Circular 137—Computer program for Monte Carlo economic evaluation of a mineral deposit

By R. J. Roman and G. W. Becker, 1973, 23 pp., 2 tables, 2 figs., 2 appendices.

Supersedes Progress Report E-5. Describes how computer science can be used in analyzing a mineral property. The NM Bureau of Mines and Mineral Resources provides computer time and assistance in adapting the program to individual needs. Raising capital to develop a mineral property depends largely upon good economic evaluations. The program outlined here is designed to help promoters take advantage of computer science in analyzing potential mineral areas. Results of the economic evaluation, however, are only as good as the data provided for the evaluation. The importance of this aspect of the evaluation, therefore, is emphasized.

Before any business venture can attract risk capital the promoter must demonstrate that this venture will yield a return on investment commensurate with the risk involved. The usual procedure has been to prepare an estimated cash flow statement for the business venture listing all incomes and expenditures for the life of the venture, and to calculate a return on investment (ROI) for the venture. In addition to an estimated cash flow statement a sensitivity analysis is usually included in the report. The sensitivity analysis shows the changes in ROI to be expected if input estimates are wrong, that is, how sensitive the ROI is to each input item.

During the past 10 years a third dimension has been added to financial analysis: probability. Monte Carlo simulation sets forth in quantitative terms the elements of uncertainty in estimating the various cash flow items. Monte Carlo simulation differs from the sensitivity analysis. In Monte Carlo simulation, the elevator recognizes and defines the uncertainty in the estimated deposit size, feed grade, recovery and every other input variable; and these uncertainties are transformed into uncertainties in the ROI calculated. The purpose of this circular is to present a versatile computer program which uses data supplied by the promoter to calculate the expected ROI, make a sensitivity analysis and do a Monte Carlo simulation on the venture. The techniques of evaluation are not discussed, but several good references on this topic are listed in the bibliography.