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By Thomas P. Bispham

INTRODUCTION From the lender's point of view, the greatest period of risk in a project financing occurs during the construction phase. Therefore, most projects are supported during this phase by completion guarantees supplied by some credit-worthy entity; for example, the project sponsors in the case of a joint venture, such as that of W.R. Grace, Hanna Mining, and Liberty Capital; or by a strong contract with a utility or foreign importer/investor, such as the way North American Coal Corporation has structured many of its transactions. THE PROJECT LOAN REQUEST A project financing is a more complex form of term loan than one using an ongoing corporation's balance sheet as a credit base and, therefore, a potential lender will subject the loan request to a more rigorous analysis. To support this effort, the financial institution will require a more detailed information memorandum to evaluate the credit and technical risks of a project - especially since much of the necessary information is not otherwise available. (See also Gibbs and Sroka paper above in this Chapter) A well-prepared information memorandum will impress prospective lenders with the planning ability and general competence of management. Also, the process of preparing the memorandum will help management understand the true extent of the opportunities and limitations of its venture. Appendix A outlines the topics which comprise a complete information memorandum for a loan request. Of some interest to those seeking to sell a currently-operating mining venture, a similar information memorandum should be prepared i.e., covering the same topics discussed here, for the investment banker to use with potential purchasers. For that purpose, though, one might not want to prepare quite as much detail as for a lender. Appendix B outlines the elements of a reserve evaluation and feasibility study, often called the "Bankable Document." Usually, these studies are prepared by independent engineering consultants for use by potential borrowers and sellers. (Potential purchasers will often contract for a similar study for their use in evaluating an acquisition.) ELEMENTS OF A LOAN INFORMATION MEMORANDUM 1. Outline: The information memorandum should begin with a one-page outline covering such topics as: a. The borrower's name, address, and phone number. b. Principal contact at the borrower. c. Amount of the proposed financing. d. Desired pricing and structure of the proposed financing. This should include a description of the amount and source of equity in the proposed financing. e. Use of the proceeds and timing. 2. Summary: The most important information contained in the memorandum should be summarized in two pages. Note - If the borrower is a recently-formed single-purpose company, then elements 3, 4, and 5 will apply to the guarantors of completion and to the project sponsors. 3. The Borrower: This section is a brief biography of the borrower including such topics as date and state of incorporation, founder(s), lines of business, etc. 4. Capitalization: The borrower's current debt and equity position, including leases and trade debt, with amounts, terms, names, and addresses enumerated. Equity owners, and percentage ownership, should be identified. 5. Historical Financial Statements: If available, a minimum of five year's worth of complete historical financial statements

Jan 1, 1985

By T. K. McCranie, A. H. Tousley, A. H. Kackman, L. R. Gregory, A. Jr. McElrath, R. J. Krekel

In Roman and earlier civilizations the term cement was applied only to mixtures of lime, pozzolana, sand, water, etc., used as a mortar to bind larger stones. Today, portland cement, the subject of this section, can be briefly defined as follows: The product obtained by finely grinding clinker produced by calcining to incipient fusion (i.e., sintering) an intimate and properly proportioned mixture of argillaceous and calcareous materials. History The Egyptians were probably the first to join building stones with a mixture of sand and a cementitious material (i.e., having the property of or acting like cement). It is generally accepted that the cement used by the Egyptians on such structures as the Great Pyramid was calcined gypsum, Later the Greeks began to calcine limestone for use as a mortar with sand and water. Still later, broken brick and tile were added to the mortar to make the first concrete. The Greeks and Romans found that some sands produced mortars that were especially resistant to the action of water. Hydraulic (i.e., underwater-hardening) cements formed by combining slaked lime, water, and finely divided siliceous materials (e.g., pozzolana) possess superior strength and are capable of resisting the destructive action of water. They were used on the Pantheon, Colosseum, and other structures, some of which are still standing. In 1756 an English engineer, John Smeaton, found that an argillaceous limestone (i.e., containing an appreciable amount of clay as an impurity) produced a cement with greater resistance to the action of water. Despite Smeaton's findings, the use of the old mixture of lime and pozzolana long retained its popularity. Significant contributions in cement technology from England, Swe¬den, France, and Holland were made in the next 68 years. However, the invention of portland cement is generally credited to Joseph Aspdin, an Englishman, who in 1824 patented "portland cement." The name was selected because, on hardening, it resembled the natural building stone from the Isle of Portland, England. The patent features mixing ground limestone and argillaceous materials in appropriate proportions and calcining (i.e., expelling CO2 by roasting) the mixture. This superseded the existing practice of calcining naturally occurring argillaceous limestone. In about 1845 Isaac Johnson, also English, conducted experiments on proportioning the components and calcining them at higher tem¬peratures. His accomplishments are accepted as the beginning of the present-day portland cement industry. The U.S. cement industry originated with the demand for good hydraulic cement for building structures such as the Erie Canal, which was started in 1817. The first discovery of cement rock (i.e., naturally occurring argillaceous limestone with near-optimum ratios of calcium carbonate, alumina, and silica) near Fayetteville, N.Y., was made by C. White. In 1818, White secured a patent for the manufacture of natural cement from that deposit. Subsequently, several natural cement plants were built in 1830-1840 at Rosendale, N.Y., and in the Lehigh Valley of Pennsylvania. David Saylor, who participated in establishing a natural cement plant at Coplay, Pa., in 1850 discovered that a superior cement could be produced by calcining the rock at higher temperatures than hith¬erto. In 1871, Saylor obtained a patent and commenced the manufac¬ture of portland cement. By 1890, there were 17 portland cement plants in the United States with a combined annual output of 62,300 tons. At the end of 1970, the number of plants producing portland cement in the United States (including Puerto Rico) was 169, down from a maximum of 185 in 1967, with total annual shipments of 73.4 million tons valued at $1,298 million. (Fig. 1). In 1970, annual world production of hydraulic cement (which includes pozzolanic materials, hydraulic limes, natural cement, alumina cement, and portland cement, all of which are in current use in various parts of the world) reached 630 million tons (Table 1). Flowsheets of typical U.S. cement plants are shown in Chapter 13. Chemical Composition and Physical Properties It is generally accepted that portland cement clinker consists of a mixture of compounds or synthetic minerals. The four principal compounds are:

