ECONOMIC ANALYSIS OF INVESTMENT PROJECTS IN MINING INDUSTRY

In principal, the investment project in mining industry doesn’t significantly differ from any other capital investment project. There are, however, some specific characteristics that must be considered, because they may affect the final conclusion. The present article stresses on: depletion allowance – an amount that is deducted from the net revenue and decreases income before taxes. The depletion allowance has an important role for development of mineral and energy resources, because it is additional source of financial funds for investments in exploration and development of new deposits; a brief comment of pros and cons of different appraisal methods of investment projects; decision tree of investment in mining industry; the most used method for measurement the uncertainty and risk – the expert assigning of probability distribution. Summing up the discussion two main conclusions may be made: 1.) There is not a common acceptable rate of return of investment projects in mining industry; 2.) There is not a precise method of evaluation of these projects. The economic analysis is necessary for making various decisions, concerning extraction and processing of mineral and energy resources: the engineering design of the development of a deposit; the acquisition or sale of a deposit; a change in the mining and processing methods; a change in the extraction rate and/or extraction level; an assessment of value of assets for taxes purposes; re-evaluation of the investment programme; the evaluation for the purposes of leasing. With the limited firm’s finance any manager must select the best investment opportunity from among those available. The economic analysis, therefore, must give answer of two important questions: does the investment project satisfy the objectives of the firm?; and how does this project compare with other investment opportunities? Maximization of the profit or minimization of the short-run losses is a prior goal for many firms. The goal may be, however, expansion of production capacity, an increase in firm’s market share, diversification, vertical and horizontal integration, or extending the life span of the firm as much as possible. Each of these goals has an important role in the processes of planning and consequently in the economic evaluation of the investment projects. Rank ordering of investment projects according to priorities of the firm ensures that a specific project is justified to the goals of the firm. It also provides good guidelines for the distribution of limited financial resources. Even there was only one investment opportunity, it must be compared with other generating profit economic activities. The concept of the opportunity cost has to be integral part of each economic analysis.