’s assays is closest to that of the umpire’s. Provisional payment (90 per cent of provisional 6 April
value is paid on arrival at the smelter, based on
CONCENTRATE SALES – GENERAL prices in week prior to B/L date).
CONSIDERATIONS Quotational period two months after month of June
It is tempting to believe that the market will be prepared arrival (QP2 MAMA) at smelter.
to accept whichever concentrate grade optimises plant Final payment (final value based on the average 15 July
recovery. After all, smelters may have the appropriate price over the QP, less provisional payment).
technology to process such a grade and other mines may
be selling a similar or even a less-acceptable grade. This
is unfortunately not always the case. To understand the
Payment terms
factors that make a concentrate attractive to a buyer Other than the clauses dealing with treatment charges
and, therefore, command a higher purchase price, it is and other deductions, clauses that affect the NSR and
useful to look at the following factors from the smelter’s cash flow are those that define the payment terms.
viewpoint. These are the quotational period, valuation (price
basis), currency conversion and payment or settle-
Feed mix ment clauses. Payment terms are negotiable, varying
Custom smelters seek the blend of concentrate feed according to market conditions. A typical cash flow is
stocks that optimises their plant efficiency, profitability shown in Table 3.6.
and the environmental constraints under which they
operate. The shipping and delivery program must be
Reliability of supply
planned to ensure that a consistent feedstock can be Historically the supply of and demand for concentrates
blended from the range of contracted supplies. Each have been volatile. Smelters need to be sure that they
shipment, therefore, determines the desirability of have a consistent supply of concentrates that maximises
subsequent purchases. A particularly dirty concentrate their output at minimum cost. Consequently, smelters
shipment will subsequently require a large volume prefer customers whose supply is less likely to be
of very clean concentrates to dilute the undesirable interrupted by natural (eg weather), socio-political (eg
elements in the dirty concentrate. Therefore, further strikes, wars) or economic (eg closure due to high costs
purchases of dirty concentrates are precluded until the and poor prices) factors. Usually smelters reduce the
first quantity is consumed. supply risk by buying from a range of suppliers. In
addition, smelters enter into long-term contracts with
Integration with concentrate producers reliable suppliers to further stabilise the quantity and
Where mines and a smelter are owned in part or full quality of concentrates that are delivered in any year.
by the same organisation, preference is usually given Concentrates supplied under long-term contracts may
to concentrates from the mines associated with the be supplemented with one-off or ‘spot’ purchases at
smelter. The quality and quantity of the concentrate any time.
produced by the integrated mines will thus affect
what concentrates are acceptable for the balance of
Smelter contracts
the smelter feed. Partly integrated or non-integrated Table 3.7 shows the most common clauses that are
smelters that rely on concentrate purchases from the included in smelter contracts. Although those listed
international market are referred to as custom smelters. apply specifically to the sale of base metal concentrates,
TABLE 3.7
Smelter contract clauses.
Section or clause Information given

Preface Names and addresses of contracting parties. Agreement that both parties will abide by terms
and conditions of contract.
Definitions Appropriate conversion rates. Precisely defines any parameters used repeatedly in contract.
Duration and period Specific dates between which contract will apply. Usually defines whether contract applies to
mine’s production or shipments.

TABLE 3.7 CONT ...
Section or clause Information given

Quantity Minimum and maximum monthly or annual tonnages. Alternatively, stated as total mine
production over period, in which case seller normally agrees to advise buyer of its future
production on quarterly, half-yearly or annual bases.
Material or quality Typical analyses of concentrate, with ranges for more important assays. Maximum and minimum
assays acceptable to smelter and, if these tolerances are exceeded, whether this will involve
rejection of the delivery or renegotiation of terms.
Delivery Methods of transporting, packing and where deliveries will be made. Who will pay freight,
insurance and loading/unloading charges.
Shipment Rate of shipment and size of vessel. Can also cover rate of loading/unloading, associated
overtime payments, demurrage and despatch money, ships’ agents, shipping documents, method
of stowage and port dues and charges.
Valuation Unit deduction or percentage metal paid for. Metal price that will apply (eg LME, Penang, US).
Price deduction or refining charge. Payments for credit elements.
Quotational period Specific period during which deliveries will be priced (often combined with ‘valuation’ clause).
Usually quoted as the average price in a specific month after the month in which the product is
delivered.
Treatment charge or Treatment charge. Refining charge (can also be in separate clause). Other charges, eg for
deductions sampling.
Penalties or impurities Tolerance levels and payments for penalty elements.
Escalation Basis and method of escalation. Charges to which escalation will apply.
Payment or settlement Timing, conditions, documentation, currency and methods for provisional and final payments by
buyer to seller.
Weighing, sampling and Who will weigh and sample shipments for assay and moisture determination (normally this is
moisture determination done at buyer’s works and expense, but seller is given right to be represented) and who will pay
for this work. Size of sampling lots.
Assays Splitting of samples for assay by buyer and seller, exchange of assays, assay splitting limits,
conditions for using umpire assays and basis for agreement of final assays.
Currency, conversion or Basis for conversion of currency. Can also include section stating how charges will change if
exchange rate exchange rates vary outside specified limits.
Insurance Type, value and period of insurance cover, who pays for insurance, and who is the beneficiary.
Force majeure Conditions under which the contract can be suspended by either party, and procedure to be
adopted if this clause is invoked. Period of continuous suspension after which contract may be
cancelled.
Loss of vessel Conditions and liabilities governing total or partial loss of a shipment (often incorporated in force
majeure clause).
Title and risk Precise moment when concentrate becomes property of buyer.
Tarif fs, taxes or duties Who pays any taxes, duties or tarif fs.
Licences Licences necessary for contracts to be ef fective.
Fair operation, revision, Circumstances not covered elsewhere in the contract that will allow either party to renegotiate
renegotiation or cancellation contract so that it remains fair to both parties; and procedure to be adopted if this clause is
invoked.
Arbitration Basis for settling any disputes or dif ferences.
Applicable law Country under whose law the contract will be governed and construed.
Notices Procedure and rules governing submission of formal notices concerning terms of contract.
Successors and assigns Whether contract can be passed on to successors and assignees.
Termination The circumstances under which the seller or buyer will be entitled to terminate the contract.

many of the clauses are used in contracts covering the McIsaac, 2010. Net smelter return, 6 p. Available from: <http://
sale of any mineral product. Some contracts include all www.minedesignwiki.org/index.php/Net_smelter_
return>. [Accessed: 3 December 2010].
the clauses listed in Table 3.7, plus a few others peculiar
to the circumstances of either the smelter or the mine; Raw Materials Group, 2010. Raw materials database,
Stockholm.
others contain only the important clauses.
Sullivan, D, Sznopek, J and Wagner, L, 1998. 20th century US
mineral prices decline in constant dollars, United States
REFERENCES Geological Survey, 9 p.
Barnett, H J and Morse, C, 1963. Scarcity and Growth (Johns Svedberg, P and Tilton, J, 2006. The real real price of
Hopkins for Resources for the Future: Baltimore). non-renewable resources: Copper 1870 - 2000, World
Cuddington, J T, 2010. Long-term trends in the real prices Development, 34(3):501-519.
of primary commodities: Inflation bias and the Prebisch- United States Geological Survey (USGS), various years.
Singer hypothesis, Resources Policy, 35:72-76. Mineral Information web page. Available from: <http://
Heap, A, 2005. Riding the super cycle, metals and mining, minerals.usgs.gov/minerals/pubs/mcs/>.
Global Equity Research, Citigroup, 31 January. Vogel, A and Grey, C A, 1990. Lead and zinc smelting charges,
Hillman, J, 2010. The International Tin Cartel (Routledge: in Proceedings Mining Industry Capital and Operating
London). Cost Estimation Conference (The Australasian Institute of
Lewis, P J et al, 1993. Revenue calculations and marketing, Mining and Metallurgy: Melbourne).
Chapter 16 in Cost Estimation Handbook for the Australian Wellmer, F-W, Dalheimer, M and Wagner, M, 2008. Economic
Mining Industry (eds: M Noakes and T Lanz) (The Evaluations in Exploration, second edition (Springer:
Australasian Institute of Mining and Metallurgy: Berlin).
Melbourne).
Western Areas NL, 2010. Annual report 2010, Perth.
Lundgren, N-G, 1996. Bulk trade and maritime transport
costs: the evolution of global markets, Resources Policy, World Bureau of Metal Statistics, various years. World metal
22(1/2):5-32. statistics, Ware, Hertfordshire.

CHAPTER 4
Capital Cost Estimation
Sponsored by:
SPONSOR PROFILE
Metals X Limited is a diversified resource group with a collaboration and cooperation to develop Wingellina towards
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carried to production.
Metals X is Australia’s largest tin producer with its 50 per cent
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Metals X makes strategic investments in projects that have
Metals X owns 100 per cent of the world-class Wingellina been identified by its highly experienced mining and technical
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167 Mt at 0.98 per cent Ni, 0.08 per cent Co and 47.3 per cent those companies, these strategic investments including:
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• M
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2008 concluded a robust project for the construction of a nickel
interest) is a Mongolian-focused resource company that is
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Metals X continues to move Wingellina towards development
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had signed a non-binding Memorandum of Understanding (MOU) Australia (the majority of this holding was acquired in late
with Samsung C&T Corporation to establish a framework for June and early July 2012)
CHAPTER CONTENTS
Definitions 44
Estimating methodology 44
Quality of deliverables 44
Other definitions 44
Basis of estimate 45
Project scope 45
Work breakdown structure 45
Organisational breakdown structure 45
Project execution plan 45
Schedule 46
Developing and presenting the cost estimate 46
Resources and organisation 46
Estimate 47
Contingency 48
Escalation 48
Quality definitions 48
Levels of definition 48
CONTRIBUTORS
Neil Cusworth FAusIMM, Executive Director, Enthalpy

Capital Cost Estimation
This chapter sets out the basis of the content, extent Estimating methodology
of definition required and accuracy of estimates
The definitions outlined in Table 4.1 are used to describe
of capital costs for investments in mineral projects
the methodology applied to cost estimation.
during each phase of the study. This chapter also sets
out the quality of definitive estimates, which may
Quality of deliverables
need to be prepared during the project execution
phase. The definitions outlined in Table 4.2 are used to
describe the degree of completeness of engineering and
Studies include scoping, prefeasibility and
other documents that provide data and quantities for
feasibility phases of mining projects as defined in
the basis of estimates.
Chapter 2 – Basis of Studies.
The specifics of the individual or group of deliverables
The quality of capital cost estimates should be
used to define specification, drawing and design
based on achieving defined quality levels for:
completeness needs to be evaluated on a case-by-case
•• defining the scope of the project basis.
•• defining the resources needed to carry out the
project Other definitions
•• defining the engineering and project deliverables Other terms commonly used in cost estimation are
required to support the capital cost estimate defined in Table 4.3. Some of these terms can be
•• defining the cost rates and provisions to be misunderstood; these are explained below.
included in the capital cost estimate A contingency allowance addresses known risks that
•• estimating costs that can be validated by are considered likely although initially ill-defined. It
supporting documentation that contains sufficient might include, for example, an extra budget of time or
detail and is structured so that it can be used for cost to cover possible weather delays. With reference
cost management purposes during the delivery of to Chapter 1 – Using the Handbook, it includes
the project (ie costs are demonstrable) Rumsfeld’s ‘known unknowns’. The term ‘management
•• identifying risks and related contingency plans or reserve’ is often used to cover the unknown unknowns
allowances, including uncertainties that require and, if used, the two types of allowance should be
greater definition in future phases of study kept separate. Neither should be used to cover scope
•• ensuring that the cash flow needed for the project changes, which require approval of a revised budget.
can be forecast and then monitored during the An escalation allowance covers cost increases due to
project execution phase. general inflation or to increases in specific costs, such
Certain projects will require a definitive estimate as labour, fuel or materials, over the term of the project.
to be prepared during the project execution phase. A detailed analysis of expected changes in costs in each
Chapter 2 – Basis of Studies sets out the basis and the area is usually required. Individual contracts usually
approach to these types of estimates. This chapter include escalation clauses that reflect major sources of
sets out the minimum quality and accuracy required change that are beyond the control of the contractor.
for capital cost estimates prepared during: The term ‘allowance for growth’ is sometimes used
•• scoping studies interchangeably with ‘contingency allowance’, but
•• prefeasibility studies should be reserved for increases in cost resulting from
increases in physical quantities that may occur after
•• feasibility studies
estimates have been prepared. For example, experience
•• the project execution phase. may suggest that the length of pipework required will
be five per cent more than the length taken off plans
DEFINITIONS because of the practicalities of installation.
Following are the defined terms and their description While direct and indirect costs are adequately defined
for the estimating methodology. below, the term ‘indirect costs’ includes temporary

CHAPTER 4 – CAPITAL COST ESTIMATION
TABLE 4.1
Definitions of estimation methodologies.
Methodology Definition of Description
methodology
Work on development of deliverable has not begun, or is only conceptual in nature so a plug
1 None
number is used.
Costs based on judgement of general benchmarks but no quantities can be measured
2 Assessed
specifically and hence are not yet available.
Proportioned from previous cost data and benchmarks.
3 Factorised Some general quantities can be measured for rating against benchmarks, sizing the growth
allowances, contingency and escalation.
Supplier, vendor or contract developed cost estimate not necessarily a binding or detailed offer
4 Budget priced
or tender.
Using deliverables inputs, can accurately derive sizes or features on a detailed and trackable
5 Calculated
basis and to take-off quantities.
All quantities can be from take-off.
6 Detailed Equipment and material supply costs quoted.
Labour cost rates and productivity either fully calculated or supported by budget or bids.
Knowledge of quantities level of completeness based on engineering deliverables approved for
construction status.
7 Final
Equipment and material on order or firm quotes available.
Contracts awarded or evaluated tenders are available.
facilities; construction support; and engineering, The project scope statement included in the basis of
procurement and construction management (EPCM). estimate must present the work breakdown structure
However, it is often used as a catch-all including (WBS) at least down to and including Level 3 so that it
EPCM plus owners’ costs and commissioning. The includes areas, subareas and systems. The WBS ensures
meaning of indirect costs in an estimate should always that the capital and operating cost estimates address
be made clear. each element of the project’s scope of work and the
operations basis and plan.
Owners’ costs are defined in Table 4.3 and further
defined in Table 4.5. They vary significantly according Work breakdown structure
to the management approach taken by the owners, The capital cost estimate must be based on the project’s
which in turn may depend on the size and experience WBS, which should follow a structure similar to:
of that company.
•• Level 1 – prime areas
•• Level 2 – subarea of the project
BASIS OF ESTIMATE
•• Level 3 – systems or work packages
The basis of estimate for the capital costs of a project
•• Level 4 – assets such as equipment or elements of
must be capable of being reviewed as part of the
construction
normal quality assurance and peer review processes.
•• Level 5 – commodity or trade-discipline components
The basis of estimate should be included to explain the
of costs
estimating process and qualifications.
•• Level 6 – type of cost (eg supply, freight, install).
Project scope Organisational breakdown structure
The basis of estimate should include a brief description
The organisational breakdown structure (OBS)
of the scope of the potential project and reference the presents the operating costs for operating departments
scoping, prefeasibility or feasibility study statement of and general administration or process structure. The
the scope of the potential project. OBS may be aligned with the owners’ costs section of
Any exclusions from the project scope must be clearly the project WBS.
stated in the basis of estimate. This includes work
that will be performed by other parties, but which is Project execution plan
needed so the potential project can be executed and/or The basis of estimate should present an extract of
operated. the project execution plan (PEP), which presents the

