Quiz 2: Chap 3 and 4 Flashcards

Question

When is the breakeven cutoff grade achieved?(Chapter 3)

Answer 1

Breakeven cut-off grade is the grade wherein the revenue is equal to production cost.

Answer 2

1 tonne (metric ton) = 1,000 kg 1 ton (short ton) = 907.18474 kg 1 long ton = 1,016.05 kg

Answer 3

The main difficulty in determining a breakeven cut-off grade is to decide which costs should be incorporated into the calculation.

Answer 4

A sunk cost refers to past costs that cannot be recovered. The money associated with sunk costs has already been spent. Sunk costs are not incorporated into cut-off grade decisions

Answer 5

A residual cost refers to the future costs, which are incorporated into the future production decisions. Only residual costs are included in the calculation of breakeven cut-off grade.

Answer 6

As seen from the cut-off grade-tonnage curve, if the cut-off grade is changed, ore tonnage will _change_. However, if the operation has a constant processing capacity, the variation in ore tonnage (processing input) associated with cut-off grades should be considered. One reasonable choice is to increase processing plant life if the cut-off grade _decreases_. On the other hand, One reasonable choice is to decrease processing plant life if the cut-off grade _increases_.

Answer 7

Grade tonnage curves also ignore accessibility. This constraint significantly affects relationship between cut-off grade and processing capacity. For a given cut-off grade, over- or under-capacity problems may occur. Therefore, in addition to the maximization of profit, cut-off grades should satisfy the processing capacity to a certain extent.

Answer 8

1. economic parameters (breakeven grade, marginal cut-off, static cut-off) 2. capacities (cut-off grade based on capacities)

Answer 9

We need to find a balance between capacity and cut-off grade. Otherwise, _opportunity or additional costs occur due to idle or over capacity in ore production_.

Answer 10

1. idle problems. 2. over-capacity problems.

Answer 11

Overcapacity problems may be solved through stockpiling, but it causes stockpiling costs and possible problems such as oxidation of ore or internal combustion.

Answer 12

Idle capacity causes capacity utilization problems that have an opportunity cost.

Answer 13

1. If the mining and processing capacities do not change, the metal quantity produced per given time will reduce 2. Since, grade decreases mine life increases. If ore tonnage increases, but processing capacity remains the same. Then a stockpile is required and the processing plant's life extends. 3. The trade-off between additional mine life and lowering metal quantity per given time is determined by the discount rate. If discount rate high, the revenue from extension of the mine life will be lost when turned into an NVP. If discount rate low, the additional revenue from extension of the mine life can be meaningful.

Answer 14

1. If the mining and processing capacities do not change, the metal quantity produced per given time will reduce 2. Since, ore quantity decreases, mine life shortens. 3. There is a trade-off between disadvantage obtained by shortening mine life and increasing metal quantity per year determined by the discount rate. If discount rate high, the disadvantage obtained by shortening life will disappear to some extent because the contribution of the shortening years to NPV would be very low. If discount rate low, the disadvantage obtained by shortening life will be furthered because the contribution of the shortening years to NPV would be lost

Answer 15

1. How much does the price increase? 2. What are the initial mining and processing capacities? 3. When price increases, will capacities increase or will mine life change? 4. When the cut-off grade is changed, what are the new average grades and tonnages? 5. What homogeneity level of ore within deposit qualitatively and quantitatively? 6. What is the discount rate used in this project? 7. What is the future expectation of the price?

Answer 16

Some ore is mixed with waste and disposed to waste dump. This could be up to 10-30% of total ore tonnage. Losses is an inevitable phenomenon and can be minimized by selection of production method, equipment sizing, and drilling and blasting design.

Answer 17

Dilution is the contamination of ore with waste material. Similar to losses, some waste is mixed up with ore and sent to mineral processing. Dilution is also related to equipment selectivity and blasting (e.g., flying rock).

Answer 18

If mining company, which has mining and mineral processing only, works with a separate metallurgy company, there is a specific agreement between the mining and the metallurgy company. The metallurgy company charges its costs to the mining company and takes some value of metal refined. Depending on Smelter contract conditions, refining charges, marketing charges and concentrate transportation costs effects can be combined

Answer 19

Smelter contract conditions, refining charges, marketing charges and concentrate transportation costs effects can be combined and expressed with the Net Smelter Return factor.

