Abstract
Higher royalty and other production-contingent payment policies cause some otherwise economical mineral projects to become uneconomical. But, even for projects that are still economical, such payments lead to a slower rate of mineral production and may decrease ultimate recovery.
Introduction
Assume an investor owns a quantity Q of a mineral source and that this quantity ultimately will be recovered regardless of recovery rate. What determines how fast an investor would produce the source Q? Physics places no upper limit on the rate of production attainable. There is no lower limit. Provided that an investor chooses to produce the mineral source at all, the range of chohices possible is broad. As investors choose to produce minerals owned in 10, 20, 50, or more or less years, the ratio of recoverable reserves to the annual rate of recovery for minerals is established.
How does an investor pick the recovery rate? We first analyze this question with a very simple model of the investor's problem, which we call the zeroth version model because of its simplicity. For brevity, we use the abbreviation ZVP to refer to the zeroth version problem.
In the zeroth version model, the investor can elect to spend a lump sum for development cost at time tD. The present value of these development costs is given by
where CD is the development cost required in dollars per dollar per year of gross revenue from mineral production. Thus, in ZVP, development costs are assumed exactly proportional to production rate, which is assumed constant throughout the production period ?. The factor XD converts total development costs to net development costs after considering applicable taxes or leasing arrangements such as profit sharing.