TABLE 4.2
Definitions of quality of deliverables.
Quality Definition of Description
quality level
1 Assumed Basis, criteria, layouts and sizes based on non-demonstrable experience and professional judgement.
Work on deliverable has begun.
2 Started Development is typically limited to sketches, rough outlines or similar levels of early completion, and may
be sufficient to indicate, but not define, the scope.
Primary features shown. Basis derived from valid data; that is, preliminary survey data.
3 Outlined
Dimensions are specified.
Engineers’ concept drawings or similar outlines based on assessed data and measured dimensions.
4 Approximate
Both primary and secondary features are shown. Some multidisciplinary checking has been completed.
Work on the deliverables is advanced. Interim cross-functional reviews have usually been conducted.
Development may be near completion except for final reviews and approvals.
5 Preliminary Documents are sufficient to define scope and major sizes and locations, so that material take-offs
(MTOs) can be be prepared.
Better quality than ‘approximate’ but not yet defined or ‘complete’.
Complete documents are nearing status of approved for issue. Documents are at a defined level or
quality with the technical and economic value of effort best case identified and are based on survey
6 Optimised
data, geotechnical data and selected equipment (but not certified equipment data). Multidisciplinary
checking is complete.
The physical dimensions and performance features of all items or areas can be set, such that design
quantities can be measured for final estimating purposes. Documents are sufficient for issue for tender,
7 Final
or approved for construction with holds in place. All checking is complete and final, only awaiting
certified data on some equipment.
Engineering has been reviewed, approved and completed. Documents are sufficient to define scope
8 Complete and quantities to allow trackable MTOs to be prepared, based on the status of released or for award of
construction. Holds have been released. Certified data are now included.
proposed approach to execute the project and bring the cost–time relationship and the point of transition from
operations to readiness stage. capital to operations.
In summary, this requires each level of the project’s As the capital cost estimate depends on time, it is
WBS to be assigned to either the owners’ project and essential that the project schedule be aligned to the
operations groups, to the engineer or implementation same project WBS as used for the cost estimate.
contractor and to suppliers and construction contractors
or other third-party organisations. In this way, the cost DEVELOPING AND PRESENTING THE COST
estimate basis of each work package can be defined.
ESTIMATE
The contracting plan, which will be included in the
This section outlines the factors needed in a cost
basis of estimate, should list the scope of each work
estimate, and methods to present them.
package to identify:
•• costs of the work being delivered through internal Resources and organisation
company costs, or external contracts or purchase The cost estimates must be based on a documented
orders presentation of the resources and organisation
•• tasks to be performed proposed to deliver the scope of work. Typically a
•• work or outcomes. PEP presents the organisation and staffing plan (the
Each estimate item will be assigned to a work package, resources) needed to execute the project and bring the
purchase order, contract or services agreement. operation into production.
It is essential that this information be developed and
Schedule presented in the basis of estimate for the capital costs
The project schedule is a necessary part of the basis of the project. The information then directly translates
of estimate. Most projects are highly sensitive to the to the cost estimate for the project. Hence, it is critical

TABLE 4.3
Other definitions used in cost estimation.
Definition Description
Allowance for growth Amounts to cover the expected differences between measurements and final design quantities. Based on
experience or corporate records.
Allowance for waste Amounts added to cover the quantities needed for cutting to size or losses incurred in construction.
Baseline Defined quantum used for a key performance indicator (KPI).
Budget price Quoted price by a supplier or vendor that is based on defined technical requirements but limited to
commercial and project definitions. Not necessarily a commercially binding offer.
Capex Capital cost estimate (capital expenditures).
Class Quality of estimate ranked in levels according to phases (Table 4.4).
Contingency Amount allowed for ‘known unknowns’ that will be spent during the project.
allowance
Direct costs Supply and construction costs including contractor margins and freight but excluding project indirect and
owners’ costs.
EIS/EIA Environmental impact study or assessment.
Escalation allowance Amount to cover increasing inflationary costs over the schedule of the project.
Factor Multiplier applied to a base criterion or provision, such that the total cost can be estimated; for example,
known mechanical equipment supply cost times a multiplier gives the all-up installed cost of the equipment.
Indirect cost Cost that is not a fixed asset of the project or that is a temporary asset removed after the project is completed.
Labour productivity Difference between the budgeted hours and the real hours spent on a work task or activity.
P90, P10 Probability of 90 per cent or ten per cent that the estimate will not exceed the stated value.
Proved and Probable Reserve classifications as per the JORC Code.
MTO Material take-off, which is a measure of quantities from drawings, sketches or output of a computer-aided
design (CAD) system. Neat quantitya.
Opex Operating cost estimate (operating expenses).
Owners’ cost Cost directly managed and normally delivered by the client of a project.
QS Quantity survey; MTO is the result.
Quotes (firm/budget) Defined offers with set prices for supply that can be accepted.
Prices (firm) Defined prices set from multiple quotes from multiple suppliers; these are not a commercially binding offer,
but the price is accurate.
Single check price Telephone or short-form price from a vendor, supplier or contractor to validate an in-house detailed estimate.
Specific Version developed uniquely for the project, not a generalised or generic version.
Take-off sketch Engineer’s or designer’s sketch or diagram that is used to generate an MTO.
Tender price Firm defined offer able to be accepted for the supply of equipment and materials for construction works.
Unit price Cost per standard quantity of measure.
a. Neat quantity is the as-measured amounts for the drawings or models, with no allowances for cutting, waste or order lengths or sizes, nor for growth,
design or contingency-allowances.
to define the project staff and other support personnel •• costs by systems
needed, as well as the time that they will be engaged •• individual equipment numbers or elements of
on the project. construction work
•• indirect costs clearly identified by subareas and
Estimate work packages
The cost estimate for a project should include: •• owners’ costs clearly identified by subareas,
•• costs by summary, area or departments functions and positions
•• costs by subareas •• each cost element for:

•• common distributable consumable cost •• state that the recommended contingency is less than
•• construction equipment the minimum standard
•• currency of each component of the estimate item •• demonstrate that the recommended contingency is
•• direct construction cost applicable adequate, and why.
•• freight cost to site of the material or equipment Escalation
•• growth allowances Detailed escalation calculations should be presented
•• indirect costs of labour in the appendices to the study report. The basis
•• installation or construction cost components of the calculations must clearly state the factors,
•• quantity and unit of measure published basis or data used. The escalation will be
•• supply cost of the material or equipment a recommended value, and will be either included in
•• WBS code and estimate item number unique the capital cost estimate, or in the financial evaluation
description model, depending on the owners’ policy. Escalation
•• work package number for supply and/or calculations for feasibility study class estimates should
installation be prepared by the estimator, with current experience
of actual escalation.
•• trade type (eg civil, mechanical)
•• indirect costs separately identifiable, contractors
QUALITY DEFINITIONS
indirect cost or project indirect cost
•• contingency and other provisions separately Table 4.4 presents quality definitions used in this
identified chapter for capital cost estimates. The definitions
generally align with the American Association of Cost
•• method of calculation fully described for each
element Engineers Guidelines.
•• sources of cost data fully described
LEVELS OF DEFINITION
•• estimate split by currency for exchange rate
purposes Levels of definition required for each class of estimate
(as defined in Table 4.4) are set out in Table 4.5. In this
•• construction cash flow forecast
table, the purpose and phase of development are shown
•• benchmark comparisons. along with Class as given by the American Association
Contingency of Cost Engineers (AACE).
All contingency calculations must be presented in Although Table 4.5 defines the classes of estimates,
detail in the estimate or study report. If the contingency the classes should not be considered absolute levels.
calculation recommends a level of contingency lower It is not necessary that the classes comply with all
than the minimum standard amounts set out in categories of cost estimates to achieve a certain accuracy
Section A4.1 of Table 4.5 then the study report should: in estimates for each phase.
TABLE 4.4
Classes of estimate.
Purpose – scoping study
Class 5 Methodology – generally estimated none to assessed
Deliverables – generally estimated assumed to outlined
Purpose – prefeasibility study
Methodology – generally estimated budget priced to calculated
Class 4
Deliverables – generally estimated approximate to preliminary
Some calculated costs based on MTOs, preliminary budgets and some factorised limited assessed costs
Purpose – feasibility study
Class 3 Methodology – generally estimated to detailed
Deliverables – generally estimated defined to complete
Purpose – definitive
Class 2 Methodology – generally estimated to final
Deliverables – generally estimated to complete
Class 1 ‘As-built’ cost estimates used to prepare asset registers on the estimate and completion cost of any project

TABLE 4.5
Basis of capital cost estimate.
Scoping study – Phase 1 Prefeasibility study – Phase 2 Feasibility study – Phase 3 and Project execution – Phase 4
investment decision quality and definitive estimate
Class 5 Class 4 Class 3 Class 2
Level of definition – (expressed as a 1 - 2% of full project engineering 10 - 15% of full project study 15 - 25% of full project study 40 - 60% of full project definition being
percentage of complete engineering definition definition definition completed with minimum 60% engineering
using appropriate indicators; ie % of completed, minimum 40% procurement by
EPCM, % of engineering cost value fixed by quotation and minimum 10%
construction fixed by quotation or tender
Typical accuracy range based on P10 ±30 to ±35% ±20 to ±25% ±10 to ±15% ±5 to ±10%
and P90 levels For novel technology or
underground projects for which
there are no benchmarks the

accuracy may be +35 to +50%
Quotations/tenders – supporting the None – benchmark data derived Equipment quotes and Multiple firm and budgetary Equipment selected or on order, tendered or
estimates from existing mine, rail and port benchmark material supply equipment quotes. Multiple material firm quotes available. Tenders for material
contracts and construction rates. supply and construction quotes supply and construction costs. Some
Mine, rail and port contracts and rates checked. Mine, rail and contracts awarded. Completed and executed
factorised from existing port, power, tailings facilities and mine, rail and port contracts specific to the
arrangements with preliminary water supply contracts negotiated project
negotiations as to the likely to binding heads of agreement or
differences near final agreements specific to the
business case
A. Capital cost estimates methodology
A1 – Mining costs
A1.1 Mineral Resource Indicated and Inferred Indicated and Inferred Measured, Indicated and Inferred Measured, Indicated and Inferred
classification
Cost Estimation Handbook
A1.2 Geotechnical conditions Assumed or started Preliminary Defined Detailed

A1.3 Hydrological conditions Assumed or started Preliminary Defined Detailed
A1.4 Site layout Sketch Preliminary Defined – generally optimised Complete
A1.5 Mine design criteria Assumed or started Preliminary Defined – generally optimised Complete for year 1 and defined thereafter
A1.6 Waste dump design criteria Assumed or started Preliminary Defined – generally optimised Complete for year 1 and defined thereafter
A1.7 Mine schedule Assumed Approximated Optimised or preliminary – matched Complete for year 1 and defined thereafter
to fleet
49
TABLE 4.5 CONT ...
50

A1.8 Mine equipment None or assessed Budget priced Calculated or detailed Final – quoted specifically
A1.9 Mine services Assessed Budget priced – sketch designed Calculated or detailed – full outlines Final
A1.10 Mine environmental Assumed Preliminary Defined – generally optimised Complete
compliance
A1.11 Ore Reserve classification Not required Probable Payback × 1.5 Proved; balance Payback × 1.5 Proved; balance

Probable Probable
A2 – Plant and infrastructure costs
A.2.1 Equipment quotes None or factorised Budget priced – single check price Detailed – multiple firm or budgetary Final on prices – firm major
quotes equipment
A.2.2 Civil/structural Assessed – sketched only Budget priced – take-off sketch Calculated or detailed – MTO and Final – tender or contract prices
multiple quotes for supply costs, major contract packages
benchmarked hours to install
A2.3 Mechanical/piping Assessed – calculate as % of key Budget priced – mix of MTOs and Calculated or detailed – MTO and Final – tender or contract prices
equipment or benchmarked costs unit supply and construct factors multiple quotes – benchmarked to
similar plus hours to install data
A.2.4 Electrical/instruments Assessed – calculate as $ per kW Calculated for high voltage drives Calculated – MTO and hours with Final – estimates or tender prices
and medium voltage / low voltage benchmarked or budget quotes for
over 100-kw drives. Factorised – installation and construction quotes
$ per kW per drive for LV and less
than 100 kW
A2.5 Information systems/control Calculate as % of total direct costs Calculate as % of total direct costs Calculated – mix of calculated and Detailed tender or contract prices
systems multiple quotes
A2.6 Labour rates Not required Factorised or benchmarked off best Budget priced by contractors or Detailed or final – tenders or
current information equivalent, and benchmarked contracts prices
A2.7 Labour productivity Included in general factorisation Assessed Calculated Detailed – tenders or contracts
prices
A2.8 Construction equipment Not required Factorised – $/h on labour rates Calculated – $/h on labour rates – Detailed or final on quotes – firm
quoted or calculated for large cranes
and special equipment costs
TABLE 4.5 CONT ...
A3 – Indirect costs
A3.1 Temporary facilities Calculate as % of direct costs Calculate as % of direct costs Calculated Detailed or final – tender or contract price
A3.2 Construction support Calculate as % of direct costs Calculate as % of direct costs for Calculated for each component at Detailed or final – tender or contract price
(eg camp, catering, third-party each component listed or identified Level 3
services, freight and duties, Major cost items must be supported
vendor representatives, by budget quotations or fixed priced
first-fills, start-up and offers.
commissioning services,
ramp-up assistance, insurance
bonds permit support,

operational manuals)
A3.3 EPCM services Calculate as % of direct costs Calculate as % of direct costs, Calculated in detail – benchmarks Detailed or final – tender or contract price
checked to benchmarks used to verify detailed hours
estimates by person and function.
Overheads, project office costs
quoted. Fee declared
A4 – Owners’ management services
A4.1 Contingency (refer to notes in Assessed or factorised for overall Calculated or detailed – by area Detailed – by trade and area Final – by trade and area
text) project 15 - 25% of total costs 10 - 15% of total costs 5 - 10% of total costs
Basis 25 - 35% of total costs Add up to 5% for project in existing Add up to 5% for project in existing Add up to 5% for project in existing
Minimum Add up to 5% for project in existing operation operation operation
Others operation Add up to 5% for new or novel Add up to 5% for new or novel Add up to 5% for new or novel
Add up to 5% for new or novel technology or underground projects technology or underground projects technology or underground projects
technology or underground projects
A4.2 Commissioning Calculate as % of direct costs Calculate as % of direct costs Calculated or detailed Detailed or final based quotes – firm
A4.3 Preproduction Calculate as % of direct costs Calculate as % of direct costs Calculated or detailed Detailed or final based quotes – firm
A4.4 Corporate costs Calculate as % of direct costs Calculate as % of direct costs Calculated or detailed Detailed or final based on quotes – firm
A4.5 Provisions Calculate as % of direct costs Calculate as % of direct costs Calculated or detailed Detailed or final based on quotes – firm
A4.6 Foreign exchange Only identify major equipment Identify equipment and Identify equipment and commodities Detailed – calculations of some actuals
components exposed to foreign commodities to be imported, basis, to be imported basis, values and or basis. Would have knowledge of
exchange values and likely currency. Quantify likely currency. Provide forecasts of currencies
51
to Level 3. changes. Quantify to Level 3.