Jan 1, 1985

By H. W. Schreiber, G. R. Castle

INTRODUCTION The small mining company faces the dilemma of how to finance the development of its properties. Many of these small companies don't have the financial resources to pay for development costs from their own funds and frequently they do not even have the financial strength to permit them to borrow the money needed for development. A project financing can sometimes be arranged in such a way as to solve this dilemma. A typical project financing will not provide the answer to the "little guy's" problem because most project financings require that the sponsors of the project provide completion undertakings and sometimes other undertakings. These undertakings are often a prerequisite to obtaining financing, and if the sponsor is not financially strong enough to provide the comfort that the lenders require, then the sponsor will have difficulty obtaining financing no matter what undertakings are offered. However, with a little imagination and the right set of circumstances, a project financing can sometimes provide the solution to the small mining company's problem. The Strathcona Sound Project is unusually suited as a case study because the sponsor, Mineral Resources International Limited,(MRI) was able to arrange a project financing for the development of the project even though the lenders probably would not have been willing to loan a similar amount of money direct to MRI based on the full faith and credit of MRI's balance sheet. The way that MRI was able to arrange this financing makes for an interesting story. THE CASE In early 1974, MRI owned 100% of a small to medium sized zinc - lead - silver massive sulfide deposit (Property) located 475 miles north of the Arctic Circle less than two miles from deep water on Strathcona Sound which is a shipping zone in the Canadian Arctic. The Property was situated at a desolate location except for an Eskimo settlement (Arctic Bay) which was about 20 miles west of the Property. In other words, the project required that complete infrastructure would need to be installed in this far northern location. Independent reserve and feasibility studies (Study) had been completed on the Property which confirmed a total of 6,825,000 tons of reserves classified and summarized as shown below on Table I: [ ] These reserves were based on 229 diamond drill holes totalling 58,909 feet and were established on a cut-off grade of 7% zinc and a minimum mining height of seven feet. The overall mining recovery rate was estimated at not less than 85% and not more than 90%. The feasibility study indicated that it would cost an estimated $45,044,000 to develop an underground mine, a concentrator, a town-site, a power plant, storage facility, loading dock, a tailings disposal area and an airstrip on the Property with an annual capacity of 525,000 tons of ore per year. The construction period was expected to take two years and projected capital costs were broken down as set forth below on Table II:

