__PRODUCTION__

·
30,000 tons copper per day for 350
days for 20 years

·
Through put recovery is 87 % for
every 1 tonne mined.

·
Cu ore grade is 0.8 % tone Cu per
mill tonnage produced

·
Price of Cu is projected to be US$
1.25/lb

Now:
30,000 x 350 =

**10 500 000 tonnes/year of Copper ore**
For
20 years = 10500000

Now:
87% through put recovery for every 1 tonne mined:

0.87
x 10 500 000 tonnes = 9 135 000 tonnes recovery from through put per year

0.8%
tones copper per mill tonnage produced (is the Cu grade)

0.008
% x 9 135 000 = 73 080 tonnes of Cu recovered per year

Now conversion of 1.25/lb to
price/tonnage

2204.62 lb = 1 tonne

1 b =

*x*
2204.62

*x*= 1*x*= 1/2204.62 = 4.536x10 -

^{4}

Price of Cu = US $ 1.25/4.536x10 -

^{4 }tonnes
Now : 1.25 = 4.536x10 -

^{4}*x*= 1

1.25 =

*x*4.536x10 -^{4}*x*= 1.25 / 4.536x10 -

^{4}

= 2, 733.775

Price of Cu = US$ =
2,755.775/tonnage

Therefore the value is:

73080 x 2755.77 =

__US$ 201, 392, 037.00__

__CAPITAL COST__

Real
escalation = 4/Inflation in 2010 =

__CPI Dec. 2010__– 1 =__219.2__-1 = 0.6832 =__68.32 %__
CPI Dec. 1990
133.8

Nominal escalation

(1+0.6832) (1+0.04)

^{20}- 1
= 2.589 = 258.9 %

Cost (Capital Cost 2010) = 600 M x
(1+2.589) = 2 153 400 000

Working Capital 2010 = 70 M x
(3.589) = 251 230 000

Salvage Value = 2 153 400 000 x 20%
= 430 680 000

Now: 60% of Capital Cost is Debt = 1
292 040 000

(Debt Life = 10 years)

A
=

__0.12 (1 +0.12)__x 1 292 040 000 = 228 670 619.5 (annual repayment^{10}
(0.12 +1)

^{10}- 1
Equity: 2 153 400 000 – 1 292 400
000 = 861 360 000

So now: 1 292 040 000/ 10 yrs = 129
204 000 (principal)

228 670 619.5 – 129 204 000 = 99
466619.5 (interest expense)

Total Capital COST = 2 153 400 000

Equity = 861 360 000

Working Capital = 251 230 000

Salvage Value = 430 680 000

Interest Expense = 99 466 619.5

Principal (Repayment) = 129 204 000

__OPERATION COST__

Cost Projected From two cost
parameters

Ã˜ Mining
Operations Cost Involving disposal of waste and ore extraction and handling

Ã˜ Mining,
Severance and Adminstration Operation Cost

1.
Total Ore and Waste
tonnage is 90000 tonnes mined/day for 350 days and its costs $1 /tone to remove
both waste and ore.

Calculate 1990 values and convert to 2010 value

Now: Nominal escalation ( OF 20
years from 1990 -2010) = 258.9%

Cost (1990) For mining $1 /tone x
(1+ 2.589) = 3.5.89/tone (2010 value)

Mining Cost = 90, 000 x 350 x 3.589
= 113 053 500 (2010 value)

2.
Milling, severance
and administration

Milling
Cost for 2010 = 1.6 x 3.589 = 5.7424 /tone

Severance
cost 2010 = 0.1 x 3.589 = 0.3589 /tone

Administration
Cost in 2010 = 0.2 x 3.589 = 0.7178 /tone

Therefore
the total is give as: 6.8191

Now:
6.8191/ 0.87 = 7.838

NOW:
7.838 x 30 000 x 350 = 82 299 482.76 (milling cost)

Total
operation cost = 113053500 + 82 299 482. 76

=

__US$195, 352, 982.80 per year__

__ECONOMIC FUNCTIONS__

Ã˜ Royalty
is 2% plus MRA levy of 0.25 % from year 2 to 12
and next 10 years PNG Government intends to remove MRA levy starting
year 13 at the production years.

Ã˜ Income
Tax Rate = 30% of the corporate income

Ã˜ In
high production periods, year 2 – 14, apply double Declining Balancing method
(1/2 year convention) and then switch to straight line depreciation starting
year 15 to mine closure in year 22.

Ã˜ Real
escalation = 14 years

Ã˜ Risk
free rate of return = 4 %

Ã˜ Beta
= 1.0%

Ã˜ Global
Mining Industry rate of return is 6%

NB:
The initial inflation is applied in year 2 to year 12 will increase by 2.5%
from year 13 to 22

Now:
the expected rate of return on stock investment

ECRi
= Rf + I [Rm –Rf]

= 5% + 1% (6%-5%)

= 6%

*Weight Average cost of capital*
=WACC
= E (Ri) x D/(D+E) + D/(D+E)X (1-t)X i

=6%
x 60/(60+40) + 60/(60+40)x (1-0.3)x 12%

=

**8.64% (nominal Discount Rate)**
Inflation
2010 =

__CPI (Dec.2010__) - =__219.__2 -1 = 0.6382 =**63.82%**
CPI (Dec.
1990) 133.8

Average
Inflation =

__219.2__1/20 - 1 = 0.024989 =**0.025**
133.8

**Therefore the inflation rate to be used is:**

__2.5 %__

__Summary of the Discounted Cash Flow Model__

Discounted Cash Flow
(DCF) analysis provides useful techniques to assess in terms of value
maximization and cost minimization which addresses financial efficiency
objectives.

The DCF analysis is a
techno – economic technique applied to convert Profit Lost statement to
evaluate financial viability of a new project/investment options. The criterion
for decision making are not limited to NPV,IRR/ROR,DPP & KE but must also
consider other risk such as environment impacts, political and socio – cultural
conditions.

Gross revenue increases
over the period beginning at year 2 to 22 as seen from our calculation.

Depreciation during
Double Declining Balance Method of depreciation, it decreased slowly over the
period from year 2 to year 14. In year 15 to year 22, straight-line
depreciation method is used and so the depreciation value is constant. During
the exploration stage, in year 0 to 1, there was only cash out-flowing only but
from year two and upwards, there is cash in-flow.

It is seen from our
results that, the NPV is $ 8,058,113,286.68. So the project is viable because
NPV is greater than zero (>0). The IRR is 56.29% which exceeded the discount
rate, as such it gives and impression that Frieda Copper Project is viable.

Capital Efficiency (KE)
is a measure of project profitability on the capital invested. It must be
greater than zero (>0) to meet the condition to be viable. Since our
calculated KE is 3.74 > 0, it is better.

Scenario analysis
applies DCF model variables to investigate likely scenarios if changes occur in
the future. These scenarios could be increase or decrease in these variables
with respect to DCF model. It is seen from the Scenario Analysis Spider Chart
and we conclude that NPV is more sensitive to both positive and negative
changes in revenue or price. Therefore if there is a positive increase in
price, the NPV improves proportionally and vice versa if decreases

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