TABLE 4.5 CONT ...
52

B. Basis of deliverables and general project data needed to be available
B1 – General project
B1.1 Baseline reports – climate, Assumed Preliminary Defined or complete Complete
soils, geotechnical, hydrology,
wind, wave etc
B1.2 Environment and community Started – general assessment Preliminary – focusing on constraints Defined – specific constraints, Complete – management plans
reports and issues issues and commitments declared defined and detailed

B1.3 Project scope description Started Approximate to preliminary Defined Complete
B1.4 Integrated project execution Started Approximate Defined – specific Complete – specific
plan
B1.5 Contracting strategy – Assumed Outlined Defined and generally optimised Defined and detailed
implementation
B1.6 Project master schedule – Outlined to Level 2 Preliminary (bar chart) to Level 3 and Defined and resourced to Level 4 Actual to date, detailed and
implementation critical path verified. Preliminary and the critical path fully detailed resourced to go
resource analysis to activity Level 4. Resourced at
Level 3 or lower
B1.7 Project master schedule – Assumed to Level 2 Outlined to Level 3 and critical path Defined to Level 4 and the critical Complete – resources and critical
commissioning and ramp-up verified path fully detailed to activity Level 4 path detailed
B1.8 Work breakdown structure Outlined to Level 2 Level 3 and preliminary to Level 4 Defined to Level 4 list of deliverables/ Defined to Levels 5 and 6
units of property, equipment items
and tagged material items
B1.9 Project code of accounts None Preliminary Defined not to a cost report at Level 4 Defined
B1.10 Escalation strategy None Preliminary Defined and detailed to source Defined
currency for individual items
B1.11 Foreign exchange strategy None Preliminary Defined multiple currency quotes Defined
may not be defined
B1.12 Contingency methodology Assessed overall, or by areas Approximate or calculated by area or Detailed calculation and risk Complete – calculation on the
trade. Maybe based on risk analysis analysis. Detailed evaluations and committed and the to go costs
presentations of design, growth and checked with risk analysis
contingency allowances
TABLE 4.5 CONT ...
B1.13 Accuracy Assessed by judgement Evaluated by area and subareas Detailed analysis – Monte Carlo. Detailed analysis – Monte Carlo
Benchmarked with prior practices by
subarea methodology
B1.14 Basis of estimate and Outline Preliminary Complete Complete
methodology statement
B2 – Engineering deliverables
B2.1 Block flow diagrams Started to optimised Preliminary to complete Complete Complete
B2.2 Process flow diagrams Assumed – basic outline Started to preliminary Preliminary to complete Complete

B2.3 Piping and instrumentation Some sketch only Started. Maybe mark-ups of process Preliminary to complete status. Only Complete
diagrams flow diagram have started but must small bore piping remains to be
have main process lines and control defined
valves defined
B2.4 Heat and material balances Started Preliminary Complete Final
B2.5 Design criteria Outline Preliminary Complete Final
B2.6 Overall site plan Outline sketch Started to preliminary Preliminary to complete Final
B2.7 Plot plans None Started to preliminary Preliminary to complete Final
B2.8 Process/mechanical Started/preliminary Started to preliminary Preliminary to complete Final
equipment list
B2.9 Electrical equipment list None Started to preliminary Preliminary to complete Final
B2.10 Specifications and datasheets None Started Preliminary to complete Final
Preliminary – possibly for some Preliminary – for major mechanicals
major mechanical
B2.11 General arrange,ent drawings None Started and some initial preliminary Preliminary to complete Final
by facility or area
B2.12 Mechanical/piping discipline None Started Preliminary to complete – small bore Complete
drawings piping may only be ‘started’
B2.13 Civil/structural discipline None Started Preliminary to complete Complete
drawings
53
TABLE 4.5 CONT ...
54

B2.14 Electrical single line diagrams None Started to optimised Preliminary to complete – low Complete
voltage cabling and trays may only
be ‘started’
B2.15 Electrical discipline drawings None Started Started to optimised – low voltage Preliminary/complete
cabling and trays may only be
‘started’

B2.16 Instrumentation and control None None Started to optimised – low voltage Preliminary/complete
discipline drawings cabling and trays may only be
‘started’
B2.17 Process/system capacity None Preliminary Complete Complete
simulations
B2.18 Communications and data None Stated to optimised Preliminary to complete Complete
capture systems
B2.19 Spare parts listings None Started Optimised or preliminary Complete
B2.20 Environmental management Assumed Preliminary Defined Complete
B2.21 Cash flow Not required Preliminary – annual Detailed Updated monthly
B2.22 Information systems None Started to preliminary Preliminary to complete Complete
B2.23 Information systems plan, as None Started Preliminary to complete Complete
per PEP
B3 – Owners’ deliverables
B3.1 Project execution phase and Assumed Outline or preliminary execution plan Defined – project execution phase Complete – PEP and defined
procedures operations plans
B3.2 Operational readiness plan Assumed Outlined Preliminary – included in project Defined
execution phase
B3.3 Permits and approvals Assumed Identified and commenced Essentially complete with approval Complete
document and management plans
issued
B3.4 Baseline environmental Desktop review Baselines commenced Complete (known basis) Complete
conditions
TABLE 4.5 CONT ...
Scoping study – Phase 1 Prefeasibility study – Phase 2 Feasibility study – Phase 3 and investment Project execution – Phase 4
decision quality and definitive estimate
B3.5 Health, safety, environment Declared policy Declared policy and basis Declared policy and expanded to suit Complete
and community standards and circumstances
policies
B3.6 Communications and Not required Started/preliminary Preliminary/complete Complete – ongoing status review
stakeholder liaison
B3.7 Human resources strategy Not required Preliminary Defined Complete – ongoing status review
B3.8 Financing plan and strategy Not required Not required Defined – conditions precedent identified Complete

B3.9 Marketing plan and strategy Not required Broad market assessed and Defined plan and off take negotiated Complete
particular market identified
B3.10 Purchasing plan and strategy Not required Not required Defined plan Complete
B3.11 Economic modelling Assumed – rudimentary Optimised – cash flow model Defined – cash flow model with all cash flows Complete – regular update and
annual cash flows integrated with production scenarios (including financing and taxation), plus multiple review
scenario analysis and simulation
Note: Class 1 does not appear in Table 4.5 because this class represents the actual final costs after the project has been completed.
55
Similarly, a particular class of estimate for capital The lowest class of the quality of an estimate achieved
costs may be met, but for demonstrable reasons the for any area of an estimate should decide the overall
operating cost estimates may achieve a different class class achieved for the overall project estimate. Should
of estimate. one or more individual cost items not achieve the
As represented above, classes of estimates for stated accuracy levels, but other items exceed the stated
capital costs span a range of likely accuracies for each accuracy level, then the overall class in that area may be
methodology. achieved for the whole project estimate.
It is noteworthy that the accuracy should typically be The methodology used and the quality of deliverables
+35 to +50 per cent for the scoping phase, novel technology or will determine the class of estimate, and hence the
underground projects for which there are no benchmarks. A accuracy achieved by the end of a phase.
similar relationship exists for accuracy of the operating
cost estimate.

CHAPTER 5
Operating Cost Estimation
CHAPTER CONTENTS
Introduction 61
Data requirements 61
Estimate quality and accuracy 62
Resource requirements 63
Estimation rules-of-thumb 63
Six-tenths rule 63
Adjustment for cost inflation 66
Adjustment for country location 66
Auditing and peer review 66
Operating codes of accounts 67
Use of benchmark cost data 68
Estimating contract costs 69
Mobile and fixed plant operating costs 70
Depreciation 70
Finance 71
Insurance 71
Electricity 72
Job factors 72
Fuel and lubricants 73
Maintenance supplies 73
Maintenance labour 73
Operating supplies 74
Operating labour 74
Major overhauls 75
General and administration costs 75
Checklists for general and administration costs 75
Factors affecting general and administration costs 76
Cost estimation for conceptual and prefeasibility studies 77
Cost estimation for a feasibility study 77
Other administration costs 79
Checklist for infrastructure and utilities 79
Labour costs 79
Environmental and remediation costs 80
Contingency allowance 80
Sensitivity analysis 80
Fixed and variable costs 81
Start-ups – the learning curve 81
References 82
CONTRIBUTORS
First edition text by: T Lanz and W Seabrook [Administration costs]
Revised and updated by:
Peter L McCarthy FAusIMM, Director, AMC Consultants Pty Ltd

Operating Cost Estimation
This chapter discusses quality of estimation data •• an engineering function may be reported separately
required for different types of studies and the need for rather than distributed across user departments
peer review. Resource requirements and checklists are •• a technical services function may be reported
presented for different types of operating costs. separately, rather than distributed across
departments
INTRODUCTION •• health, safety and environment may be reported
The cash costs of activities specific to mining and together
processing operations must be estimated from •• separate categories may be reported for supply,
schedules of activities that have been broken down finance, security and civils, depending on their
into appropriate intervals, such as months, quarters relative importance to the operation.
and years. Some of these cash outgoings may then
Each operating cost reporting category is then further
be reallocated from direct operating costs into other
subdivided into categories chosen to relate to the type
categories (eg capital development or exploration),
of mining and processing operation. The categories
depending on the accounting treatment. Other non-
should align with the structure of the financial model
cash costs, such as depreciation and accounting
for a feasibility study. It should be possible to carry
accruals for advance stripping or stockpiling, may be
them forward into operational cost reporting.
introduced into the reported operating costs.
For comparative and ranking purposes, a useful high- An alternative but complementary system is to divide
level classification for reporting operating costs from a the major categories into:
mining operation is the Brook Hunt cost methodology. •• contract services, which again may be subdivided
This method uses a standardised set of cost components into operating and maintenance services
(C1 - C3) to determine the operating costs per unit of •• maintenance labour
production (ounce, tonne etc): •• materials, which may be further divided into
•• C1 cash cost – the costs for mining, processing and operating materials (consumables) and maintenance
administration, including accounting movements materials
for stockpiles and product-in-circuit. It does not •• operating labour
include capital costs for exploration, mine capital •• utility services such as electric power, compressed
development or capital works on the processing air and water.
plant. It includes net proceeds from by-product
Contrary to the Brook Hunt approach, by-product
credits. It does not include the cost of royalties.
credits should be shown in studies and budgets as
•• C2 production cost – C1 costs plus depreciation revenue items, not as negative costs or cost credits.
and amortisation. This brings in the capital cost of
Some mining companies find that the allocation
production.
of some subdivisions to each of the unit operations
•• C3 total cost – C2 plus interest, other indirect costs is either too arbitrary or of insufficient importance
and royalties. to warrant calculation. This is particularly so for the
Direct (C1) mine site costs may be categorised in utilities of power and compressed air. Consequently,
many ways. The usual categories are: some costing analyses include these items as major cost
•• environment centres.
•• general and administration
DATA REQUIREMENTS
•• health and safety
In order to estimate operating costs, the estimator
•• mining (including mine geology)
must have access to schedules of all physical activities
•• processing (including tailings management). planned for the estimating period. Types of operation
Variations to these categories occur because: and associated schedules might include:
•• mine geology may be reported separately •• ancillary equipment such as pumps and ventilating
•• waste and tailings management may be reported fans – operating hours and power or fuel
separately consumption

