Discount rates applied in mining project economics are typically in the range of 5% to 10% for feasibility studies, though they can vary significantly depending on the specific project and its risks [1]. Higher rates, sometimes in the 15%+ range, are used for projects in riskier jurisdictions or earlier stages of development.
Typical discount rates
The typical range for the discount rate used to calculate the Net Present Value (NPV) of a mining project is 5% to 10%.
Standard Range: Many standard mining feasibility studies use discount rates between 5% and 10% [1].
Risk Adjustment:
- Rates closer to 5-8% might be used for projects in stable jurisdictions with low perceived risk and for well-defined, later-stage projects (e.g., Feasibility Study stage).
- Rates closer to 8-10% or higher (e.g., 12-15% or more) are common for projects in jurisdictions with higher political/sovereign risk, for commodities with poor marketability, or for early-stage studies (like Preliminary Economic Assessments) that carry greater technical and financial uncertainty.
The discount rate represents the required rate of return that an investor or company expects to earn on a project, compensating them for the time value of money and the risk associated with the investment [2].
Determination of discount rates
Discount rates for mining projects are not set by a single formula but are determined by assessing a combination of the company’s cost of capital and the specific risks of the project.
Weighted Average Cost of Capital (WACC)
The Weighted Average Cost of Capital (WACC) is the foundational metric [3]. It represents the blended rate a company is expected to pay to finance its assets, considering both debt and equity. It is the minimum rate of return a company must generate on its overall assets to satisfy its shareholders and debt holders [4].
The WACC is calculated as:
WACC = (E×V-1×Re) + ((D×V-1×Rd) ×(1-Tc))
Where E = Market value of equity, D = Market value of debt, V=E+D (Total market value of financing), Re = Cost of equity, Rd = Cost of debt, Tc = Corporate tax rate.
Hurdle Rate and Risk Premiums
While WACC is the minimum acceptable rate, a hurdle rate is often used as the discount rate in practice [5]. The hurdle rate is the minimum return an investor or company requires to pursue a specific project, and it is typically WACC plus a risk premium [5].
Hurdle Rate = WACC + Risk Premium
The risk premium is determined by evaluating several project-specific factors, which increase the required rate of return:
|
Risk Factor |
Impact on Discount Rate |
|
Project Stage |
Higher for early-stage (e.g., Preliminary Economic Assessment, Pre-Feasibility) due to more technical unknowns and cost uncertainty. Lower for a producing mine or one at the Feasibility Study stage. |
|
Jurisdictional/Sovereign Risk |
Higher for projects in politically unstable regions, or areas with uncertain tax/regulatory environments. Lower in stable, established mining jurisdictions. |
|
Commodity Risk |
Higher for industrial minerals or specialty metals with limited marketability or price volatility. Lower for precious metals (e.g., gold) or base metals with deep, liquid markets. |
|
Sponsor/Owner Experience |
Higher if the owner is a junior company with limited development/operational experience. Lower if the owner is a major, recognized miner. |
Market-Derived Data
Comparisons with market transactions for similar mining assets (mergers, acquisitions, or investments) can also be used to validate or derive an appropriate discount rate, especially in a market-derived discount rate approach.
In essence, the discount rate in mining economics is a reflection of the project’s opportunity cost of capital (WACC) adjusted upward by a risk premium that accounts for the unique technical, political, and market risks inherent to that specific mining venture.
Reference
[1] “Rethinking NPV Valuation for Critical Minerals in a Metal-Reliant Future,” Discovery Alert. Accessed: Sept. 25, 2025. [Online]. Available: https://discoveryalert.com.au/news/npv-mining-valuation-2025/
[2] I. M. Finance and Economy, “How to evaluate a mining project using discounted Cash Flows?,” Mining Doc. Accessed: Sept. 25, 2025. [Online]. Available: https://www.miningdoc.tech/question/how-to-evaluate-a-mining-project-using-discounted-cash-flows/
[3] M. Taheri, M. A. Pour, and M. Irannajad, “Estimating the discount rate for projects of a mining complex,” IJMME, vol. 2, no. 4, p. 277, 2010, doi: 10.1504/IJMME.2010.039038.
[4] “Understanding Hurdle Rates: Essential Insights for Investors and Businesses,” Investopedia. Accessed: Sept. 25, 2025. [Online]. Available: https://www.investopedia.com/terms/h/hurdlerate.asp
[5] “Understanding Hurdle Rates: Essential Insights for Investors and Businesses,” Investopedia. Accessed: Sept. 25, 2025. [Online]. Available: https://www.investopedia.com/terms/h/hurdlerate.asp