Jan 1, 1985

By Rodney G. Ravenscroft

Leasing is not a new phenomenon. Experts have identified its origins as early as biblical times. It is a method of finance that has grown rapidly and is now used in most countries, including those of South East Asia, South America, the Middle East and even the People's Republic of China. Internationally, the leasing world divides fairly easily into two groups and this is determined, by and large, according to whether a country has Anglo-Saxon origins or not. Most of the Anglo-Saxon countries have seen tax-oriented leasing become a sophisticated means of financing the acquisition of large and costly items of equipment and large projects. Countries such as France, Spain and Japan have a highly developed leasing industry but it is not tax-oriented. This paper will not address leasing of this kind. LEASING - THE CONCEPT Wide acceptance of leasing as an alternative for financing capital equipment has grown with the recognition by the users of equipment that it is use and not ownership that generates profits. Whilst this seems obvious, memories of repossession of assets during the Depression and attitudes towards leasing as "last resort financing" have raised strong philosophical resistance that has only recently begun to be overturned. A financial lease is a commitment by way of contract between a user of equipment (lessee) and a financial owner (lessor) under which the lessee makes a series of payments in return for use of the equipment. The lessee is acquiring economic value associated with ownership but not ownership of the equipment itself - that remains with the lessor. A lease is a method of financing the use of an asset; other methods finance the assets themselves. It is the taxation aspects that then become important. The lessee is giving up some or all of the taxation benefits of ownership such as depreciation and investment tax credits. The lessor claims these benefits, as he is entitled to do as owner, and takes them into consideration when determining the level of lease payments that are necessary to generate his required rate of return. These lease payments are, of course, lower than they would have been without those taxation benefits. The lease payments themselves are fully tax deductible. This is tax shelter leasing. The lessor is acquiring taxation deductions that are applied fully and immediately against his other taxable income so as to reduce the amount of tax he is to pay to the revenue authorities. It is this concept that makes financial leasing work. Governments provide incentives by way of tax concessions to encourage capital investment. Governments presume that prudent capital investment will offer employment opportunities, generate sales and streamline economic activity. These, in turn, will lead to the collection of government revenue. It makes no difference at all whether these incentives are claimed by a commercial or industrial owner/user or by a financial owner who makes equipment available for use by industry. Rather, the issue is to ensure that if an incentive is available, it is used so as to achieve its desired results. No greater or lesser incentive is available for leasing and leasing does not misuse the taxation aspects of equipment ownership. The critical issue is whether the full value

Jan 1, 1985

By Phillip N. Yasnowsky

"In this Bureau of Mines report, the Federal income tax treatment of mineral exploration and development expenditures is summarized, and changes in the tax treatment of these expenditures since 1951 are detailed and analyzed. Although no attempt is made to establish causal relationships, major tax changes favorable to exploration and development activities did occur in 1951 and 1966 when the Nation was engaged in military actions and the economy was expanding. More recent changes have been unfavorable to exploration and development and were parts of major tax reform efforts. INTRODUCTIONThis Bureau of Mines report discusses the Federal tax law provisions relating to mineral exploration and development expenditures. These provisions, contained mainly in sections 616 and 617 of the Internal Revenue Code of 1954 (Title 26 of the U.S. Code), apply specifically to minerals (other than oil and gas), and thus are of interest to the Bureau of Mines.Bureau of Mines involvement in this subject stems from the legislative mandate in the 1913 amendments to the Organic Act of 1910 (the Act creating the Bureau) to conduct economic investigations of the mineral industries. Congressional concern with the financial conditions in the economic and mineral industries was expressed more recently in the Mining and Minerals Policy Act of 1970 and in the National Materials and Minerals Policy, Research, and Development Act of 1980. The General Accounting Office recommended in 1976 that the Department of the Interior ""identify and evaluate laws and agency programs that affect maintaining and developing a sound and stable domestic mining and minerals industry"" (17, p. iii). 2Taxes, a source of revenue to governments, are a cost to private firms. Thus, taxes directly affect private sector profits, and unique tax provisions are designed to encourage (or discourage) activities such as agriculture, construction, or mining. Even the international competitiveness of the domestic mineral industries may be affected by taxes because many minerals are traded in world markets."

Jan 1, 1985

By Michael Bradbury

INTRODUCTION A major change in financing exports in recent years has been the decreased importance of subsidized export credits, following the commitment of the OECD countries to eliminate the subsidy element. Subsidized export credit rates are now often more expensive than market rates as the financing for exporters has decreased in volume and importance. The forfait market, in recognition of this decreasing importance, provides a rapidly expanding source of nonrecource finance for exporters. The following is a step by step guide to what it is, how it works, its benefits and problems. WHAT IS FORFAITING? Forfaiting is not new. It has been used in Europe for about 25 years to provide export finance for both capital goods and commodities without recourse to the exporter. Although long the preserve of exporters in Germany, and more lately Italy, forfaiting is now used increasingly by exporters in Great Britain, the United States, Canada and Scandinavia. It is a fairly simple operation with easy straight-forward documentation. The transaction involves the purchase by the forfaiting bank of a bill of exchange or a series of bills without recourse to the exporter. These bills will have been drawn by the exporter, accepted by the importer, and will usually bear the unconditional guarantee of the importer's bank. They are normally drawn payable at intervals during the credit period agreed between importer and exporter and are purchased at a discount by the forfaiter. The exporter thus obtains his cash payment and the importer receives his credit period. The forfaiter collects the amount of the bills as they mature directly from the importer. Credit periods vary, depending upon the type of goods and the country and commercial risk of the importer. The period is generally between one and five years with six monthly maturities. The usual forfait currencies are US dollars. Deutschmarks and Swiss francs and others, such as sterling, French francs, and the Scandinavian currencies are being used more frequently. CHOOSING FORFAITING Most types of financing require the continued involvement of the exporter in the financial side of the transaction during the credit period. Forfaiting has certain comparative advantages. In particular, it is possible to forfait 100 percent of the risk without recourse to the exporter, unlike government sponsored export finance schemes, where some retention of the risk by the exporter is required. In addition, exports from country sources do not present problems and forfaiting can also cover trade within the EEC. Other benefits for the exporter are: (a) The exporter's balance sheet is improved; debts are turned into cash thus improving the liquidity of the company and enhancing its cash flow. And there are no contingent liabilities for bills of exchange. (b) If the sales contract is in a foreign currency forfaiting removes the risk to the exporter of adverse movements in foreign exchange during the credit period. (c) Fluctuations in interest rates during the credit period can be ignored since in forfaiting the transaction is usually done on fixed interest rate terms on a discount basis. (d) The political and transfer risks are taken by the forfaiter. (e) The commercial risk is taken by the forfaiter. (f) The costs of administration and collection etc. during the credit period are removed.