CHAPTER 5 – OPER ATING COST ESTIMATION
•• drilling, blasting, loading, haulage and ancillary It is also essential to have some appreciation of the
equipment – equipment schedules, including influence of in-system storage on plant utilisation,
operating hours efficiency and performance for each type of operation.
•• each work category – personnel schedules, The effects of storage on different types of operation
specifying on-site and off-site personnel under include:
the proposed roster, including management and •• open pit operations – run-of-mine (ROM) stockpiles
technical support decouple the mine from the plant and ensure
•• open pit – ore and waste movement by bench and maximum crusher feed, without truck queuing or
location, together with rock properties (rip or blast, delays from the pit (rain, etc), but will add the cost
with powder factor), dewatering requirements, of rehandling at least some ore
slope support activities, etc •• underground operations – storage of ROM ore
•• processing plant – schedule of materials to be in orepasses influences crusher capacity (and
processed including physical properties and levels underground output)
of contaminants, tailings disposal measures, tailings •• underground and open pit – crushed ore storage
storage facility construction during operations and ahead of the plant ensures that ore is always available
reclaim for fill for maximum plant efficiency and capacity.
•• underground mine – production schedules While such system storage optimises the processing
delineating ore tonnages from stoping by stope type, capacity, it adds to working capital requirements in
ore tonnages from development, waste tonnages terms of ‘work-in-progress’ accounting.
from development, lateral development metres and
Fundamental inputs to all of the cost estimates are the
vertical/inclined development metres.
unit costs of power, supplies and labour, which may
Cost estimates are prepared as schedules using
include:
activity-based costs that relate to the specific situation.
For example, consumption of wear parts will depend •• delivery to site, per tonne of supplies
on the rock hardness and abrasiveness, while fuel •• diesel fuel
consumption will depend on job factors including •• electric power on-site
engine size, load, equipment condition and road
•• gas
conditions.
•• messing and camp costs
For a processing plant, the same flow sheet used for
the capital cost estimate is needed for determining •• on-costs such as workers compensation insurance,
operating costs. A list of all units or areas of processing fuel tax and superannuation
is prepared from this flow sheet. The process criteria •• personnel in all categories, per hour or per annum
are based on results of metallurgical test work, •• travel (eg flights)
supplemented by experience with similar operations •• water.
and the environment in which the plant operates.
The processing plant cost estimate must take into ESTIMATE QUALITY AND ACCURACY
account the site conditions and the operating schedule, Operating cost estimates may need to have sufficient
expressed (at a minimum) as:
quality and accuracy to support:
•• crushing plant operation hours and days
•• scoping studies
•• crushing plant availability
•• prefeasibility studies
•• overall annual throughput
•• feasibility studies
•• treatment plant operation hours and days
•• life-of-mine or multi-year plans
•• treatment plant availability
•• annual operating budgets.
•• crushing plant daily throughput
The definitions shown in Table 5.1 describe the
•• treatment plant daily throughput.
methodologies applied to cost estimation.
However, ore availability and its effect on process
plant utilisation must be considered. Crushing plants A suggested basis and definition of operating cost
are often operated on day shift only but the treatment estimates in given in Table 5.2. In this table, purpose
plant is usually operated continuously for at least five and phase of development are shown along with Class
days per week but more often seven days per week. It is as given by the American Association of Cost Engineers
important that mining, crushing and milling operations (AACE).
are properly integrated. Other authorities give accuracy ranges of ±20 - 25
A materials balance is developed during the design per cent for prefeasibility studies. The use of such
stage. Information required includes solids, liquid and ranges is of limited value, as a related confidence
pulp flows, and reagent and water requirements. For level is rarely quoted (prefeasibility study accuracy is
some operations a heat balance is also required. probably at 60 - 75 per cent confidence). Indeed, the

TABLE 5.1
Methodologies for cost estimation.
Methodology Definition of Description

methodology
1 None Work on development of deliverable has not begun, or is only conceptual in nature, so a plug
number is used.
2 Assessed Costs based on judgement of general benchmarks but no quantities can be measured
specifically so are not yet available.
3 Factorised Proportioned from previous cost data and benchmarks. Some general quantities can be
measured for rating against benchmarks.
4 Budget priced Supplier, vendor or contract developed cost estimate not necessarily a binding or detailed offer
or tender.
5 Calculated Using deliverables inputs, can accurately derive sizes or features on a detailed and trackable
basis and calculate quantities.
6 Detailed All quantities can be calculated. Equipment and material supply costs quoted. Labour cost rates
and productivity either fully calculated or supported by budget or bids.
7 Final Engineering deliverables approved for construction status. Equipment and material on order or
firm quotes available. Contracts awarded or evaluated tenders are available.
compliance of any study with these levels is difficult ESTIMATION RULES-OF-THUMB

or impossible to demonstrate. Does the accuracy range
Operating cost estimates for early studies are usually
refer to each item, or to the overall capital or operating
derived from rules-of-thumb, comparison with similar
cost? A ±10 per cent study requires around twice the
projects and some estimation from first principles. This
engineering effort of a ±15 per cent study. If the aim approach can be surprisingly accurate when compared
is simply to demonstrate feasibility for an investment with subsequent estimates, but should be used with
decision, then the greater detail may not be required. caution. For example, there is a risk that a significant
factor concerning the proposed operation may be
RESOURCE REQUIREMENTS misunderstood or ignored, causing errors in one or
Members of the cost estimation team must cover all the more of the estimate components. Examples of some
disciplines, either directly or in their ability to manage rules-of-thumb are presented in this section.
the specialist disciplines. This requirement effectively
Six-tenths rule
says that it is necessary to have a combination of
experience and expertise. As outlined in Chapter 1 – Using the Handbook, this
rule approximates the split between fixed and variable
A core study team will generally comprise mining,
costs. To use the ‘six-tenths rule’, a capital or operating
geological, mechanical and processing professionals
cost for a similar operation of known capacity must be
who will undertake most of the design and scheduling available. In such cases:
work. Specialists and consultants will vary with the
project. The range is large, but basic requirements are: (Cost) 1 (capacity) 1 0.6
== G
•• environmental (Cost) 2 (capacity) 2
•• geotechnical
As an example of a factored capital cost, a 30 000-t/d
•• mineralogical
concentrator costs $60 M. The cost of a similar 40 000-t/d
•• hydrological plant is:
•• product market and price
(Cost) 1 = 60 # 10 6 # 8 B = $71.3 M
40 000 0.6
•• detailed civil, electrical and mechanical design 30 000
•• concentrate product transport The six-tenths rule can be applied to annual operating
•• materials handling, stockpiling, reclaiming and ship costs, from which unit costs can be derived. For
loading (for bulk products) example, operating cost for a 30 000-t/d concentrator is
•• human resources specialists. $20/t, which is 30 000 × 360 × $20 = $216 M per annum. A
Experienced cost estimators familiar with cost similar 40 000-t/d plant would have an operating cost of:
estimation procedures and software should assemble
(Cost) 1 = 216 # 10 6 # 8 B = $256.7 M/a or $17.82/t
40 000 0.6
the estimates using input from the study team. 30 000

TABLE 5.2
Basis of operating cost estimates.
Scoping study – Prefeasibility study – Feasibility study Execution – Phase 4

Phase 1 Phase 2 – Phase 3 and and definitive estimate
investment decision
A. Operating cost estimate methodology
Typical accuracy range Based on known Based on known Based on known ±5% or better for
based on P10 to P90 levels operations ±15 to +20% operations ±10 to +15% operations ±5 to ±10% known operations,
(excluding accuracy related or for new operations or or for new operations or or for new operations or ±5% to ±10% for new
to commercial supply novel technology novel technology novel technology operations or novel
pricing issues) +25 to +30% ±15 to +20% ±10 to ±15% technology
Contingency on operating Not normally applied Can apply up to 10% None unless special None
if defined for specific circumstances and only
reason, not normally if defined
applied
A1 – Basis of estimate and Outline Preliminary Complete Final
methodology statement
A2 – Staffing
A2.1 Staff levels Factorised Factorised Detailed – estimate Final – known/actuals
A2.2 Cost rates Factorised Calculated Detailed – known basis Final – known/actuals
A3 – Consumables Factorised Factorised Calculated – estimate Detailed – estimated
A4 – Maintenance Factorised Factorised Calculated – estimate Detailed – estimated
A5 – Spares Factorised Factorised Calculated – estimate Detailed – estimated
B. Basis of deliverables and general data needed to be available
B1 – Labour
B1.1 Labour cost rates Accessed off existing Calculated – by Detailed – calculations Final – calculations and
categories on based on negotiations updated to actuals
preliminary basis from of new contract basis
existing contracts
B1.2 Labour burden rates Accessed off existing Calculated – by Detailed – calculations Final – calculations and
categories on based on negotiations updated to actuals
preliminary basis from of new contract basis
existing contracts
B1.3 Labour hours Factorised Calculated Detailed calculations Final – calculations
and updated to
actuals agreed, good
clarification
B1.4 Labour overheads Accessed off existing Calculated – by Detailed – calculations Final – calculations and
and management categories on based on negotiations updated to actuals
costs preliminary basis from of new contract basis
existing contracts
B2 – Utilities and consumables
B2.1 Power costs – fuel Factorised – data bank, Budget priced or Detailed calculations Final – calculations and
and generating costs benchmarks calculated updated to actuals
B2.2 Water costs Factorised – data bank, Budget priced or Detailed calculations Final – calculations and
benchmarks calculated updated to actuals
B2.3 Fuel costs – mobile Factorised – data bank, Budget priced – quotes Detailed – quotes – firm Final – quotes – firm
equipment benchmarks and updated to actuals

TABLE 5.2 CONT ...
Scoping study – Prefeasibility study – Feasibility study Execution – Phase 4

Phase 1 Phase 2 – Phase 3 and and definitive estimate
investment decision
B2.4 Consumables Factorised – data bank, Budget priced – quotes Detailed – quotes – firm Final – quotes – firm
benchmarks and updated to actuals
B2.5 Drill and blast costs Factorised – data bank, Budget priced or Detailed calculations Final – calculations and
benchmarks calculated updated to actuals
B2.6 Supplies and Factorised – data bank, Budget priced – quotes Detailed – quotes – firm Final – quotes – firm
reagents benchmarks and updated to actuals
B3 – Plant maintenance Accessed or factorised Calculated Detailed calculations Final – calculations and
updated to actuals
B3.1 Maintenance Accessed or factorised Calculated Detailed calculations Final – calculations and
materials updated to actuals
B3.2 Plant hours Factorised Calculated Detailed calculations Final – calculations and
updated to actuals
B4 – Transport and Calculate as factored % Calculated Detailed calculations Final – calculations and
logistics of total estimate quotes – firm
B5 – Other operating costs
B5.1 Business systems Calculate as factored % Approximate/ Preliminary – detailed Defined – detailed
– eg core and of total estimate preliminary calculations review review and updated to
support systems, actuals
e-commerce,
business
management, office
B5.2 Training Calculate as factored % Approximate/ Preliminary – detailed Defined – detailed
of total estimate preliminary calculations review review and updated to
actuals
B5.3 Ramp-ups including Calculate as factored % Approximate/ Preliminary – detailed Defined – detailed
any loss of of total estimate preliminary calculations review review and updated to
production from actuals
existing mine and
plant
B5.4 Insurances Calculate as factored % Approximate/budget Preliminary – written Defined – based on
of total estimate quotes quotes from broker, not actual policy cost
insurance policy
B5.5 Escalation Calculate as factored % Approximate/ Preliminary – detailed Defined – detailed
of total estimate preliminary calculations calculations. Based on review and updated to
individual commodities actuals
B5.6 Foreign exchange Identify any major Identify equipment Identify equipment Defined – calculations
equipment components and commodities to be and commodities to be of actuals or basis
exposed to foreign imported, basis, values imported, basis, values
exchange and likely currency. and likely currency.
Quantify to Level 3 Provide forecasts of
changes. Quantify to
Level 3
The exponent 0.6 is an average and depends on the economic conditions, geographic location and
type of plant. Some estimators prefer to use a ‘seven- regional productivity are responsible for substantial
tenths’ rule. Such factors as type of site, prevailing variation.

It is also possible to apply the method to components even at this level because of differences in labour costs,
of operating cost. The relevant exponents are set out in labour productivity, technological skills and culture.
Table 5.3 (Mular, 1982). Operating costs are affected by maintenance levels,
plant utilisation philosophy and operating skills. At a
TABLE 5.3 higher estimation level, such as the mining or processing
Exponents for calculating operating cost. cost-per-tonne, there may be little in common among
dissimilar countries. Allowance must also be made for
Estimate required Capacity Exponent
differences in the costs of supplies, including those
Open pit mine labour cost t/d (mined) 0.5 arising from transport and import duties.
Open pit mine supplies t/d (mined) 0.5 To adjust for country location, a two-stage
Underground mine labour t/d (mined) 0.7 computation is used. Stage 1 adjusts the original
estimate of cost from the original price-year to a target
Underground mine supplies t/d (mined) 0.9 price-year, using an appropriate inflation index such
Treatment plant labour t/d (treated) 0.5 as the CPI or an industry-specific index if available.
Stage 2 converts the price-year adjusted cost-estimate
Treatment plant supplies t/d (treated) 0.7
from the original currency to a target currency, using
Open pit (mine + mill) electric power t/d (treated) 0.5 published exchange rates.
Underground (shaft mine + mill) t/d (treated) 0.7 The International Monetary Fund (IMF) World
electric power Economic Outlook Database ‘Gross Domestic Product
(GDP) Deflator Index’ data set (International Monetary
Note that for operating costs the rule is applied to Fund, n/d) provides CPI values used in Stage 1 of the
the annual total cost, not to the unit cost-per-tonne. calculation. This data set contains CPI values for 181
If applied to unit costs it makes smaller operations countries (currencies) from 1980 onwards. It is updated
cheaper! (The procedure can be applied directly to in April and October each year.
unit costs, however, if new exponents are calculated
As an example, a loader operation calculation in
by subtracting 1 from the exponents listed above.)
Australia in 2010 is based on C$100/h (dry) in Canada
The method should generally be used for directly
in 2005. The Canadian CPI was 106.967 in 2005 and
comparable operations or activities.
was forecast as 116.462 in 2010. The new cost is
Adjustment for cost inflation 116.462/106.967 = C$108.867. At the exchange rate
C$1.00 = A$1.14 the cost is A$124.19/h.
When older costs are factored for use in an estimate
they must be adjusted to account for cost inflation over The weakness of this approach is apparent, as some
time. Some costs such as fuel may have decreased since costs may have moved widely from the CPI. Therefore,
the benchmark cost was reported. it is better to benchmark the cost from comparable
Many databases of cost indices are available free of operations or build up the estimate from first principles.
charge from the internet. Others must be purchased
as a subscription service. Some are updated monthly, AUDITING AND PEER REVIEW
while others may lag by up to two years. Some useful As well as a project manager, every cost estimation
references include: team should include a designated peer reviewer, who
•• Australian Bureau of Statistics series 6345.0 – Labour has appropriate skills and will be available during
Price Index, Australia with annual data from June the planned program. The peer reviewer should be
1998 involved in preparing the project plan and schedule
because he or she must eventually sign off on the cost
•• Australian Bureau of Statistics Consumer Price
estimate. Therefore, the peer reviewer must ensure that
Index (CPI)
adequate skills and time have been provided for.
•• Marshall and Swift equipment cost index (USA),
published in Chemical Engineering magazine. It is the responsibility of the peer reviewer to ensure
that the cost estimate is technically sound based on the
As an example, a cost inflation calculation is based
available data, and that written and graphic material is
on total operating labour cost for a mine, which was
easy to understand. The peer reviewer ensures the cost
$16.8 M in August 1997 when the Mining Earnings
index was 1202.4. The total labour cost for an identical estimate complies with relevant codes, guidelines and
mine in February 2009, when the index was 2019.6, is statutes. Typically, peer review might comprise two to
$16.8 M × 2019.6/1202.4 = $28.2 M. five per cent of the total estimation workload.
The overriding principle of peer review is that no one
Adjustment for country location should be required to check his or her own work. In a
‘Simple’ costs such as the ‘dry’ cost per hour (before complex study, team members may make non-critical
fuel and labour) for operating a front end loader can mistakes without any adverse reflection on them. It is
be adjusted for country location using the historical the responsibility of the peer reviewer to identify and
exchange rate. However, great caution must be applied correct these mistakes.

