When applying the techniques of mine valuation a discount is applied to adjust the yearly income(s) to a present value. This discount rate is the preference of the mining company to reflect the value needed to go for an investment. Q What is the lowest rate that is reasonalble if you are the property owner. Realizing the lower the discount rate the higher the PV. What justification is utilized for this low rate.
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Mine Property Valuation
- Thread starter edpresley
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You are talking about hurdle rate. This 'target discount rate' should equal AT LEAST the cost of capital to the company, PLUS a return for the risk involved in making the investment. You calculate the internal rate of return using the IRR function in your spreadsheet, compare it to the hurdle rate. <br>
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Hurdle rate is set from experience. A rough guide from Legge & Hindle 1997, Entrepreneurship, is: Use the current before-tax return on government bonds. The range of hurdles is from that +4% to +20%, with most in the middle third of this range. Lower-end hurdle rates around 15% are for very long-lived projects with secure returns, eg buying privatised power stations. My company has used this for mining projects, but given the grade risk this would not be appropriate in small gold deposits! They say hurdle rates of 25% or more should be used for projects with long development expense and time, or forcing entry to an established market.
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Hurdle rate is set from experience. A rough guide from Legge & Hindle 1997, Entrepreneurship, is: Use the current before-tax return on government bonds. The range of hurdles is from that +4% to +20%, with most in the middle third of this range. Lower-end hurdle rates around 15% are for very long-lived projects with secure returns, eg buying privatised power stations. My company has used this for mining projects, but given the grade risk this would not be appropriate in small gold deposits! They say hurdle rates of 25% or more should be used for projects with long development expense and time, or forcing entry to an established market.
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