Answer 20

The net smelter return is a function of price. Copper – 70 % Lead – 65 % Tin – 85 % Zinc – 50 %

Answer 21

The cut-off grade is a function of the total value (f.o.b.)* of all these contained products. Under "F.O.B." or "free on board," the goods are placed on board the ship by the seller at a port of shipment named in the sales agreement

Answer 22

"C.I.F."-- meaning "cost, insurance, and freight"--is C. & F. with the additional requirement that the seller procure transport insurance against the risk of loss or damage to goods. The seller must contract with the insurer and pay the insurance premium.

Answer 23

. F.O.T." means "free on truck." It refers to goods being carried by truck and should only be used when the goods are carried by truck.

Answer 24

* Given that price widely fluctuates in markets, cut-off grade also changes. * Since there is a strong correlation between price (e.g., gold price) and cost (e.g., oil price in terms of diesel consumption), if price changes, cost will also change. * Therefore, there is no answer how to react to price changes. This also depends on what extent price change and discount rate.

Answer 25

* Grade varies throughout orebody * As grade changes, cost and recovery also change. * If one aims to kept the cost constant, recovery will vary. * If one aims to keep the recovery constant, processing cost will vary.

Answer 26

1. When should mineral reserves be exploited? 2. How do mineral prices evolve? 3. How can the needs of future generations be considered? 4. What is the optimal extraction path of commodities? 5. How do the findings of resource economists assist in mining stakeholders? 6. What is the relationship between mineral endowment and economic development? 7. How can resource-based growth be managed? 8. Are mineral resources a curse or blessing? 9. What strategy should be followed to avoid from the Dutch Disease?

Answer 27

In the early 2000s, oil would have been depleted. This view was developed under oil shock in the 70s and underestimated the role of the development of new exploration technologies. The roles of discoveries and new technologies should not be ignored.

Answer 28

In 1939, the Australian government imposed an embargo on iron ore exports to prevent the early exhaustion of national reserves. Removing restrictions motivates new exploration campaigns because of exporting opportunities. Lesson: Large market and exporting opportunities will be incentives to produce more. Thus, they invest in exploration, innovation, and new technologies.

Answer 29

* In 1974, the Canadian government introduced a policy requiring uranium-producing companies to accumulate reserves sufficient to cover 30 years of national requirement for existing and planned nuclear installations. For electricity generation, the nuclear option is not favorable anymore. However, Canadian nuclear plans have been substantially scaled-down as the other countries are. However, this policy prevented Canada from benefiting from the extraordinary uranium boom in the late 70s. 1. New technologies and regulations may make the resource irrelevant if you do not produce it today. The future is uncertain. 2. Good marketing and export opportunities could have motivated the companies to invest in exploration. These opportunities could have led to new deposit discoveries. 3. This would also strengthen technological progress and innovation. 4. National institutions could have established, and knowledge accumulation on mining could have secured.

Answer 30

The Chilean government wanted the deferral of the Escondida copper mine in 1991. It was expected that when Escondida had started the operation, copper price would have fallen 10%, from 80 c/pound to 72 c/pound. The extraction cost in Escondida would be 50 c/pound. As seen capacity expansion caused $66M loss 1. This calculation can be acceptable in the short term. Since the price will decrease, copper would be a cheap substitute for many industries. Eventually, copper prices will rise again in the long term. Lesson: Short-term and long-term elasticity will be different. 2. Increased supply will give monopoly power to Chile in such a way as to control price. As a result, Chile would have had more room for speculation. Lesson: Price setting power will be lost.

Answer 31

Sweden obtained a huge benefit (net social benefit) by exploiting its iron ore resources from the early 1900s until the 1950s. Since the mines were close to the steel-making plants in Central Europe, they were important. Over time, thanks to new transportation technologies, the European steelmakers could import the iron ore from the other continents because iron ore mines in Australia and Brazil were operated by cheap open-pit method. If Sweden had deferred production, this country would have lost the benefit from iron ore mining. Furthermore, they would have deferred current social development. Lessons: In addition to mining and exploration technologies, technologies in the related industries (e.g., transportation, digital, and computer) should be monitored. If the production is deferred, economic development is deferred cumulatively.