The peer reviewer should examine critical aspects Typically, in a mine, between 70 and 90 per cent of
and sensitivities of the estimate and make independent the costs are represented by ten to 20 per cent of the
checks of logic and arithmetic. Where possible, the peer number of cost items.
reviewer should use benchmark data from different The cost centres must provide the data necessary for
sources. While some checks should be made by the accounting purposes and calculating statutory taxation.
peer reviewer, it is sufficient that others are made by Much of the statistical data that the business provides
the estimator. to government also rely on cost-centre data.
Alternative methods of estimation provide useful
To allow the estimate to be presented in a logical
cross-checks. Spreadsheets should be checked for
format, a cost-code structure should be developed. This
logical errors. For large spreadsheets, some of the
is also used as a checklist to ensure that major items
response to changes in key parameter values must be
have not been forgotten. A simple cost code should
tested. Example values might double the fuel price,
zero the discount rate, zero the equipment ownership have at least two major subdivisions that will allow the
cost, halve the density, plot out the pit design and scale project to be broken down into physical areas and types
off dimensions to check overall slope angles and cut- of work within those areas. An example of the first
back widths. In addition, some entirely separate or subdivision breakdown for a typical mining project is:
manual calculations may be needed. Code Area
1XX Site development
OPERATING CODES OF ACCOUNTS
2XX Mining (includes geology)
Operating codes of accounts are developed based on the
selection of cost centres. The scope and number of cost 3XX Processing (or milling)
centres used during estimating will vary according to 4XX Tailings and reclaim
the data available, the term of the estimate, the accuracy 5XX Utilities
sought or obtainable and the detail that the recipients of 6XX Ancillary facilities
the estimate require. The needs of financial modellers
may drive the structure and content of operating cost 7XX Indirects (general and administration)
data, particularly into classifications required for tax Within 3XX, a further breakdown could be:
purposes. Operating codes must provide for the needs 31X Crushing and stockpiling
of operations management.
32X Grinding
Typically, annual budgeting requires the most
33X Flotation
detailed estimates with the greatest number of cost
centres and itemised accounts. Estimates used in mine 34X Thickening and filtration
design or cost comparisons may only require some of 35X Concentrate handling
the cost centres and less detail, as many of the common 38X Reagents
elements can be eliminated. Longer-term planning
39X General
where data, particularly geological data, are scarce uses
summary cost centres based on historical and statistical The cost code within each area must be adapted to suit
data. A costing system used as a database contains the the activities. An example of the sequential breakdown
most detailed division of costs. within Area 200 (Mining) for a large open pit is:
For the collection and estimation of costs, cost centres 1. capital cost codes will be 200, where:
should be defined by location, function, activity, •• first digit (2) designated mine capital
similarity and variability. This is sometimes referred •• second digit (1 - 6) designated equipment type
to as the organisational breakdown structure (OBS).
The structure order flows from on-site to off-site 2. operating cost codes will be 0200, where:
and corporate, then to mining, process, services and •• first digit (0) designated operating cost
maintenance; it then opens out to labour and materials •• second digit (2) designated mine
services, etc. It is usually not useful to combine into the
•• third digit (0 - 9) designated equipment or event
one cost centre production and support activities that
type
are not in the same location. Labour and other costs can
vary substantially between locations. For instance, the •• fourth digit (1 - 4) designated operating, mainte-
cost of operating a planning department in a capital nance, parts or labour
city is different from operating the same department 3. third digit designations:
on-site. •• (021) 1 blasthole drilling
Cost centres should be examined to determine •• (022) 2 blasting
whether there are any purposes for which they should
•• (023) 3 loading
be aggregated. Many small items can be aggregated.
In any collection or estimation of costs it is useful to •• (024) 4 hauling
assemble and group them in Pareto tables and graphs. •• (025) 5 auxiliaries

•• (026) 6 staff salaries 50

•• (027) 7 engineering 45
40
Total Cost ($ M)
•• (028) 8 vacation, sickness and absentee leave 35
4. fourth digit designations: 30
25
•• (0231) 1 operating labour (distributed) 20
•• (0232) 2 operating consumables (fuel, tyres, 15
ground engaging tools and drill string) 10
5
•• (0233) 3 maintenance labour (distributed) -
•• (0234) 4 maintenance parts (oil, filters, repairs - 100 200 300 400 500
and component exchange) Total Work (Mt.km)
•• (0235) 5 contracts. FIG 5.2 - Total haulage cost versus total work done (2004 data),
plotted for various sites (shown by diamond symbols).
USE OF BENCHMARK COST DATA
50
Benchmarking of existing operations can provide
45
reliable cost estimates, provided the benchmarking 40
Total Cost (M$)

process is approached systematically and the definitions 35
of the inclusions and exclusions for each cost element 30
are declared. A cost driver tree is valuable. 25
20
Haulage, as an example, highlights some issues that 15
need to be considered when benchmarking operating 10
costs. Figure 5.1 shows typical Level 4, 5 and 6 driver 5
trees where total cost is split first into three high-level -
functions of general and administration (G&A), mill - 1000 2000 3000 4000 5000 6000
and mining costs. Then each cost is further drilled Total Capacity (t)
down into the underlying functional costs (although FIG 5.3 - Total haulage cost versus truck capacity (2004 data),
only mining is shown in Figure 5.1). plotted for various sites (shown by diamond symbols).
Even when detailed cost driver trees cannot be
prepared, high-level benchmarking may provide a data set and imply a fixed cost component around
useful check on the overall operating cost estimate. $5 M/a if no work is done.
For example, Figure 5.2 shows the relationship of total The relationship in Figure 5.3 shows that a significant
haulage cost to total work done. The cost includes a amount of the total cost will be incurred just because
lease component, which has been calculated on similar the capacity is on-site. There are costs of capital and
terms for each site. This treatment accounts for the ownership, employing operators and maintenance
capital that has been used to purchase the capacity. It personnel and running the engine for at least some
ensures that equipment operation is compared, and not time. Selection of the right equipment for the job is the
the management’s ability to raise finance. Figure 5.3 best way of controlling the cost at the operation. This
shows total cost versus available capacity on-site, has, of course, to be balanced against the requirement
defined as the sum of the tray capacity of the trucks of ensuring the process is not interrupted if equipment
on-site. Note that Figures 5.2 and 5.3 are from the same is not available.
Level 4 Level 5 Level 6
G&A Cost Eng. & Super. Labour

($ / t Ore) ($ / t Rock) ($)
Cost to Ore Mill Cost Drill Energy

($/t Ore) ($ / t Ore) Strip Ratio ($ / t Rock) ($)
(t Ore / t Rock)
Total Haul
Mining Cost Blast Cost Supplies
($ / t Ore) ($ / t Rock) ($) ($)
Mining Cost
($ / t Rock) Load Contracts
($ / t Rock) Mean Haul ($)
(EFH†km)
Haul Capital
($ / t Rock) ($)
Haul
Ancillary ($ / t.km Rock)
†
EFH = Effective flat haul ($ / t Rock) Total Work
(t.km)
FIG 5.1 - Level 4, 5 and 6 driver trees for an example of mining cost.

The next issue, once the equipment is on-site, is what blasting, weather, meal breaks, refuelling, prestart
work it performs. Figure 5.4 shows Levels 7 and 8 checks and meetings; these can be offset by
on the driver tree, capturing the two most important stockpiles, etc. These delays are then broken down
elements of productivity. First, once on-site how many into scheduled and unscheduled.
hours does the machine work for? Second, what does it •• Equipment delay – prevented from doing useful
do during those hours? work because the equipment is not available
Effectiveness is a measure of how well an operation to be operated because of maintenance; these
uses the available capacity. In the case of haulage it delays are again broken down into scheduled and
represents the work performed in tonne–kilometres, unscheduled.
divided by the site haulage capacity, which is the sum Errors in cost estimation can arise from misinterpre-
of the capacity of all the trucks on-site. For a truck this ting benchmarked availability and utilisation data.
equates to the average number of effective flat-haul Sites that have a high cost for the work they perform
kilometres by a truck in a year. This is a strong metric generally get a low number of hours from the
because it includes the three main drivers of overall equipment they operate. The only true measure in this
output, maintenance (through availability), capital area is how many of the 8760 hours available in the
utilisation and operational efficiency. year the machine operated.
To drill down on utilisation and availability, a Figure 5.5 shows a breakdown of how the 8760 hours
standard time model must be applied so sites are in a year were used at a range of sites in different
comparable. One approach is to break the 8760 h/a into operating environments and with different fleet ages.
the following classifications:
•• Operating – performing useful work. ESTIMATING CONTRACT COSTS
•• Standby – not required. A contractor might be used for individual tasks such
•• Process delay – prevented from doing useful work as maintenance, truck haulage, production drilling and
because of mining process interference, including surface crushing, or the entire mine development or
Level 7 Level 8
Utilisation
(%)
Time per Truck
(hrs)
Total Work Time Availability
(hrs) (%)
Number of Trucks
Total Work (#)
(t.km)
Effectiveness Mean Truck Size

(t.km / t (t)
Capacity) Work Rate
(t.km/hr)
Total Capacity
(t) Haul Rate
(km/hr)
FIG 5.4 - Level 7 and 8 driver tree for an example of mining cost.
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
Production Time Standby

Process Unscheduled Downtime Process Scheduled Downtime
Equipment Unscheduled Downtime Equipment Scheduled Downtime
FIG 5.5 - Average truck annual hourly usage.

production program. Contracting is often appropriate •• included contingency amounts are reasonable in
where a small additional increment of capacity is view of the potential risks
required for one or two years. It also makes sense where •• the contractor has not biased the estimate for
specialist skills, such as cablebolting, are required for commercial competitive reasons in regards to future
a limited time, or where the necessary expertise is not business opportunities.
available near the mine and there is insufficient time
to train a workforce. The use of a contractor may also MOBILE AND FIXED PLANT OPERATING COSTS
assist a junior mining company to demonstrate to Operating costs can be estimated from:
investors and lenders that it is capable of operating the
•• detailed cost records and performance of similar
project.
equipment
Contract costs can be estimated from:
•• cost records for the new item from another operation
•• first principles
•• manufacturer’s cost and performance estimates
•• recent similar contracts in the same area
•• a database of costs from a range of operations.
•• ‘indicative prices’ provided by contractors
To support ongoing decision-making, good record
•• firm bids from a competitive process keeping and cost allocation are required over the life of
•• an awarded contract. each unit. The mine accounting system must be able to
Firm bids or an awarded contract should be used for track each piece of major equipment, and not report a
a final feasibility study. These must be confirmed or combined cost for all drills, trucks, etc. Records should
updated late in the study process so that the validity include engine hours and, for rock-drilling equipment,
periods extend through to the contract award date. percussion or hydraulic pump hours, as well as outputs
It is also useful to build up a ‘shadow bid’ from first such as tonnes loaded, tonne–kilometres hauled or
principles early in the study, providing the estimating metres drilled.
team has the time and expertise to do so. An estimate
Caution must be used when comparing costs from
built up from first principles provides a firm basis for
different operations, where different operating
comparison with later contractor quotes, so that the
conditions may apply, and the basis of reported costs
principal understands what drives the costs and is in a
may not be well understood. Estimators should be
much stronger negotiating position.
particularly wary of manufacturer’s estimates, as they
Contractors are a source of current cost data for usually assume ideal conditions and even then may
contract mining, but the quality of data is variable. be optimistic. This is an area where consultants can
A contractor’s estimating team is usually very busy, so be very helpful, as a good consultant should have an
an external request for an ‘indicative quote’ or ‘budget extensive cost and performance database.
price’ may not receive full attention. Contractors’
The approach to estimating costs for surface and
indicative prices should be used with caution.
underground mine mobile plant is the same. In all
Validation of contractors’ claims of costs need careful
cases the operating costs can be subdivided into:
review – ownership costs should relate to the actual
cost of the piece of equipment to the contractor, rather •• electricity (or compressed air)
than the ‘list price’ from the supplier, as contractors •• fuel (usually diesel) and lubricants
commonly receive substantial discounts on purchase •• maintenance labour
prices. •• maintenance supplies
Factored contract rates may be useful provided their •• operating labour
full context is understood. It is not usually possible to
•• operating supplies
‘break out’ individual unit rates, as the contract must
be viewed in its entirety. In using contractor rates, the •• ownership costs (depreciation, finance and
estimator should check that: insurance).
•• provision is made for day works and other situations Supervision costs are usually not allocated across
where time is lost for reasons beyond the control of individual items of plant. Equipment operating costs
the contractor can be estimated per expected operating hour, shift, day,
week, month or year, depending on the purpose of the
•• clear distinction is made between those services
estimate. A cost per operating hour is the most useful, as
provided by the contractor and those provided by
it can readily be converted to other time measures.
the principal
•• the effect of a rise-and-fall formula is used to escalate Depreciation
estimated costs Depreciation is a reflection of the loss of capital
•• the contractor has put an appropriate effort into investment value per operating period. Consider a
preparing the estimate truck that has an initial cost of $1.0 M and a salvage
•• the rates are in line with similar rates current in the value of $0.2 M after an estimated four-year service
industry life. The depreciation is thus $0.8 M over four years or