Jan 1, 1985

By C. Richard Tinsley

INTRODUCTION Project financing has been defined by various authors in this book. It is founded on reliance upon the project's own future cash flows and secondarily on the collateral value of the asset base developed. It is chiefly provided by the banking community who, after an assessment of the risks involved (See Chapter 9) analyse the company's presentation (See Chapter 10) in order to structure a financing package often at a leverage of up to 80% debt. This paper describes the various support and structuring techniques used to delimit and abate the risk components perceived from the banks' experience on project development especially for the period before cash flow is generated (pre completion). ADVANTAGES The advantages of project financing extend beyond the offloading of risks to banks. Among the advantages are the following: 1. Longer loan maturity than conventional, unsecured financing; 2. Loan disbursement and repayment tailored to specific mine; 3. Ability of a joint venture without a "track record" to raise financing; 4. Obtain financing where further direct borrowing (corporate credit) limited by existing indentures; 5. Possibility of arranging finance off-balance sheets; 6. Leverage return on equity; 7. Obtain tax savings with certain project financing structures; and 8. Obtain flexible loan repayment conditions. It can also be said that from the point of view of the company, project financing has certain disadvantages which can be summarised as follows: 1. Perceived higher cost (risk premium) compared with straight corporate credit; 2. More documentation; and 3. Need to negotiate risk-sharing aspects. The main attraction of project financing is the ability to pass certain risks on to the lenders within a flexibly funded transaction. (For a more detailed description of the specific risks see the author's paper at the beginning of Chapter 9. The same risk system is followed here.) The typical project financing has corporate support prior to completion and will usually carefully control the resultant cashflow after completion to ensure the bank does not unnecessarily assume further risks of an equity nature. WITHIN THE COMPANY'S CONTROL Operating Risk This is broken into three interrelated segments for ease of description. Technical Component: This must be specifically addressed if new technology or unproven adaptations are to be used. The banks will have scrutinized the sampling and bulk testing work, perhaps grilling the geological, mineral processing, metallurgical, and mining engineering staff or consultants directly. A number of supports are available such as: TECHNOLOGY GUARANTEE: Either the company itself or the process developer will guarantee that the technology will work for a period of, say, six months to two years after startup. If not, then financial penalties will apply although these are rarely sufficient to repay the loan. Many process developers are weak financially and may have little substance to back such a guarantee.

Jan 1, 1985

Many of the difficulties faced by the U.S. mineral industry in 1982 and 1983 emanated from the worldwide recession, from the high value of the U.S. exchange rate, and, in part, from actions taken by foreign governments to protect selected industries. While some problems will be minimized with continued worldwide economic recovery, others remain and may require special attention by U.S. policymakers. These problems include declining U.S. production capacity in selected mining and mineral processing industries, the impact of the high value of the U.S. exchange rate, and protectionist trade practices by competitor nations. Illustrative of the last is the International Trade Commission (ITC) determination in June 1984 that both the domestic steel and copper industries have been substantially injured by foreign imports. In its July 1984 recommendations to the President, the ITC suggested higher tariffs and quotas for 5 years on 70 percent of steel imports but conditioned the aid on cost-cutting and modernization steps by the domestic industry. In the copper decision, two commissioners recommended increased duties, two recommended that quotas be imposed, and one recommended that no relief be provided. The President decided in September to seek voluntary restraint agreements with nations that export steel to the United States and rejected both quotas and higher tariffs on copper imports. General Economic Setting This decade opened with the U.S. mineral industries struggling to deal with double-digit inflation, record high peacetime interest rates, and almost 7 years of oil-cartel-induced energy price increases that seriously affected the profitability of energy-intensive industries such as mineral production and processing.

Jan 1, 1985

By J. Douglas

The past year has been a strange one for the fertilizer industry of the world and the United States. Listening to news stories, you would think the sky is falling on the world's agriculture and probably conclude that we should have had an exceptionally poor fertilizer season. In some respects, we did. Prices were low, profits were low, and in some cases nonexistent, but volume was good. We heard much in the press about the farmers' credit crunch. The truth of the matter is that only 6.6 percent of the U.S. farmers have debt-equity ratios of 70 percent or more, and a large percentage of our farmers have absolutely no debt but operate entirely on their own cash assets.