Answer 32

Cartels aim to sell their product (e.g., oil) at a high price and with less production. However, from the experience, such an activity could be successful only in the short term. Eventually cartel collapses, the prices sharply decrease and stay low for a long time. Cartel behavior creates incentives for the other countries/corporates for exploration efforts or substitutes. Lesson: Cartel power is not sustainable in the long term.

Answer 33

If you exceed the regeneration rate* of a renewable resource, it can extinct (e.g., some fishes, forests). Nonrenewable resources never run out from the world. They can be available at a cost through recycling.

Answer 34

Early exploitation is preferable unless there is an unequivocally rising price trend. The present value of today’s income is more valuable than the net present value earned later. Because income obtained by mining exploitation speeds economic progress, there is a social net benefit in exploiting the mineral resources as soon as possible.

Answer 35

Hotelling rule states that, in a competitive market, the price of a depletable resource must increase at the same rate as the discount rate.

Answer 36

In an environment of profit-maximizing firms using unchanging technology to exploit a natural resource from a known, finite, and uniform stock, the value of a unit of the unexploited resource rises at the rate of interest.

Answer 37

This rule supported the deferral because the present value of income earned would not change. The project would not lose value by waiting.

Answer 38

1. the necessities of future generations 2. political advantage in future due to having a strategic resource

Answer 39

1. Unchanging technology 2. Finite and known reserve (no new large discovery) 3. Uniform deposit 4. Increasing costs 5. Unlimited production without capacity limitation 6. There are no uncertainties on size, grade and reserve of orebody

Answer 40

1. Production technologies 2. Exploration technologies 3. Transportation technologies 4. Health and safety technologies

Answer 41

Entropic degradation is the deterioration of environment, working conditions, slopes and openings over time, leading to additional cost.

Answer 42

1. New production technologies reduce costs and increase productivity 2. Cost reduction effect through technological improvement compensates cost increase through operational degradation. 3. The effect of technological innovation on price is significant.

Answer 43

1. A mine has a limited life compered to a plant based on conversion process (e.g., cement, paper, and refineries). 2. The price in process industries is more stable than mining commodities. 3. Each mine is cost-specific. Therefore, production costs of mining widely fluctuate in mining industries. However, the production costs of process industries fluctuate less. 4. Mining costs are steeper cost curves, and process industries are flatter cost curve.

Answer 44

Thanks to new exploration technologies, major discoveries were made. To hold Hotelling’s rule, the marginal cost of discovery should not change. Otherwise, commodity prices will not increase with interest rate proportionally Known resources/reserves usually grow over time. In many mines, resources/reserves increase as the operation goes deeper.

Answer 45

The material does not have a uniform quality throughout the deposit. Therefore, mineral rent received per unit varies. Quality uniformity is an unrepresentative assumption.

Answer 46

As the resource is extracted, the costs increase. Since the production goes deeper. Since mining firms start the production in the lowest-cost area first. There will be quality ranking in production, from high quality to low quality. In this case, the price increase should be more than the discount rate to offset the adverse effect of degradation effect. To hold the Hotelling rule, the loss gained by resource degradation should be offset by the advantage obtained by innovation.

Answer 47

Since the production goes deeper: Stresses and heat increase underground mines. Thus, support and cooling costs increase. Distances increase, and slope stability decreases over time. Thus, fuel, maintenance, and ground control costs increase.

Answer 48

we will never experience with _physical exhaustion_ of a resource because mineral rent will not sustain profitable operation in a time point. _Economic exhaustion_ will occur when cost of further extraction becomes higher than the market is willing to pay.

Answer 49

The capacity is still a constraint which affects the price path. Ore supply is frequently ceased by various restrictions associated with environmental, safety, legal concerns, disasters, and low prices. If demand exceeds the supply constrained by capacities, price will increase.

Answer 50

The information regarding the quality and quantity of a deposit is obtained through sparse data from drillholes. Using this information, orebody is estimated qualitatively and quantitatively. There are always differences between estimation and reality.

Answer 51

A think tank- asserted that the resources should be used in such a way as to consider to sustain living standard of humankind in the distant future. This is not important effect on the policy makers.