$0.2 M per annum. If the truck operates for 5000 hours all or part of the purchase price is borrowed, or the
per annum then the depreciation cost is $40 per hour. part is purchased outright. In the latter case, there is
Depreciation should not be used in an analysis where an opportunity cost because that money could have
capital costs are shown separately, as this would lead been invested elsewhere. For the truck in the previous
to double counting. However, there is often a need example the average investment is:
to include depreciation, such as when comparing
a contract rate with the owners’ operation. The ($1.0 M + $0.2 M)/2 = $0.6 M
depreciation amount allowed for taxation reporting may
be different from the expected physical depreciation If a company has a cost of capital (or cost of borrowing)
period (useful life) for the item. The taxation allowance of ten per cent per year then the yearly interest expense
is not relevant for most cost comparison and estimation is 0.1 × $0.6 M or $60 000 for each of the four years.
purposes, although a tax depreciation schedule is Besides outright purchase, other forms of equipment
required in the project financial model. finance are available:
All equipment has a service life, after which it becomes •• An operating lease is similar to rental, is usually
uneconomical and should be replaced. For some items, for short-term requirements and can be cancelled
the service life may be equal to or exceed the mine without penalty. It is relatively expensive because
life. Typically, major fixed items such as headframes, the lessor assumes the risk of re-leasing and
winders (hoists), crushers and ball mills are designed technological obsolescence, but is fully deductible
to last the life of the mine. In practice, they may last as an operating expense. It does not affect the
40 to 50 years and outlast several mines. Some pumps lessee’s balance sheet.
might last only five years.
•• A finance lease is a contract where payments are
Most portable and mobile equipment has a finite made over much of the useful life of the asset.
service life. Typically, new mobile equipment will During this time the lease cannot be cancelled,
operate at low maintenance costs for approximately although it may be paid out if the item is disposed
10 000 hours or two years, after which the cost increases of or destroyed. The cost includes capital (less
steadily. If the machine use is lower than around salvage) cost, interest, a risk premium and the
5000 h/a, this ‘honeymoon period’ may be extended. commercial cost of providing the service. Typically
This cycle may be repeated following one or two major 60 to 70 per cent of the purchase price is financed,
rebuilds, although the subsequent maintenance costs with the balance payable as a residual. The item
are rarely as low as for a new machine. Major equipment appears on the lessee’s balance sheet.
items, typically shovels, draglines and crushers or •• Wet hire provides the equipment at an all-
mills, if properly maintained, will commonly have inclusive hourly rate that is fully tax-deductible. It
economic operating lives well in excess of ten years usually includes fuel and tyres, although the hirer
and will have scheduled component or wear part may provide fuel at a remote site. Hire includes
rebuilds or replacements at various points; the primary equipment insurance and an operator, with the
consideration in replacement decisions is commonly provider accepting responsibility for downtime due
frame and housing condition rather than the state of to equipment or operator problems.
replaceable components. •• Dry hire provides the equipment without fuel or
The salvage value for mobile equipment will depend operators. Payment arrangements for consumables
on the age of the unit, its condition and the operating vary.
hours since a major rebuild. A rebuilt 10 000-hour
underground mobile item could be worth 60 - 70 per Insurance
cent of new cost. The rebuild itself might cost 20 - The cost of the premium for insuring a piece of
30 per cent of the original purchase price. An older unit equipment may vary widely depending on the risk
will generally be saleable for about 20 per cent of new of damage or loss. For a key equipment item (such as
cost, if it is operable, although ‘long-life’ equipment a mill), insurance covers loss of revenue (or business
(draglines, shovels, crushers and mills), if well
interruption insurance) if the unit is unavailable. A
maintained, will retain value much longer. Machinery
contractor will usually identify this cost, whereas
merchants are generally willing to provide an estimate
a mining company might not. If no insurance is
of value for a used item, and for common items may
carried then the owners have effectively self-insured
not require an inspection. The cost of removing the old
item from the mine, particularly if it is a shaft mine, and arguably should still recognise insurance as an
may negate the salvage value. operating cost because, over time, losses will have to
be made good.
Finance In the absence of better information, an insurance
Ownership costs may include an interest expense cost from two per cent per annum (for low-risk surface
or a lease cost. The interest expense arises because equipment) to five per cent per annum (for at-risk
owning an asset ties up capital. This is true whether underground equipment) could be assumed. Thus

a low-risk surface truck costing $1 M and operating where:

5000 h/a might have an insurance cost of $20 000/a or DV diversity factor, typically 0.6 - 0.9
$4/hour. Insurance rates vary with market conditions.
Job factors
Electricity
Various ‘job factors’ may be used to relate site-specific
Electricity may be purchased from a third-party conditions to standard conditions, allowing cost
supplier (either from a grid or a purpose-built power estimates to be adjusted for:
station) or generated on-site by the owners.
•• equipment utilisation – operating hours and work
The tariff for supply of electricity from the local rosters
utility usually consists of a consumption charge and
•• maintenance philosophy and proximity to spare
a demand charge. The consumption component is the
electric energy used in the billing period. It is measured parts
in kilowatt-hours (kWh) with a usual billing period of •• management policy and quality of supervision
one month. This charge is identical to most residential •• material characteristics – density, swell, abrasiveness
consumers, although the unit cost is significantly lower. and hardness, etc
The demand component is the maximum power •• work conditions – road, weather and operator skill
demand for the billing period. This can be measured as •• other relevant site considerations.
kilovolt–amperes (kVA) or kilowatts (kW), depending
Job factors are classified into three broad groups:
on the supply authority.
good, average and poor. Examples of each are listed
It should be noted that the maximum demand is below.
calculated over a short period (usually 30 minutes),
Good conditions:
but this maximum figure applies for the complete
billing period. Therefore, there is usually potential for •• material is relatively loose and free flowing
reducing electricity cost by managing this maximum •• equipment operates with considerable idling or low
demand (eg soft start or spinning reserve for large power
consumers such as mills and draglines). If demand is •• long lives for wear items can be expected due to
measured as kVA, there is also potential for reducing lower abrasiveness
demand by improving the power factor. •• low digging power is required and material heaps
From the perspective of the utilities, demand charges well into the bucket
are payments for the increased capital costs of gene- •• tyres wear out rather than fail from cuts and
ration and transmission equipment. This equipment abrasions
has to be rated to deliver the maximum demand of the
•• spare parts are readily available
cyclical loads of most mining machines.
•• workforce is skilled.
Equipment suppliers are usually the best source of
power requirements for their equipment. However, Average conditions:
rules-of-thumb are available; examples are shovel and •• material requires blasting to maintain productivity
dragline energy needs per cubic metre per hour of •• power is required to penetrate the bank and the
0.6 kW and 1.5 kW, respectively. material heaps reasonably well
Any detailed work requires the input of a specialist. •• engine has periods of full power, but still some idle
Power factor, voltage supply and diversity factor (DV) periods
all contribute to the final consumption and therefore •• wear rates are moderate; spare parts not on-site can
cost. An estimate of DV can usually be made, reflecting be quickly couriered
the spread of large electric equipment at a mine site.
•• workforce has average skills.
The larger the fleet, the lower the mine site demand
charge, because each individual load cycle overlaps. Poor conditions:
For example, a fleet of five excavators of the same type •• higher powder factors are required for blasting and
would have a DV of 0.6, but if the excavators carry often the material is bulky, irregular in shape and
dissimilar loads, the estimate for DV would require generates poor fill factors
more detailed calculation. •• engine is often at full power
Electrical energy cost ($/h) = average •• tyres fail from rock cuts and abrasions
power (kW) × unit cost ($/kWh) •• wear rates are high and component life is reduced
•• workforce has limited skills, causing higher repair
Electrical demand cost ($/11) = costs.
peak power (kVA or kW) × DV × unit cost Often job conditions overlap. For example, difficult
($/kV per month or $/kW per month) digging conditions can be compensated by a skilled
Operating time (h/month) workforce, which reduces wear and tear on the machine.

Similarly, by implementing a sophisticated maintenance The second general formula is based on the
system that monitors the machine, components can be assumption that any piece of equipment is just a set
replaced before they incur additional costs. of spare parts. Some of these parts last 500 hours,
while others last over 12 000 hours. By knowing the
Fuel and lubricants ‘standard’ operating life it is possible to calculate the
The cost of fuel depends on the unit cost and the total cost of parts expected to be purchased throughout
engine consumption rate. As a rule-of-thumb, fuel this standard life, and therefore the hourly cost of these
consumption can be estimated as 0.3 L/h per kW of parts. Note that first-fill spares purchased at project
engine capacity. This consumption rate in turn depends start-up may be capitalised, whereas subsequent spares
on age and condition of the engine, duty cycle, idling use may be an operating cost.
time, operator skill and work area conditions. These The cost of spare parts is nominally in proportion to
machine- and site-specific items are reflected by the the original purchase price of the equipment. Therefore,
fuel job factor (FJF). the repair parts cost can be calculated by multiplying
the initial capital cost by a repair parts capital factor
Fuel cost ($/h) = engine (kW) ×
(RPCF) and then dividing by the standard operating
0.3 (L/h per kW) × FJF × unit cost ($/L)
life, typically 10 000 hours, to obtain an hourly rate.
where: This value is then adjusted by the repair parts life factor
(RFLF) for items with other than the standard operating
FJF varies between 0.3 and 0.6
life and then further adjusted for job conditions (RPJF).
If no detailed figures on lubrication consumption are
The selection of suitable repair parts factors requires
available, then it is usually calculated as a percentage experience and judgement. More than with other areas
of the hourly fuel cost. These proportions range of operating cost calculation, it is worthwhile accessing
from 15 per cent for equipment with a relatively low a database of real values over extended periods. These
proportion of hydraulic componentry (such as a truck) can then be updated so there is an inflation-adjusted
to 40 per cent for equipment with a high proportion of weighted average cost available for each equipment
hydraulic componentry (such as a hydraulic excavator). item.
Adjustments may be made to these figures depending
Repair parts cost ($/h) =
on how severe the duty is, but this is normally already
covered by the FJF applied to the fuel cost. Capital ($) # RPCF # RPLF # RPJF
Alternatively, the consumption rate can be obtained 10 000
from either manufacturers or operational records. where typical values are:
These rates are then multiplied by the appropriate unit
RPCF varies between 0.15 and 0.25
cost. This is obviously more accurate, particularly in the
case of large electric equipment such as draglines and RPLF varies between 0.8 and 1.2
bucket wheel excavators, which consume substantial RPJF varies between 0.5 and 1.5
quantities of lubricants, but no fuel oil.
Maintenance labour
Maintenance supplies There is no easy method to estimate maintenance
Maintenance supplies are often also referred to as repair labour costs. Factors to allow for include:
parts. Two formulas for estimation of maintenance •• amount of off-site repair work, such as component
supplies are presented. exchange and maintenance service agreements
The first general formula is appropriate for large •• fleet size and degree of commonality
equipment such as shovels, draglines and crushing– •• job conditions, including skill and experience of
conveying systems with operating lives in excess of operators and maintenance personnel
100 000 hours. The formula multiplies the capital cost •• maintenance philosophy of management
by a percentage and divides by the operating hours per •• proximity of spare parts and support
annum. The appropriate adjustments are then made for
•• time (operating hours) between scheduled services
job conditions by applying the repair parts job factor
(RPJF). •• union requirements such as a rule for a trades-
person’s assistant to assist a fitter on the job
Repair parts cost ($/h) = •• warranty agreements.
a
Capital ($) # 0.05 # RPJF Estimation is based on determining the maintenance
Operating time (h/yr) ratio, which reflects the repair work hours required
per machine operating hour for a particular set of site
where: conditions.
RPJF typically varies between 0.5 and 1.5 These ratios are determined from handbooks,
a typically varies between 0.03 and 0.10 historical site or industry records or by back-calculation

from the maintenance repair costs per machine per •• degree of overloading
operated hour. The ratio changes with the duty of the •• number of curves and grades
machine. Thus, in a detailed exercise, the ratio will vary •• prevailing work conditions
for individual operations to reflect a dozer on ripping
•• road surface condition and ambient temperature
versus a dozer on stockpile duties.
•• travel speeds
Table 5.4 shows various maintenance ratios for large
open cut equipment operating under average site •• tyre maintenance conditions
conditions. •• tyre type and quality.
In addition to the hourly charge for wearing out the
TABLE 5.4 tyre, costs associated with ongoing tyre maintenance
Maintenance ratios for open cut equipment. are usually expressed as a percentage of purchase cost:
Item Value
No of tyres # unit cost ($) # TJF # 1.05a
Dozer 0.50 Tyre cost ($/h) =
4000
Front end loader 0.50 where:
Truck 0.45 TJF varies between 0.3 and 4.0
Scraper 0.40 a typically between 1.02 and 1.06
Grader 0.35 Where it is anticipated that tyres will not be recapped,
the hourly cost is derived as:
Drill 0.30
Tyre cost ($/h) = (NTS)/(1.1 × LNT)
Maintenance cost is then calculated from:
where:
Maintenance labour cost ($/h) = unit maintenance LNT life of new tyre, in hours, before recapping
labour cost ($/h) × maintenance ratio NTS cost of set of new tyres, delivered
The factor 1.1 represents the extension to tyre life that
Operating supplies occurs when the tyre is run to the end of its active life.
Operating supplies can also be referred to as wear Where it is anticipated that tyres will be recapped, the
parts or ground engagement tools. Wear items include hourly cost formula becomes:
bucket teeth, drill bits, stabilisers and cutting edges. For
a detailed evaluation, these are usually itemised and Tyre cost ($/h) = (NTS + RTS × NoR)/
calculated for specific ground conditions. In that case, (LNT + LCT × WF × NoR)
lives are applied to each item and costs are individually
built up. This is the recommended approach for any where:
detailed level of evaluation. A simpler method is to LCT life of capped tyre, in hours
apply the wear parts cost factor (WPCF) to the capital NoR average number of possible recaps per tyre
cost, using the same logic as deriving maintenance
RTS cost of recapping a set of tyres
supplies, and adjust with a wear parts job factor (WPJF).
WF wear factor, usually between 0.9 and 1.1
Wear parts cost ($/h) = capital ($) × WPCF × WPJF
Operating labour
where typical values are: Operating labour covers the total cost of labour to
WPCF varies between 5 × 10 and 20 × 10-6 -6 operate a given machine. As such it allows for shift
roster coverage, absenteeism and multiple operators on
WPJF varies between 0.3 and 3.0
one machine. It does not include maintenance labour.
Tyre costs are usually included in operating supply
Shift configuration and industrial practices are an
costs. Tyre costs are obtained by multiplying the integral part of the derivation of labour costs. In the
number of tyres by the purchase cost of each tyre and past in Australia, and still in many places, industrial
dividing by the life of the tyre. Tyre life might range practices have required two people (such as an operator
from 500 hours for an underground load-haul-dump and an ‘oiler’) on a machine designed for single-person
unit (LHD) in severe wet conditions to 5500 hours for a operation. Where a machine (say a dragline) requires
haul truck operating on a good road. two persons on a continuous four-panel roster, eight
Tyre life has improved recently because better tyre people are required in total: two each for day, afternoon
compounds are used, and because of better road and night shift plus another crew of two, who are
maintenance in response to rising tyre costs. By rostered off.
incorporating allowances for the following in a tyre job In allocating personnel, allowance should also be
factor (TJF), then site-specific costs are calculated from: made for the availability of equipment. Unavailable

