Financial Analysis of Mining Investments Employing FAST Modeling Standard

ABSTRACT: In this study a project model is built to conduct an appraisal and sensitivity analysis of a gold mine. At the same time, the most up to date modeling standard, known as FAST (i.e., Flexible, Appropriate, Structured, and Transparent), is implemented. The purpose of choosing this standard is to identify the strengths and weaknesses that may result from the implementation of this methodology for the modeling project appraisals. The FAST standard noticeably reduces the rate of error, while the speed of modeling and the appraisal of investment projects increase noticeably. The results of the analysis using FAST also becomes more communicable after implementing this standard. An important conclusion of the appraisal is that the royalty rates charged by governments on the extraction of gold are found to be too insensitive to the magnitude of the financial surplus generated by a specific mine. In particular, our study suggests that even if the royalty rates are increased up to six times, the project still generates a positive financial net present value for the mine owners. According to this finding it should be a public finance priority to redesign the systems for setting royalty rates in mineral producing countries that would allow host countries to benefit more from high return investments while at the same time not damaging the financial viability of higher cost natural resource extraction projects. Keywords: Investment Appraisal, Royalty Rates, Gold Mine, FAST Modeling Standard, Financial and Sensitivity Analysis. …………………………………………………………………………………………………………………………