Answer 52

1. The countries reaching a mature stage of industrialization restricted mineral production for their citizens’ future requirements. 2. Emerging or developing countries concerned about the productions of foreign companies. They sometimes deferred the production until national institutions regarding mineral production would be established.

Answer 53

1. Deferral policy based on nationalist view has a misunderstanding on reserve concept. In mining, exploitation is also seen as exploration. As mining progresses, new reserves are often added. The deferral will delay the discovery of new reserves. 2. The production may also help to train local engineers and bring production technology such that national institutions will establish.

Answer 54

The deferral also ignores the role of substitutes. If the production of a demanding mineral is deferred, the buyer will direct to the substitutes in middle/long term. The technology regarding substitutes can advance such that price lowers. Thus, the resource may lose competitiveness.

Answer 55

Digital cameras led to decreasing demand for silver. Breakthroughs in technologies of mining deep-sea nodules could make irrelevant land-based nickel–cobalt operations.

Answer 56

1. Controlling mineral prices in a short-term 2. Sustaining monopoly or oligopoly (cartel) structure as a result of cartel decision in a short time. 3. If there are not sufficient knowledge and institutional structure, this can be useful for developing countries in short term. 4. There could be an opposite effect, and a mineral resource, which was not widely used in the industries in the past, can be important by new technologies (e.g., graphite, lithium). Nevertheless, the social benefit lost due to the deferral should be considered

Answer 57

New technologies decreases and recourse degradation increases production costs. Deferring production is very risky and the resource may be irrelevant over time. Technological changes will also occur in substitutes. Bear in mind that materials never diminish from the earth. There is always a chance for recycling. However, recycling may not viable economically with existing technology after the secondary process. Long before the last ounce of copper/barrel of petroleum is extracted, demand will be zero. As minerals diminish, the price will increase. The consumer will orient to substitutes. At a point, the resource will be unviable economically before exhaustion of the resource.

Answer 58

Economic rent is surplus that is obtained through production factors over production and capital costs

Answer 59

Mineral endowment does not guarantee to make economic development. This phenomenon shows that there should be a mineral policy on how to spend the rents* obtained from mineral resources.

Answer 60

International mining companies put forward that they: 1. Provide job opportunities, 2. Spend a considerable amount of capital, 3. Undertake technical and market risks, 4. Bring the production technologies.

Answer 61

Taxation policy can find an answer to this multi-objective optimization problem. A taxation policy should be high enough to contribute to the development of the host country. At the same time, it should be low enough to create incentive profit-oriented international mining companies.

Answer 62

These rents should not be spent for more consumption or more import. They should be re invested or spent for necessary infrastructure.

Answer 63

1. Absolute rent : Difference between revenue and production costs 2. Differential rent: Cost differences between mineral providers. Differential rent is obtained in high-grade deposits, shallow deposits, or easy geologic conditions

Answer 64

1. Neoclassical growth theory 2. Structural theory 3. The Dutch disease

Answer 65

Neoclassical growth theory: Economic growth needs an increasing supply of production factors. Mineral exports provide an opportunity to cover required government revenue and foreign exchange. Therefore, mineral export has strong potential to contribute to economic development.

Answer 66

Structural theory: This is the opposite of the previous view. Mineral export appreciates local currency and wages increases. Consumers spend more. The competitiveness in the other industries is lost in favor of the mineral industry. Therefore, the economies should be diversified, and the role of mining should be reduced.

Answer 67

The Dutch disease: This theory proposes a trade-off between the two previous theories.

Answer 68

1. Import policy effect 2. Redistribution effect 3. External factor effect 4. Feedback effect on the mining sector

Answer 69

Income obtained from mineral export was spent on imports (e.g., food). This caused to weakening agriculture industry, and agriculture products were available cheaper. At the same time, consumer prices increased.

Answer 70

Redistribution effect: Since the import harmed the domestic agriculture industry, the people from the countryside moved to the cities. The unemployment rate increased quickly because the emigration rate is larger than the labor requirement in the urban areas. The government created unnecessary jobs and implemented costly unproductive social programs (e.g., free food). In the cities, there was a big difference between high and lowincome groups (social issues).