mobile equipment does not normally need operators, Major overhaul cost ($/hour) =
whereas large fixed or semi-mobile production a
Capital ($) # 0.15
equipment may need operators even when
10 000
mechanically unavailable. For example, dragline and
shovels typically need operators during maintenance. a typically between 0.10 and 0.40
Conversely, if there are 20 trucks in the fleet and the
expected availability is 80 per cent then normally only GENERAL AND ADMINISTRATION COSTS
16 trucks have operators.
Unlike direct operating costs, the basis for estimating
For example, a large shovel needs two operators general and administration (G&A) costs is often not
per shift costing $200 000 each/a (with on-costs of up well defined, particularly in the early stages of a project
to 60 per cent). Assume operators remain with the feasibility study. Fortunately, because the G&A cash
shovel on service days and that leave and absenteeism operating cost of a project is typically a low proportion
provisions run at 15 per cent, then on a four-panel of the total project cash operating cost, the effect of
roster and allowing 5500 shovel operating hours per lower accuracy will be diluted in the total project
annum, the hourly cost is calculated as: estimate. G&A costs are typically substantially higher
where a fly-in, fly out (FIFO) scheme is operating.
Operating labour cost = Some of the G&A costs, such as safety and training,
2 # $200 000 # 1.15 # 4 will vary significantly across projects. Also, technically
= $334.54 per operating hour similar projects may have significantly different
5500
administration costs as a result of the company’s
A useful term is the ‘operator ratio’, which refers to policy, the skill base of the workforce or the location of
the number of operators required to crew each machine. the operation. Some locations, for example, have high
The operator ratio allows for shift roster, absenteeism, security costs.
equipment availability and providing operators during
equipment downtime. Checklists for general and administration costs
For example, a mine operating a truck fleet with The following checklists are useful to ensure all G&A
80 per cent availability, ten per cent absenteeism and costs are covered.
a single shift, five-day roster will have an effective
operator ratio of: Administration salaries and wages
Costs include:
1.0 × 0.8 × 1.1 = 0.88
•• administration, commercial or contract manager
That is, for each truck in the total fleet, on average •• environmental officer(s), if the environmental
0.88 operators will be required. monitoring and management tasks are not the
responsibility of various operating personnel
Operating labour cost ($/h) = •• operations or general manager
Unit annual labour cost ($/a) # operator ratio •• personnel manager
Equipment operating time (h/a) •• safety and industrial relations (IR) personnel if these
tasks are not the responsibility of various operating
Major overhauls personnel
Major overhauls cover the cost of major component •• secretaries and telephonist/receptionist
exchanges or rebuilds. This can be estimated as a •• site accountant(s) and account clerks
build-up of individual components and their lives. •• site external relations or community affairs personnel
For example, a truck could be subdivided into engine, •• site information technology (IT) personnel
transmission, body, frame and electricals, etc. The •• site medical personnel
replacement or rebuild cost of each of these major •• site security personnel
components is then estimated together with their
•• town administration, catering and cleaning personnel
scheduled lives. This gives an average cost per hour,
even though expenditure may only occur when the •• training personnel
damage is repaired or the rebuild is carried out. •• warehouse and procurement personnel.
Alternatively, a simpler approach is to assume that Supplies and services – site administration
a proportion of the initial capital cost will require
Costs include:
rebuild, overhaul or replacement after a specified
period. Typically, for large mobile equipment, this •• auditing
will be 15 per cent of the initial capital cost every •• bank charges
10 000 hours. •• cleaning

•• communications including operating costs for •• sewerage systems

telephones, facsimile and IT systems •• sports and recreation facilities
•• computer support and software (administration •• potable water supply operating cost if not connected
functions only) to plant system
•• donations •• power costs if not connected to main plant power
•• employee benefits including: •• supplies for recreation and sporting activities.
•• death and total and permanent disability
(D&TPD) insurance Environmental management costs
•• medical insurance The following costs should be included in G&A
•• salary continuance insurance costs if they are not directly attributable to mining or
processing operations:
•• entertainment, recreation and sports
•• environmental monitoring costs including habitat,
•• first aid
noise, dust, vibration and water
•• FIFO costs or similar rostered time-off travel
•• environmental reporting and auditing costs.
expenses for remote sites
Increasingly, these costs are reported separately from
•• freight:
G&A costs because they have become a significant
•• express freight and couriers unless charged portion of the total. In this section they are included in
directly to other departments in the cost of the
the discussion of total G&A costs.
consumables or spare parts
•• general road freight Social programs
•• fringe benefits tax Projects located in an area where there may be
•• insurance little other opportunity for employment of local or
•• legal fees Indigenous people may be required to provide services
to the local community. These services might include:
•• licence fees for pressure vessels, air receivers, liquor,
etc •• providing medical services to the local community
•• light vehicles •• providing water and/or power to the local
•• maintenance of administration facilities: community
•• administration office •• training local people to fill mine site vacancies
•• training local people in trades.
•• airstrip
•• change room Exclusions
•• security systems The operating costs of the following items are not
•• sewerage and ablution systems normally included with G&A costs but are apportioned
•• warehouse to particular operating cost centres:
•• workshop •• fuel
•• office supplies including stationery, telephone, IT •• power
software and licences •• waste disposal
•• pastoral compensation •• water.
•• postage Other costs that are normally excluded from G&A
are:
•• power
•• home (or head) office charges
•• recruitment fees
•• product marketing
•• safety and training
•• product shipment, insurance, brokerage, refining,
•• subscriptions. smelting and off-site costs
Supplies and services – accommodation or village •• project royalties.
Costs include: Factors affecting general and administration costs
•• catering and cleaning, including the cost of the The size of administration operating costs is affected
contract caterer’s staff and food by:
•• laundry facilities including laundering of bedding •• complexity of the mine and/or process plant
•• maintenance cost for village facilities: •• environmental and/or social impacts of the project
•• dining facilities •• product handling constraints through ports
•• fencing and landscaping •• philosophy of the company
•• housing •• toxicity or radioactivity of any product or reagent.

The effect of company philosophy can be difficult to to be considered in more detail. For the purposes of
assess. It may be argued that the administrative cost of this handbook, the following cost components have
a mine site is only a function of the mine, the plant and been included under the administration heading and
its location. However, the size of the parent company each component given a cost range depending on the
(or companies), and the management philosophy of the operation’s size and the policy adopted.
parent, may affect the operating costs.
Large multinational companies will often provide for Administration staff
a larger administrative budget than that of an emerging In Table 5.6 the different administration staff categories
‘single project’ company. This provides one reason that are listed together with their salary package cost; here
large companies often struggle with relatively small ‘salary’ includes base salary, site allowance, leave
projects. This larger budget may make allowance for: loading and superannuation. It does not include
•• a salary and wage structure consistent with the total payroll tax. Examples are given for a small operation
company in a regional town and an industry-average value,
•• extra personnel for corporate development effective mid-2011.
•• a standard of administration and accommodation
facilities consistent with other operations Auditing
•• the need for the larger company to provide greater Allow $125 000/a for a small operation and up to
services to the community due to worldwide $500 000/a for a large remote operation.
responsibility or company image.
Examples at each end of the scale are:
Bank charges
•• a small open cut gold mine with little impact on the Allow $10 000/a for a small operation and $20 000/a for
environment a large operation.
•• a large underground mine supporting a complex
Communications
polymetallic concentrator and smelter situated in a
remote region. Communication costs vary considerably depending
on location. Costs depend on whether dedicated
Cost estimation for conceptual and prefeasibility data transmission lines are provided, a pay phone is
studies provided for personal calls, the installation cost of the
Because G&A operating costs constitute a small system is paid as part of the project set-up or as a lease,
proportion of the total mine operating costs, it may and a direct data link to home base is provided. For non-
be adequate for conceptual or prefeasibility studies to remote sites, allow $500/a per person on-site for the total
apply a percentage cost figure to the estimated non- cost of call charges. For remote sites, allow an additional
G&A operating costs to arrive at the G&A cost with $100 000/a for a data link to the corporate office.
acceptable accuracy. The appropriate percentages are It is recommended that the minimum numbers of
shown in Table 5.5. external lines are:
TABLE 5.5 Persons on-site1 No of lines

Administration cost as a percentage of total mine operating cost. <30 Two external lines
>30 One external line per 15 people
Mine size Australia, Developing world,
residential (%) remote (%)
Donations
Small 10 - 13 15 - 20 Allow $10 000/a for a small operation and $20 000/a for
Large 8 - 10 10 - 15 a large operation, but this is discretionary.
For example, the range of sizes for the operation Entertainment, recreation and sports
would be from a small gold mine mining 250 000 t/a This item has diminished over the past few decades
ore to a large base metal mine with an output of greater as companies no longer take responsibility for it.
than say 2 000 000 t/a ore. Allow $250/a per person employed by the company
The policy towards administration facilities at a remote site with village. Allow $100/a per person
ranges from lean, with minimal on-site facilities (eg employed directly by the company at a site close to
accommodation, recreational area and office), to existing towns.
generous (eg extensive on-site administrative support
and superior recreation and accommodation facilities). First aid
Allow $300/a per person on-site.
Cost estimation for a feasibility study
To obtain the accuracy required for this level of study, 1. C
alculated on the basis of all people on-site at the plant and village; that is, it
the individual cost components of the G&A costs need excludes people off-site, on leave or on rest and recreation (R&R).

TABLE 5.6
Staff categories and salaries.
Position Small operation Industry average

Head of administration and accounting $188 000 $205 000
Senior accountant $128 000 $139 000
Experienced accountant $96 000 $106 000
Graduate accountant $69 000 $81 000
Accounting supervisor or officer $74 000 $88 000
Payroll officer $68 000 $71 000
Accounts clerk $60 000 $68 000
Receptionist $55 000 $62 000
Department clerk or administrator $63 000 $75 000
Site administrator $71 000 $92 000
Head of supply N/A $142 000
Supply supervisor $102 000 $114 000
Contracts officer $99 000 $118 000
Purchasing officer $84 000 $95 000
Storeperson (day shift) $71 000 $80 000
Head of information technology N/A $150 000
Computer technical support officer $86 000 $97 000
Head of human resources N/A $191 000
Senior human resources adviser N/A $135 000
Experienced human resources adviser $93 000 $102 000
Graduate human resources adviser $87 000 $93 000
N/A = not applicable.
Fly-in, fly-out costs requiring special licences, then licence and permitting
fees may be expected to be around $10 000/a for a
Within Australia, allow $80 per 100 km per person per
small operation and $20 000/a for a large operation.
round trip (ie if distance from the mine site to home
For computer support and software (administration
base is 600 km then the cost per person per round trip
functions only), allow $20 000/a for a small operation
would be $480).
and $40 000/a for a large operation.
Freight These amounts do not include specialist geological
For general road freight, express freight and couriers, modelling or mine planning software, which should be
allow $10 000/a for a small operation and $20 000/a for included in departmental costs.
a large operation.
Light vehicles
Insurance Administration personnel may not require vehicles.
For administration and village facilities, allow 0.5 per Estimate the operating cost of light vehicles at
cent of the total capital cost. 30 per cent of the capital cost of the vehicles used for
administration activities.
Legal fees
Legal fees can vary dramatically. Without a basis for Maintenance of administration facilities
cost of legal expenses, allow $50 000/a for a small Allow five per cent of capital cost of administration
operation and $200 000/a for a large operation. facilities.
Licence fees Maintenance cost for village facilities

Assuming that the plant does not include highly Allow three per cent of capital cost of accommodation
specialised or complicated equipment or materials and township facilities.

Office supplies and social programs have already been identified

as additional administration operating costs. It is
Allow $15 000/a for a small operation and $50 000/a for
not possible to provide a meaningful cost guide for
large operation.
other factors in environmental management or social
Pastoral compensation programs. It is the responsibility of the feasibility
This amount will vary from state to state according study manager to establish the need for and scope of
to legislation, but will probably be treated as a capital environmental and social programs.
item with a maximum cost equal to the land value for Checklist for infrastructure and utilities
non-mining use.
Operating costs must be included for:
Postage •• access and transport equipment for equipment and
The use of mail has diminished because of electronic supplies
communications. Allow $3000/a for a small operation •• accommodation camp or township
and $15 000/a for a large operation.
•• airstrip or airport
Recruitment fees •• buildings including offices, workshops and stores
Recruitment fees and relocation allowances for a remote •• communications
location approximate to $10 000 × 0.12 × number of •• compressed air production and reticulation
employees during the first two years of operation, •• electric power supply and reticulation
where yearly turnover is assumed to be 12 per cent.
During later years allow $10 000 × 0.08 × number of •• environmental monitoring stations and equipment
employees. For a project located near existing towns •• natural gas supply and reticulation
allow $10 000 × 0.08 × number of employees during the •• potable water supply
first two years of operation; during later years allow •• process water supply
$10 000 × 0.05 × number of employees.
•• pumping and storage systems for managing
For the top five site positions allow $50 000 per groundwater, rainfall and run-off
position for recruitment and relocation.
•• road and railway systems to supply the operation
Safety and training and remove product
This category includes safety instruction, fire-fighting, •• security facilities and activities
rescue training and skills training for administration •• sewage and garbage disposal
staff. Where there are no dedicated safety and •• ventilation equipment
training personnel, allow two to three per cent of •• water supply for fire-fighting and dust suppression.
total administration wages and salary cost. Allow
one per cent of total administration wages and salary LABOUR COSTS
cost where there are dedicated safety and training
personnel on-site. The calculation of labour costs to operate machines was
covered in the section on operating labour, above.
Subscriptions The first step in estimating overall labour costs for
Allow $20 000/a for a small operation and $30 000/a for an operation is to establish an organisation chart and
a large operation. personnel (manning2) schedule detailing each position,
the number of persons involved and the work roster.
Supplies and service – accommodation/village
Important decisions on manning will be influenced
The cost categories listed below are not necessarily by location. In some societies, two or three eight-hour
comprehensive and may include activities that are not shifts per day are normal, working five days per week
necessary for some operations. Consequently feasibility or with a 17-shift week including maintenance. In many
study managers will need to judge what items are
parts of the world and generally in remote locations,
included in the estimate.
ten- or 12-hour shifts are preferred. There are several
For camp costs for a remote site, allow a cost of $90/ permutations of rosters in common use.
day per person on-site at any time, which is $60/day
The shift length and roster should be determined
per employee on a 2:1 roster. The cost, which includes
cleaning, laundry and catering, may vary with the size with regard to base rates, overtime and penalty rates.
of camp and standard of service provided. These may represent a trade-off against infrastructure
(accommodation) capital costs and commuting
For power, allow 5000 kWh/a per person on-site.
and accommodation operating costs. There may be
Other administration costs constraints imposed by either governments or unions.
Environmental management costs (not directly 2. In this context ‘manning’ is applied as a gender-neutral term derived from
attributable to mining or processing operations) ‘human’.