Jan 1, 1985

By Noel N. Moebs

The Bureau of Mines studied the feasibility of water diversion and overburden dewatering for underground coal mines in the Appalachian region. All relevant published literature pertaining to the occurrence and control of surface and ground water in underground coal mines was reviewed, and the impacts of mine water with respect to health and safety, production, environment, and costs were assessed and are described in this report. The report also identifies the sources of water inflow into underground coal mines, and gives a summary description and evaluation of techniques that can be used to reduce the amount of water entering these mines. Engineering practices currently used by operating coal mines in the Appalachian region to prevent the movement of ground and surface water into active coal workings were reviewed and are summarized. Major emphasis has been placed on the identification of geologic and hydrologic conditions of the site, the water control methods used, and an evaluation of their technical and cost effectiveness.

Jan 1, 1985

By Grover R. Castle

INTRODUCTION "Project Financing" or "Project Loans" have become increasingly popular in recent years, and commercial banks are being asked to consider more and more of such financing. However, the analysis of this type of loan is quite different from the analysis of a loan to a financially sound corporation based on the company's balance sheet. For this reason Chemical Bank did a study of project loans in an attempt to be more sophisticated in our approach to them. As part of this study, we examined 29 project financings for which information was available. In this article I shall describe project loans and set forth the guidelines we developed, as an aid to credit officers who might have occasion to analyse this type of financing. DEFINITION OF "PROJECT FINANCING" OR "PROJECT LOAN" The terms "project financing" and "project loan" commonly describe the various methods that banks and institutional lenders use to finance the construction of new projects on a basis whereby payout is anticipated from the revenue stream generated by the project. A project financing often involves a loan to a new entity formed specifically to own the project. The analysis of a project loan proposal is quite different from the analysis of other term-loan proposals since it involves a credit decision based on the review of a projection or forecast rather than of historical earnings and/or it involves the reliance on contractual obligations of third parties. Lenders are asked to assume the added risks associated with project loans because: 1. Project financing may permit a company to obtain additional leverage. It is possible for companies to arrange financing on a project basis that could not be arranged as a direct borrowing. For example, a company may not be permitted to borrow more money directly, due to a limitation in a bond indenture. However, a project financing can sometimes be negotiated on a basis not prohibited by the indenture. 2. Often the sponsors of, or the stockholders in, the project are seeking an off-balance-sheet financing. For example, 11 of the 29 projects in our study were arranged on an off-balance-sheet basis and one showed on the balance sheet as a deferred income item. An off-balance-sheet financing, for the purpose of this article, is a financing which does not show as a direct liability on the balance sheet of the sponsors of or stockholders in a project. 3. Projects are often located in a foreign country. The financing is arranged so that the lenders assume the political risk on the loan because many companies rightly believe that this arrangement affords a degree of insulation from political risk not otherwise obtainable. 4. Many projects are jointly owned by several sponsors. This form of financing lends itself well to a situation where a new entity is formed to own a project and do the borrowing. Project loans can be used to finance a variety of activities including development of iron-ore deposits and associated pelletizing plants; development of coal reserves; construction of pipelines, alumina plants, fertilizer plants and refineries; etc. The specific areas of analysis can be quite different, depending upon the type of project being financed. It is important, therefore, to classify the proposal according to the type of project, and also by the nature of the financing - nonrecourse financing, financing covered by a guarantee of completion and financing supported by an undertaking lasting for the life of the financing. I will discuss each of these types in more detail later, but first, I should like to make some