Answer 71

External factor effect: Current deficit increased, and governments need external borrowing. Also, mineral prices fluctuate in the markets and production may also fluctuate in terms of quality and quantity. Therefore, mineral rents are not constant/continuous. This loop ends up a debt crisis.

Answer 72

Feedback effect on the mining sector: Since mining was a profitable sector, the government initiated new taxes and imposed import restrictions for the materials used in mineral production. An option of expropriation started to discuss.

Answer 73

1. A solid tax system based on resource rent should be built. 2. International mining companies that bring high technology and productivity, sustainable return, best practices and environmental friendly approach should be encouraged. 3. Mineral revenues should not be overestimated. 4. Mineral rents should be spent such that noninflationary growth is sustained. 5. A stable growth model of public expenditure considering business cycles should be chosen. 6. Mineral revenues should be separated from the other revenues and spend carefully (if it is too much, creating a sovereignty fund can be thought). 7. Currency appreciation and inflation should be avoided. 8. Labor market should be monitored and stable wage policy should be chosen. 9. Governments should be flexible for mining company’s strategy change on production and investment.

Answer 74

1. Some countries may be dependent on import and acute high unemployment rate. 2. Import should be directed to goods and services that can boost domestic production in an effective and productive way. However, the trade balance should be kept in an acceptable way. 3. When mineral prices are low, governments of the country that mining companies operate devaluates the local currency. This causes low wages, which reduces productivity. The relationship between wages and productivity is a key issue.

Answer 75

1. Establish guiding principles for current and future generations to use resources. 2. Create an enabling environment for local and international investments in mineral exploration, development, and production. 3. Encourage governments, companies, and communities to work together to ensure that operations are conducted in an environmentally and socially sustainable manner. 4. Ensure local economic benefits, revenue sharing, and the transparent management of revenues. 5. Help to make informed decisions through the collection of geological data and resource assessment. 6. Regulate artisanal and small-scale mining and provide adequate institutional and technical support for related activities. 7. Apply internationally accepted standards for environmental and social protection, including for indigenous peoples and the resettlement of affected communities.

Answer 76

The resource curse asserts that mineral recourses-endowed countries are not able to make economic progress, and these countries encounter poor economic performance, less democracy, corruption, and social and gender inequalities.

Answer 77

It was especially observed in the countries whose economies are based on natural resources only. The economy of these countries are very sensitive to the commodity price they produced.

Answer 78

1. The strength of economic and political institutions 2. Human asset capacity 3. Public policy, addressing inequality, poverty alleviation, education reforms, and the contribution to political decision-making.

Answer 79

It is an economic trend relating to : * Increase in natural resources revenues (Boom) * Decline in manufacturing and other sectors

Answer 80

1. Starts with a rapid and large influx of money caused by Increase revenues from resources 2. Foreigners purchase the resources with Local currency and Foreign currency 3. Demand for the local currency rises since Foreigners need it to purchase so Increase the value of the local currency 4. If they pay with foreign currency Foreigners bring foreign currency which Decreases the value of foreign country by increasing supply 5. Global competiveness of the manufactured goods declines since Salaries and local costs are still the same in local currency but worth more in global currency

Answer 81

1. Production shifts toward booming sector 2. Employees move toward easier to get and higher paid jobs 3. Direct deindustrialization

Answer 82

1. Wages increase and people spend more in service 2. Employees move toward the service sector 3. Indirect deindustrialization

Answer 83

1. Is resources boom only for a short time? 2. Are the loss in the manufacturing sector permanent? 3. Is the gains from resources exploitation greater than losses from manufacturing sector?

Answer 84

1. Slow the currency appreciation by reducing the influx of money by creating long term funds. 2. Increase competitiveness and innovation :Education, training and infrastructure investment in the non resources sectors 3. Reduce government deficit No need of foreign loans Reduce amount of foreign investments

Answer 85

1. Many factors can affect economy 2. Resources based economies are more affected by increase in currency value 3. A rapid influx of money due to resources boom can reduce competitiveness of others sectors 4. Long term economic planning can help to reduce this effect

Answer 86

Critical minerals are raw materials that are needed by essential sectors of a country.

Answer 87

These minerals change from country to country, depending on their strategies that achieve policies and sustainable growth.

Quiz 2: Chap 3 and 4 Flashcards

(122 cards)