The financing of mining exploration and development : sources of funds and decision criteria

The search for promising mineral deposits and their development into producing mines require the expenditure of much larger sums of money than was formerly necessary for success. Mining is recognized as a risky business, and the suppliers of venture capital must be adequately compensated for assuming this risk. With the progressive development of a prospect, the uncertainty regarding its value is reduced and capital is more readily available at lower cost. As capital requirements have increased, greater reliance has been placed upon the internal resources of established producers. Equity capital is still supplied by the public for the hazardous first stages of prospecting and exploration, but later development and production financing is likely to be obtained from operating companies or financial institutions. Government guarantees, loans, and purchase agreements have been important in the financing of several large ventures. The development of a mining property is a stochastic production function, the outcome of which is probabilistic. In order to optimize this output, no more should be spent on a property than the expected realization of its present worth. This requires the continuous assessment of the probability of various outcomes and their financial results at each stage of the decision process. The purchase of information to further reduce the uncertainty of future earnings may be necessary before making the final commitment to production. The developer must also be assured of sufficient capital to complete mine development and plant construction.Business, Sauder School ofGraduat