Financial Modelling

Building financial models for resource projects and financial analysis are integral components of the project evaluation process.

Capital Expenditures

Expenditures should include the initial capital outlay and sustaining capital, including investments in working capital, fixed assets, operating and maintenance costs, and environmental expenditures. Initial capital should include all expenditure to the point when the capital project is closed out. Contingency with respect to capital expenditures should be reflected as prescribed. Capitalized interest when appropriate should be included as a segregated cost to reflect the financing requirements but should be excluded from the cash flow analysis.

Demolition / Closure Costs

Any demolition (closure costs) for both project and life of facility would normally be included in the discounted cash flow analysis.

Costs and Prices

Real costs and prices (remove inflation impact) should be projected over the forecast period.  Use forecasts that are appropriate to the timing of the revenues and expenditures, with adequate provision for sensitivity analyses in supporting documents, such as reserve block models and cost estimation models.

Operating Costs

Cash costs incurred during the production and the realisation of all saleable products from the operation should be included. Where feed streams are processed through existing internal facilities these should be allocated full costs (fixed and variable). When applicable, current projections for treatment and refining charges provided for planning purposes should be used in determining realisation costs.

Residual Values

Any residual values or other recoveries resulting from the project, including the release of working capital should be included, but should not be netted against the value of the capital assets estimated for the project.

Revenue Forecasting

Revenue forecasts should be based on the current, commodity price projections provided for planning purposes. Commodity price forecasts invariably reflect inflated-dollar prices; to use these in real dollar cashflow models, the prices will have to be adjusted to remove built in inflation.

Stand Alone Basis

Each project must be evaluated on a full cost: stand-alone basis (i.e. should only include cash flows associated with the project). If synergies not specifically related to the project can be realized (e.g. tax shields, incremental cost benefits), they should be quantified separately and their impact on the various screens/measures (e.g. IRR, NPV, etc.) disclosed. Similarly, the project’s impact on the overall performance of the Business Unit should be evaluated and disclosed.


All levels and types of taxes should initially be included and calculated on a stand-alone basis. A sensitivity analysis should be prepared to indicate the impact of any tax synergies due to group benefits through tax consolidation.

Time Horizon

Time horizons will vary depending on the project and the nature of the expenditures. As a general rule, cash flows should be calculated for the expected life of the project. Practically, given the diminishing accuracy of forecasts as time horizons lengthen, and the diminishing present value of cash flows many years hence, projections should not be performed beyond 25 years. Instead, a “terminal” or “residual” value should be determined for all cash flows after 25 years.

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