Jan 1, 1985

By Tomek Ulatowski

INTRODUCTION In 1974, Industrial Miners Mexico, S.A. (IMMSA), agent for the borrowers, was the largest privately-held mining, smelting, and refining company in Mexico (accounting for 32% of Mexico's nonferrous metal and coal production in 1974), the fourth largest company in terms of sales, and the second most profitable company in Mexico, excluding government wholly-owned and operated industries. The company was engaged in the mining, smelting and refining of coal, copper, fluorite, gold, lead, silver, zinc and related by-products for domestic consumption and export. A combination of favorable factors led IMMSA to propose an investment plan amounting to US$286 million for 1974 through 1978, of which US$150 million was to be financed. These factors included: Substantial profits in 1973 and 1974 Positive near-term outlook for metal prices Success of the reinvestment program in increasing productivity Substantial additions to proved reserves during 1973-1974 and Fiscal incentives provided by the Mexican government to stimulate investment in the mining industry. The primary purpose of the investment program was to construct a new electrolytic zinc refinery and to expand and modernize many of the company's existing mining and refining facilities. THE BORROWER Company History Compania Miners Mexico, S.A. was incorporated in the city of Monterrey in 1918 as a wholly-owned subsidery of ASARCO Inc. (formerly American Smelting and Refining Company, New York) for the purpose of mining and processing non-ferrous metals and related products. In compliance with the Government's Mexicanization program, ASARCO Inc. divested itself of 51% of its equity in Compania Miners Asarco, S.A. on June 30, 1965. Subsequently, ownership in the divested share was apportioned as follows: 15% ownership in Compania Miners Asarco, S.A. to a group of private investors, and 36% in trust for subsequent public sale. The company's name was changed to Asarco Mexicana, S.A. in 1965. Mexican ownership in Asarco Mexicans, S.A. was increased to 51% in 1967, following the purchase of the 36% share ownership held in trust, and then to 66% in 1974 when ASARCO Inc. divested itself of an additional 15% of its holdings in Asarco Mexicans, S.A. Following its 1974 divestiture of 15% of Asarco Mexicans, S.A., ASARCO Inc's ownership in Asarco Mexicana, S.A. was reduced to 34%. In 1974, the company changed its name for the second time to Industrial Miners Mexico, S.A. (IMMSA). Fiscal Agreement IMMSA entered into a fiscal agreement with the Mexican government in 1969. The agreement, which was renewed in 1974, provided for 100% of the production and export tax corresponding to the federal government with a minimum of 50% of the amount refunded to be reinvested in fixed assets. Further, the agreement permitted the company to

Jan 1, 1985

By Jon C. Volkwein

The Bureau of Mines and many member companies of the Industrial Sand Association have been working in several areas to reduce personal exposure to respirable dust. Areas investigated include ventilation, modification of hardware, moisture addition to the product, and improved housekeeping practices. Ventilation systems have been devised and shown to contain 100 pct of a tracer gas released within the hood. An industrial clean air island has been developed and shown to reduce dust levels 90 pct at the opera- tor's position, Modification of hardware on a bag filling machine has been demonstrated to reduce dust 83 pct at the machine operator's lapel. This particular development has been termed a significant advancement in the state-of-the-art of bag filling by industry representatives. Addition of moisture to dried product materials has been tested with results showing dust reductions of 90 pct are possible!, Control of the moisture addition method still needs refinement and costs may be prohibitive. Dust sampling results clearly show the benefits of housekeeping practices such as building cleaning and vacuum sweeping. Rotation of work schedules is also effective for reducing personal exposure.

Jan 1, 1985

By Keith L. Harris

The performance of the world economy improved significantly in 1984. Real world output!/ grew 4.3% (compared with 2.6% in 19831, the highest since the 4.4% increase recorded in 1978 (table 1). The output of industrial nations rose 4.9%, while that of the developing nations rose 3.7%. The United States and Japan had the largest increases in output of the major industrial nations, with respective increases of 6.8% and 5.8% (table 2). The components of real output with the most significant growth in the industrial countries were gross fixed investment (9.2%), consumer expenditure (3.1%), and public consumption (2.5%) (table 1). Industrial output, as measured by industrial production indices, has returned to about the 1980 level for most of the major industrial nations (table 2). Exceptions to this were industrial production in Japan and the United States; Japan's industrial production rose steadily throughout the 5-yr period and is now more than 16% above the 1980 level, and the industrial production index for the United States reached 11 1.2 (1980=100.0). Real total domestic demand grew at 8.7% in the United States, more than double the rate of Japan, which, at 4.0%, had the second-largest growth. Average demand for all industrial countries was up 5.1%. During 1984 the U.S. dollar showed great strength on international markets, contributing to large current-dollar negative net exports of goods and services and even larger negative net exports of the merchandise sector. While growing U.S. imports helped spread the benefits of the recovery, they also led to a widening of current account imbalances and growing trade tensions throughout the world.3/, 4/

Jan 1, 1985

By Michael J. Klishis

It was the goal of this project to develop training materials specific to two areas of the mining industry: (1) safe use and care of the self-contained self-rescuers, and (2) awareness and avoidance of electrical hazards. This report describes the development of the following training material: Instructor's modules for the OCENCO EBA 6.5, CSE AU-9A1, and PASS 700E self-contained self-rescuers; and a textbook, slide tapes, and accident case study scenarios for mine electricity, and a computer based instructional package on mine electricity and electrical hazards. The report concludes that additional efforts are needed in mine training and four recommendations are made: (a) tailor existing materials to fit specific mine sites, (b) develop and evaluate computer based instructional material, (c) develop parallel training materials for metal and non-metal mines and, (d) develop additional training materials for preparation plants and surface areas of underground mines.