The maintenance workforce may be shared among •• workers’ compensation insurance (per cent of gross
departments so that the estimator for each department wages – may vary by state and company history).
needs to consult with other estimators working on the Costs that are additional to basic salary are called ‘on-
same study to prevent double counting or omission. costs’. Depending on location, on-costs typically vary
Project commissioning and the first year of operation from 20 to 60 per cent of the base salary.
often require additional labour and technical support. Employee benefits may include health insurance,
These requirements depend on the size and complexity motor vehicles, holiday travel, work clothing and
of the operation. An analysis of the risks associated miscellaneous items (eg telephone, membership fees
with start-up and process performance will assist in and loans). Accommodation and infrastructure support
determining the support needed during this period. includes the cost of housing, maintenance, power,
As it is more difficult to reduce numbers than to water and sewerage supply, recreation facilities, food
increase them it is common practice to hire additional and/or messing subsidies or direct costs and transport
commissioning personnel on a contract basis (see later costs for FIFO operations. Most employee benefits
discussion of the learning curve). and accommodation subsidies are subject to fringe
The use of contract labour or outsourcing (ie benefits tax (FBT). As this is a direct tax independent
where some normal site activities are conducted of profitability it is considered to be an on-cost for
off-site) can often be cost-effective especially if it employers.
reduces administrative burdens (such as contract
maintenance or control analyses) or capital expenses ENVIRONMENTAL AND REMEDIATION COSTS
(eg contract crushing where the contractor supplies The cost of progressive environmental rehabilitation
both the crushing plant and the operating labour). as a step toward eventual site closure may be included
The availability and suitability of contract labour for in operating costs. Sometimes it appears in operating
various aspects of the operation should be considered. cost reports as an allowance (per annum or per tonne
Once a manning schedule is established for the mined) against a cost that will be incurred later.
operation it is important to integrate it with the total This cost is estimated in the usual way as a cost of
site and company manning requirements to ensure that earthworks (per cubic metre) and surface treatment
no task is overlooked. Areas that need attention are and replanting (per square metre or hectare) of the area
the interface between mining and milling (who feeds to be rehabilitated. On waste dumps it may involve
the crusher?), maintenance of infrastructure, payroll, flattening batters to a stable angle, typically 1-in-3, then
stores procurement and expediting, general accounts covering with soil and replanting. In arid environments
and site-specific requirements such as environmental there may be a need for initial irrigation of plantings.
control and monitoring.
Chapter 19 – Rehabilitation and Closure presents
The completed mining schedule can then be used to further detail.
estimate labour costs, using:
•• additional superannuation contribution if applicable CONTINGENCY ALLOWANCE
•• annual salaries or wage rate in dollars per hour or Depending on the purpose and status (eg prefeasibility
week study) of the estimate, a contingency allowance may
•• commuting costs (airfares, etc) be included in an operating cost estimate. This is an
•• fringe benefits tax amount to cover costs that are currently not determinable
•• leave provisions including: because they are unpredictable or unforseen. They
must be clearly identified so that sensitivity analysis
•• annual leave
does not double up on these provisions.
•• leave bonus
A well-constructed operating cost estimate for a
•• long service leave feasibility study might not include a general contingency
•• public holidays amount, although there may be contingency allowances
•• sick leave on certain items. A scoping study estimate might
•• medical benefits insurance or other insurances such include a general 20 per cent contingency allowance in
as salary continuance if applicable recognition of the lack of engineering detail supporting
the estimate.
•• messing and accommodation
•• motor vehicle provision, where not costed elsewhere SENSITIVITY ANALYSIS
•• payroll tax (per cent of gross wages)
The sensitivity of the cost estimate to a wide range of
•• production bonus if applicable parameters is often needed. It is usually required by
•• recruitment and training costs the recipients of the estimate and also by the estimators
•• shift loadings if applicable themselves. The estimator examines the sensitivity of
•• statutory superannuation contribution (currently the principal parameters so that the required accuracy
nine per cent in Australia) of inputs for calculations is assessed. The accuracy of

an estimate is determined by the effort put into the This phenomenon is described as the learning curve,
estimation of those items that most affect the total. because if the average time taken to manufacture
In order to calculate the sensitivity of a variable, the new products is plotted against cumulative units of
costs are split into fixed and variable components as production, the points plotted form a curve. Formally,
previously mentioned. In a given mining situation, fixed the learning curve proposition is that each time the
costs for the whole of the enterprise are aggregated. quantity of production is doubled, the cumulative
Variable costs are affected by many parameters and the average unit time will be some constant percentage
sensitivity of the cost of the mine, or any portion of it, of the previous cumulative average time. An 80 per
to those parameters is then determined. cent learning curve is common – meaning that each
time production quantity is doubled the cumulative
FIXED AND VARIABLE COSTS average unit time is 80 per cent of the previous average.
Table 5.7 illustrates an 80 per cent learning curve.
When adjusting cost estimates for differing scales of
operation (throughputs) it may be useful to classify all
TABLE 5.7
operating costs into fixed and variable components.
The 80 per cent learning curve.
Costs can then be re-estimated assuming that fixed
costs per annum do not change, while variable costs Units of Additional Cumulative Cumulative
change in proportion to throughput. This usually gives output hours total hours average hours/unit
very similar results to the ‘six-tenths’ rule.
1 100 100 100
In practice, the fixed costs have capacity limits and
may be found to be ‘semi-fixed’ after detailed analysis. 2 60 160 80
This means that they are constant only within certain 4 96 256 64
throughput ranges. 8 153.6 409.6 51.2
Fixed costs might include:
•• electric power demand charge The first unit required 100 hours to produce. When
•• fixed contracts the output was doubled (that is, a second unit was
•• insurances produced), the second unit required 60 hours, giving
a total of 160 hours for the two units, or a cumulative
•• on-costs
average of 160/2 = 80 hours per unit. The new cumulative
•• salaries and wages.
average is exactly 80 per cent of the previous 100 hours
Variable costs might include: per unit average.
•• electric power consumption When output is doubled to four units (ie another two
•• fuel and lubricants units are produced) the additional two units required
•• maintenance supplies 96 hours for a total of 256 hours for the four units; this
•• operating supplies including reagents gives a cumulative average of 256/4 = 64 hours per
unit, which is 80 per cent of the previous cumulative
•• variable contracts.
average of 80 hours per unit. Similarly, when output
On examination, many supposed variable costs are is again doubled to eight units (another four units are
actually fixed, at least in the short to medium term. produced) the cumulative average is 51.2 hours per
If a truck is on-site, then it will tend to incur a fixed unit, which is 80 per cent of the previous 64 hours
operating cost per month, regardless of how much cumulative average per unit.
material it moves. Doubling of progressively larger output quantities
For example, a mine’s operating cost of $30/t is gives the 80 per cent reduction in cumulative average
thought to be 70 per cent fixed (hence $21/t fixed and hours per unit. Thus, the curve of cumulative average
$9/t variable) and the throughput is to be increased by hours per unit quickly flattens out. This indicates
20 per cent. The new cost will be: progressively smaller gains from learning, as expected.
Fixed cost $21 now spread over 1.2 t = $17.50/t The 80 per cent learning curve tabulated above is
plotted in Figure 5.6.
Variable cost remains = $9.00/t
Mathematically, the learning curve can be expressed
New operating cost = $26.50/t
as the exponential equation:
START-UPS – THE LEARNING CURVE y = axI

where:
In any new task that is repeated, performance improves
y cumulative average hours per unit
as operators gain experience, systems are tuned and
therefore costs are reduced, at least up to a point. a number of hours for the first unit
Obviously most of the benefit from learning occurs in x cumulative number of units
the start-up phase, but there tends to be a continual I an index of learning equal to the log of the
slight improvement over time. learning rate divided by log 2

proficiency. It can take as long as six months to optimise

the process and the probability is that the underground
operators may take two years to reach their potential.
Cumulative average hours per unit
Process optimisation is likely to occur on a number

of interdependent fronts – concentrate quality versus
recovery, concentrate A versus concentrate B, and
throughput versus recovery.
There is a view that full ramp-up is achieved when
a project is consistently producing the forecast tonnes
and grade, at its nameplate throughput and recovery,
producing in-specification product at the forecast unit
costs. Demonstration of that, or at least an ability to
perform within ten per cent of it, is the purpose of the
Number of units (cumulative)
Banker’s Completion Test. Ramping up to nominal
FIG 5.6 - The 80 per cent learning curve. tonnage throughput is often achieved within the first
12 months with a relatively straightforward project that
If a learning curve is plotted on a log–log chart it is not technically challenging. However, achievement
appears as a straight line, and is often easier to use in of the other parameters, most particularly unit costs,
this way. This can be seen by taking logarithms of both commonly takes much longer and sometimes is never
sides of the equation to give a linear equation: achieved.
Delays or underperformance in this area add
log y = log a + I log x
substantially to working capital and funding adequacy
The theoretical limits of the learning curve are a due to shortfalls in the revenue stream, and such
conditions present serious risks. A cash shortage during
100 per cent learning curve, meaning no learning at all,
the early production years can be serious, as financiers
and 50 per cent, where no time is taken for the additional
are unlikely to increase the financing package. Also, the
doubled output (first unit 100 h, average = 100; two
market may see the requirement for equity funds early
units for a total time of 100 h, or a cumulative average of
in a project’s life as a sign that all is not well, marking
50 h). In practice, learning curves are usually between
the stock down in response, and making equity raising
70 and 80 per cent.
that much more difficult.
It should be fairly obvious that when making cost
If the financial model considered that the ramp-up
predictions for mining and processing, attention
schedules are aggressive, or if there are inadequate
should be directed to the part of the learning curve provisions for contingency and capital over-run, it
on which the project currently sits. For new projects should be modified to reflect more reasonable or
there will be a large learning factor over the first few practical assumptions.
weeks and months. However, if the learning process
While mines commonly ramp-up quickly, plants
continues as theory suggests minor progressive gains
more commonly do not – to the extent that those that
can be perceived for at least the first two years.
do (apart from carbon-in-pulp (CIP) gold and most coal
The effect of the learning curve is often ignored or plants) are in the minority. McNulty (1998) and use of
underestimated in feasibility studies, leading to over- the McNulty curves on production ramp-up are useful
optimistic production schedules and budgets for the here.
first six to 12 months of production.
The learning index is different for different parts of REFERENCES
the project. It may be 70 per cent, for example, where an International Monetary Fund, n/d. World economic and
experienced contract crew does overburden stripping. financial surveys, World economic outlook database
It is close to 50 per cent for the start-up of underground [online]. Available from: <http://www.imf.org/external/
mining with an untrained crew. Examples that conform pubs/ft/weo/2010/02/weodata/index.aspx>.
to the theoretical curve are the advance rates in a new McNulty, T, 1998. Innovative technology: Its development
decline or shaft with an inexperienced crew. and commercialization, in Managing Innovations in the
Minerals Industry (ed: M C Kuhn), Chapter 1 (Society for
A non-refractory open cut gold operation with simple Mining Metallurgy, and Exploration: Littleton).
metallurgy will achieve processing proficiency quickly Mular, A L, 1982. Mining and Mineral Processing Equipment
but it may take longer to optimise the grade control Costs and Preliminary Capital Cost Estimations, special
methods. A polymetallic base metal underground volume 25, 265 p (Canadian Institute of Mining and
operation will take considerably longer to achieve full Metallurgy: Montreal).

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CHAPTER 3

Mineral production, markets and prices 32

First edition text by: P J Lewis

Revised and updated text by:

Accurate and realistic estimation of a mine’s revenue

32 Cost Estimation Handbook

Cost Estimation Handbook 33

Bauxite 93.72 54.45 0.58 30.87 0.33

Source: USGS (various years).

34 Cost Estimation Handbook

Nickel 24 69 Medium Yes where:

Cost Estimation Handbook 35

TABLE 3.4 TABLE 3.5

36 Cost Estimation Handbook

Cost Estimation Handbook 37

within predetermined limits (called ‘splitting limits’) TABLE 3.6

Section or clause Information given

38 Cost Estimation Handbook

TABLE 3.7 CONT ...

Section or clause Information given

Cost Estimation Handbook 39

40 Cost Estimation Handbook

Neil Cusworth FAusIMM, Executive Director, Enthalpy

44 Cost Estimation Handbook

Cost Estimation Handbook 45

46 Cost Estimation Handbook

Cost Estimation Handbook 47

48 Cost Estimation Handbook

CHAPTER 4 – CAPITAL COST ESTIMATION

A1.2 Geotechnical conditions Assumed or started Preliminary Defined Detailed

Class 5 Class 4 Class 3 Class 2

CHAPTER 4 – CAPITAL COST ESTIMATION

CHAPTER 4 – CAPITAL COST ESTIMATION

to Level 3. changes. Quantify to Level 3.

Class 5 Class 4 Class 3 Class 2

CHAPTER 4 – CAPITAL COST ESTIMATION

CHAPTER 4 – CAPITAL COST ESTIMATION

Class 5 Class 4 Class 3 Class 2

CHAPTER 4 – CAPITAL COST ESTIMATION

Class 5 Class 4 Class 3 Class 2

CHAPTER 4 – CAPITAL COST ESTIMATION

56 Cost Estimation Handbook

First edition text by: T Lanz and W Seabrook [Administration costs]

Revised and updated by:

Peter L McCarthy FAusIMM, Director, AMC Consultants Pty Ltd

Cost Estimation Handbook 61

62 Cost Estimation Handbook

Methodology Definition of Description

compliance of any study with these levels is difficult ESTIMATION RULES-OF-THUMB

Cost Estimation Handbook 63

Scoping study – Prefeasibility study – Feasibility study Execution – Phase 4

64 Cost Estimation Handbook

TABLE 5.2 CONT ...

Scoping study – Prefeasibility study – Feasibility study Execution – Phase 4

Cost Estimation Handbook 65

66 Cost Estimation Handbook

Cost Estimation Handbook 67

•• (026) 6 staff salaries 50

Total Cost (M$)

Level 4 Level 5 Level 6

G&A Cost Eng. & Super. Labour

Cost to Ore Mill Cost Drill Energy

68 Cost Estimation Handbook

Effectiveness Mean Truck Size

Production Time Standby

Cost Estimation Handbook 69

70 Cost Estimation Handbook

Cost Estimation Handbook 71

a low-risk surface truck costing $1 M and operating where:

72 Cost Estimation Handbook

Cost Estimation Handbook 73

74 Cost Estimation Handbook

Cost Estimation Handbook 75

•• communications including operating costs for •• sewerage systems

76 Cost Estimation Handbook

TABLE 5.5 Persons on-site1 No of lines