In any mining sector, “life of mine” (LOM) is essentially the economic pulse of a mine. The time period during which a mine is capable of extracting ore is denoted by this parameter. A critical event in the entire mine life is mine life extension (MLE). This refers to additional productive years in which increased ore discovery, technological enhancement in processing, as well as a beneficial economic downturn, contribute to this critical period of a mine’s existence, resulting in dramatic consequences for both valuation as well as shareholders’ perspectives of value in a mine’s existence.
From a strictly financial point of view, a calculation of what MLE means to asset value is essentially a mathematical procedure. The DCF valuation formula is currently the industry norm for valuing a mine, consisting of projecting future cash inflows (from selling minerals) and future costs (such as operating costs, taxes, and capital costs) for every year of remaining mine life, discounting those cash flows to their value in today’s money, and summing those present values to create the Net Present Value, which is in essence, mine value itself, denoted by NPV.
A key point to understand is that when an analyst extends the life of a mine, they’re not just appending an additional year to the model; they’re potentially appending five, ten, or even twenty years to it. Now, every single year that they’re appending is another stream of cash flowing in, which is positive cash flow. Sure, cash received in twenty years is worth very little, even much less than cash received this year, but it’s a positive number nevertheless, which, at an exponentially high discount rate, does indeed artificially inflate it.
However, what’s even more influential in respect of shareholder sentiment is an entirely different consideration—at least in this context—also fundamental to an establishment’s existence, which is risk itself. A mine’s shorter life translates to high risk exposure for an establishment’s shareholders, as they find themselves in front of a ticking time clock, which is counting down to an end, as revenue-generating potential is to be set aside in favour of closing costs.
The mine life extension completely removes this threat as well. Extending the closing date of the mine to very far into the future, MLE alters the nature of this asset in front of an investor. An asset is no longer of the short-term kind, which is depleted, but of longer duration, providing a stable source of returns in this case. This reveals several other positive attributes as well, including efficient management, exploration expertise, expertise in running operations in such a manner that low-grade deposits become economical to extract, amongst several other things as well.
