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Importance of Discount Rates in Mining

A Discount Rate is a factor that is used to convert projected cash flows into a present value to enable comparison of competing options for which the cash flows reflect differences in both timing and amounts. That is, the Discount Rate is a measure of the risks associated with the projected cash flow and it is a reflection of the Rate of Return an investor would require for taking the risk associated with that particular mine project.
In finance, risks are broadly classified as market risks and private risks
Market risks are the risks that can be captured in the value of a traded security. In the case of a mine project, this risk is reflected by the company (owner) activity in the market. Also by the metal price, because is traded in the metal market.
Private risks are all risks not captured by the market. In the case of a mine project, this risk is reflected by geological (grades, tonnes, etc.) risks, political, and environmental risks, among others.


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