Jan 1, 1985

By J. Trevor Eyton

This paper addresses some of the financial risk hedging mechanisms available to a corporation contemplating entering the mining business at a significant level of investment. The approach which I have adopted is that of a case study relating to the risk hedging aspects of Brascan Limited's acquisition of 46% of Noranda Inc., formerly Noranda Mines Limited, followed by some remarks on options open to mining companies for reducing financial risks. To appreciate the rationale for Brascan committing over (Can.) $800 million to the natural resource sector, some knowledge of Brascan's parent company, Edper Investments Ltd., is required at the outset. Edper Investments, prior to acquiring a 48% interest in Brascan, controlled Trizec Corporation, one of the world's largest property companies. Edper also was involved in the financial services sector through Continental Bank of Canada and Hees International Corporation. For some considerable time prior to Edper's investment in Brascan, Edper felt a need to provide a better balance to its portfolio of property and financial services. Brascan was rich in cash, relatively unleveraged, and with important existing holdings in natural resources and consumer products. The acquisition of a controlling interest in Brascan provided an opportunity to balance Edper's portfolio of property and financial services with world class acquisitions in natural resources, supplemented by consumer products and financial services. The end result of Brascan's activities over the last few years is illustrated by the following analysis of the book value of Brascan's assets at the end of December 1983. [Can.$% Millions _ Natural Resources81748 Consumer Products 654 38 Financial Services 157 9 Other Operations895$1,717100% ] Source: Brascan 1983 Annual Report. The large emphasis on natural resources came about from the fact that for Canadians operating mainly in Canada, natural resources were attractive. We were impressed by Canada's position in the world natural resource industry as illustrated by some of the following statistics: [CommodityCanadian Estimated Production In 1983 As % of World Total Newsprint 30 Potash 21 Uranium 18 Molybdenum 17 Zinc 17 Pulp 16 Nickel 16 Saw Logs 11 Silver 8 Copper 7 Lead 6 Gas 5 Oil3] Source: U.S. Bureau of Mines and Brascan estimates. In addition, the quality of Canada's reserves looked good to us. The polymetallic nature of many of Canada's orebodies offered a hedge against risk relating to any one metal. Put another way, the by-product metal credits offered a net operating cost advantage with respect to many of the metals mined. Our energy costs also appeared to provide Canada's natural resource industries with an advantage. We considered Canadian mining expertise as amongst the world's finest, as were the exploration equipment and technology developed in Canada. In addition, Canada offered a stable political climate and one we knew. Further, we felt the Canadian Government's future role in the industry would, on balance, be benign, partly because the Canadian content of the mining industry was very high in contrast to the petroleum industry. Granted, we could find cheaper sources of copper; however, to do so would involve venturing into regions where country risks were higher.

Jan 1, 1985

By B. Thomas Mansbach

INTRODUCTION The Overseas Private Investment Corporation ("OPIC") is a U.S. Government agency mandated to promote the economic development of the less developed countries ("LDCs") by assisting U.S. private investment in the Third World. Generally, investment decisions turn on the optimism or pessimism of the private sector's financial analysis of a project, with market price of product a major unknown in a very chancy set of projections. Discussions with American mineral companies, however, show that, more often than not, in developing country projects it is the political risks of investing in mineral exploration and extraction that pose the most serious deterrent to investment. In several of the projects described here, investments would not have been made if OPIC had not been involved providing support to the project sponsors and their funding sources. Clearly it is not OPIC's business to promote U.S. investment in a project which is not commercially viable, but OPIC's programs can neutralize the political uncertainties which act as disincentives to investment in otherwise commercially viable projects. That is to say, OPIC's programs are designed to reinforce market decisions and not distort them. Although OPIC is an independent agency of the U.S. Government, it is managed by a Board of Directors, the majority of whom come from the private sector. This, coupled with the statutory requirement that it be self-sustaining and operate with due regard for the principles of prudent risk management, requires that it operate on a business-like basis. Although established as a development agency, to the business public OPIC is both an insurance company and a lending institution, with two major programs which are available to U.S. investors in the minerals sector: its political risk insurance program and its finance program. Each has been specially tailored to the meet needs of the mining industry. The insurance program provides coverage against four basic types of political risk: Currency Inconvertibility, Expropriation, loss caused by War, Revolution and Insurrection and Interference with Operations as a result of an act of War, Revolution or Insurrection. Coverage against the risks of Civil Strife can be added to both War, Revolution and Insurrection coverage and Interference with Operations. Inconvertibility coverage provides protection against a deterioration in an investor's ability to convert local currency into U.S. dollars. This deterioration can be the result of either active or passive delays. Active delays consist of a change in exchange laws or regulations that leads to inconvertibility delays of 30 days or more. For example, if the exchange regulations at the time of contract execution allow an investor to transfer earnings equal to 18% of its registered capital per annum and the government of the host country later changes the law to allow conversion of only 12%, the insured would convert the 12% transferable under the new exchange regulations with the government foreign exchange authorities, delivering the remaining 6% to OPIC for conversion at 99% of the then prevailing rate of exchange. (OPIC does not cover devaluation risks.) Upon delivery of the local currency to OPIC, normally at the U.S. Embassy in the project country, the insured's account in the U.S. would be credited with dollars. Delays can also result from what is termed passive blockage, which includes administrative delays of more than 60 days (sometimes longer) caused by the bureaucratic tie-ups or pigeonholding of transfer requests, as well as delays suffered simply because the government of the host country does not have sufficient foreign exchange. The transfer procedure is the same as with active blockage - the local currency is delivered to OPIC in the project country and OPIC provides dollars in the United States at the then prevailing rate of exchange. The second coverage -- Expropriation -protects not only against the loss of the investment due to the well-known risks of expropriation, nationalization or confiscation by the host government, but also against

