The cost of mine suspension from social conflict: A decision tree model

Abstract

This paper presents a method which incorporates the risk associated with project suspension from social conflict into a mining project's net present value (NPV). The model applies a series of decision trees to a project's discounted cash flow (DCF) allowing for the chance of project suspension from a company-community conflict event. The model determines a social-risk-adjusted NPV for the project based on the likelihood of project suspension and the potential loss of future opportunity. This paper applies the model to a generic mining cash flow using two different approaches to estimating the project's likelihood of suspension and compares the efficacy of each method. The paper then applies the model to the proposed Pebble Project in Southwestern Alaska. The work concludes that after the risks associated with stakeholder opposition are accounted for, the NPV of the Pebble Project drops from approximately $6 billion to $1.1 billion. The model translates stakeholder concerns and priorities into potential financial consequences for investors, thereby demonstrating the business case for incorporating stakeholder positions into mine design and planning.