An economic analysis of oil sands mining options

Abstract

Mining projects normally involve huge levels of capital outlay with their attendant high investment risks. Thus, all new mining projects and existing projects have to be economically evaluated to assess their viabilities and whether they add value to the company’s portfolio. Economic analysis is one of the best tools for evaluating and comparing different projects or investments options. Various economic evaluation criteria such as the Net Present Value, Profitability Index, Internal Rate of Return and Discounted Payback Period are commonly used, alone or in combination, to determine the acceptability or attractiveness of projects and to aid in the selection of the best investment ventures from a number of options. In this paper, economic, risk and sensitivity analyses were conducted on two oil sands mining options at Syncrude Mine in Canada. These are the Current Mining System (CMS) and the Cyclic Excavator Conveyor Belt Control System (CycEx CBCS). The results of detailed economic analysis show that the net present value (NPV) of the CMS option is $3.20 ´ 1010 while that for the CycEx CBCS option is $4.06 ´ 1010. The profitability indices for the CMS and CycEx CBCS options are 19.37 and 43.37 respectively. The internal rates of return of the CMS and CycEx CBCS options were calculated to be 29.02% and 33.37% respectively. Both the CMS and CycEx CBCS options have very short discounted payback periods (≤ 0.27 years). The results of risk characterisation of the two mining options show that there is 85% probability that the NPVs of the CMS and CycEx CBCS options will be greater than $2.69 ´ 1010 and $3.42 ´ 1010 respectively. The results of sensitivity analysis show that the input variables that significantly affect the NPV in both mining options are the discount rate, production rate, oil price, exchange rate, and the federal and provincial tax rates. In general, changes in input parameters such as discount rate, scheduled mine production capacity and time, price of oil per barrel and total operating costs had lower effects on the NPV of the CycEx CBCS option than the CMS option. The calculated economic parameters together with the results of the risk and sensitivity analyses show that the CycEx CBCS option is more economically viable than the CMS option.