Jan 1, 1985

By Dennis J. McCarthy

TAX TREATMENT OF EXPLORATION AND DEVELOPMENT EXPENSES Exploration Expenditures General Principles. Exploration expenditures are expenses incurred within the United States or the Outer Continental Shelf for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral. Section 617 of the Internal Revenue Code permits a taxpayer to elect to deduct these expenditures currently. In default of election, exploration expenditures must be capitalized and included in the basis of the mineral property for purposes of determining cost depletion. Entitlement to Deduction. In order to qualify for current deduction, exploration expenditures must be incurred prior to the commencement of the development stage, i.e., when mineral deposits are shown to exist in sufficient quantity and quality to reasonably justify commercial exploitation. Generally, expenditures for geological and geophysical investigations, reconnaissance, surveying, testpitting, trenching, drilling, driving of exploration tunnels and adits and similar types of work constitute exploration expenditures if incurred prior to the commencement of development. However, expenditures to further delineate the extent and location of an existing commercially marketable deposit are not exploration expenditures. Exploration expenditures may be incurred from within a producing mine to ascertain the existence of what appears to be a different ore deposit. Expenditures for property which is subject to an allowance for depreciation are not deductible under §617. However, depreciation properly allowable on assets used in exploration is an exploration expenditure. Election to Deduct Exploration Expenditures. The election to deduct exploration expenditures is made by deducting these expenditures in the return for the first taxable year for which such treatment is desired. The election applies to all properties of the taxpayer. Once the election is made all exploration expenditures, in the year of election and thereafter, must be deducted, unless the election is revoked with the prior consent of the Commissioner. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) made substantial changes in the treatment of exploration expenditures. For exploration expenses incurred after 1982 and before 1984 by a corporation, the amount currently deductible is limited to 85% of the expenditure. The remaining 15% must be capitalized and recovered over a five-year period. Although exploration costs capitalized under this provision are not part of the basis of the property for cost depletion purposes, investment credit may be claimed with respect to these expenditures. Further changes have been added by the Tax Reform Act of 1984 with respect to expenditures made after 1984. The Act reduces the amount of otherwise currently deductible costs from 85% to 80%. Additionally, it limits the availability of the investment credit for capitalized mineral exploration costs to deposits located in the United States. TEFRA also allows individuals a special method of recovery under which exploration expenditures may, at the election of the taxpayer, be amortized ratably over a 10-year period beginning with the year in which the costs are paid or incurred. If taxpayer does not use this method, the excess of the exploration expenditures actually deducted over the amount that would have been deducted if 10 year amortization had been elected is an item of tax preference subject to the alternative minimum tax.

Jan 1, 1985

By Takeshi Nagano

Copper pyrometallurgy in Japan has experienced quite fundamental changes in last fifteen years. The severe environmental restriction coupled with increase of energy costs accelerated the development work of the new continuous process in Mitsubishi Metal Corporation. After several years of pilot plant test work the commercial plant was put into operation at Naoshima Smelter in 1974, the design capacity of which was 4,000 tonnes of copper per month. Many modifications and improvements have been incorporated into the process and 7,200 tonnes per month of copper production was achieved in 1983, proving that continuous process was much more economical than conventional process. It is now possible to design and operate the continuous process in wide range of capacity. This paper will review the process and describe the progress of the process in these 10 years. 311

Jan 1, 1985

By Jurgen H. Kleinau

This paper details Keeler/ Dorr-Oliver's experience with the application of fluid bed combustion technology to the burning of coal-mining waste. The designs of two stage fluid bed combustors/dryers are demonstrated as useful in the drying of coal, slag and coke, using coal and coal refuse (gob) as fuel. Anthracite mining refuse (culm) is more than abundant in Northeastern Pennsylvania. After demonstration at Shamokin, Pennsylvania, a full commercial-sized fluid bed boiler using culm is used for district heating in Wilkes-Barre, Pennsylvania. Limited research work has shown the utility of using fine coal as filter aid in sludge in¬cineration. With the rising avenues of the suitability of coal as auxiliary fuel in fluid bed sludge incineration, an expansion of these concepts combines the use of coal or coal refuse as filter aid and auxiliary fuel. Lime¬stone addition controls SO2 emission.

Jan 1, 1985