Capex, Opex and Sustaining Capital: The Cost Words in a Mining Study

Introduction

When a junior publishes a preliminary economic assessment (PEA), a pre-feasibility study or a feasibility study, the headline is usually the net present value. Behind that number sits a cost table: what the mine would cost to build, what it would cost to run, and what it would cost to keep running and eventually close.

Those cost words have specific meanings, and they move in predictable ways as a project matures. This guide explains each one. We cover the study stages themselves, and metrics such as all-in sustaining cost (AISC), in separate guides, so here the focus is on the cost lines.

The NPV is only as solid as the cost table underneath it.

Where the Numbers Come From

In Canada, a study disclosed by a reporting issuer is supported by a technical report under National Instrument 43-101, filed on SEDAR+. The form that sets its contents, Form 43-101F1, requires three things relevant here:

• Capital and operating costs: a summary of the cost estimates, with the major components set out in a table, and an explanation and justification of the basis for the estimates.
• Economic analysis: the principal assumptions, annual cash flow forecasts, net present value, internal rate of return and payback, and a sensitivity analysis to changes in metal price, grade, and capital and operating costs.
• Environmental and closure items: a discussion of mine closure, remediation and reclamation requirements and costs, among other permitting and social factors.

The study's news release gives the summary. The technical report gives the detail.

Initial Capital

Initial capital, also called pre-production or upfront capex, is the spending needed before the mine produces anything saleable. A typical breakdown includes:

• Direct costs: the processing plant, mine development and pre-stripping, the mining fleet if owner-operated, the tailings facility, power, water, roads and camp.
• Indirect costs: engineering, procurement and construction management, owner's costs, temporary facilities, first fills and spares.
• Contingency: an allowance on top of the estimate, discussed below.

Initial capital is the number that decides how much financing a company needs. It is often the hardest hurdle for a junior, because it can be many times the company's market value.

Watch for what is left out. Some studies assume a contractor fleet or leased equipment, which lowers initial capital but raises operating cost. Others place a power line or road outside the project. Neither is wrong, but both change comparisons.

Contingency

Contingency is money added to an estimate for costs that are expected but not yet defined in detail. It is not a reserve for disasters. It reflects how much engineering has been done: the less design work behind a number, the more of it is unknown.

That is why contingency is normally larger, as a percentage, in an early study than in a feasibility study. A PEA that carries a small contingency on a lightly engineered estimate deserves a closer look, not more confidence. The technical report should say what the contingency covers and how it was chosen.

Operating Cost

Operating cost covers the recurring spending: mining, processing, general and administrative costs, and often site services and transport. Studies commonly express it per tonne of ore processed, sometimes split into mining cost per tonne mined and processing cost per tonne milled.

Per-tonne figures matter because they connect to grade. Suppose a hypothetical open pit has a total operating cost of $40 per tonne processed. If each tonne contains metal worth $60 after recovery, the margin is $20 a tonne before capital and taxes. If the grade falls so that each tonne contains $45 of metal, the margin shrinks to $5. This is the logic behind cut-off grade, which we cover in its own guide.

Studies also convert operating costs into a cost per ounce or per pound of metal. Those figures depend on grade and recovery, and often on by-product credits, so they are not directly comparable across projects without checking the basis. The AISC margin calculator shows how a cost per ounce compares with a metal price.

Sustaining Capital and Closure

Sustaining capital is spent during production to keep the mine operating at its planned rate: replacing equipment, raising tailings facilities, and ongoing development. The World Gold Council's guidance on AISC treats production-phase open pit stripping and underground development as generally sustaining, and separates out non-sustaining costs, such as spending on new operations or major projects expected to materially increase production.

Expansion capital is the other side of that line. It is money spent to grow output, and it is usually shown separately in a study.

Closure costs cover reclamation and remediation at the end of mine life, and sometimes long-term water treatment. They can be large and they arrive when the mine is no longer earning. Regulators often require financial security in advance. In British Columbia, for example, reclamation security may be a condition of a Mines Act permit, and the province holds it to cover reclamation costs if a company defaults on its obligations.

Why the Numbers Move

Cost estimates change between study stages for ordinary reasons:

• More detail. A feasibility study designs things a PEA only assumed. Detailed design tends to find costs that were not in the earlier estimate.
• Changed scope. A larger or smaller plant, a different mining method, or new infrastructure.
• Time. Equipment, labour, energy and reagent costs change. A study from several years ago reflects the prices of its date.
• Currency. Many inputs are priced in US dollars. A study in Canadian dollars carries an exchange rate assumption.

A higher capital estimate at a later stage is common and is not, by itself, a sign of a bad project. What matters is whether the economics still work at the new figure, and whether the company explains the change.

What to Check

• The study date and currency. Costs date quickly.
• Initial capital and contingency. How large the contingency is, and what it covers.
• Owner or contractor mining. It shifts costs between capital and operating lines.
• Operating cost per tonne. Compared with the value of metal in each tonne.
• Sustaining and closure capital. Whether both are included over the full mine life.
• The sensitivity table. How far NPV moves if capital or operating costs rise.
• Funding. Initial capital set against the company's cash and market value. See reading a junior's capital structure.

Read the full technical report on SEDAR+, and speak to your own adviser before making an investment decision.