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Mining executives use economic evaluations as a decision-making tool
Mining executives use economic
evaluations as a decision-making tool
Interview with John Stermole of Investment Evaluations Corporation
 In today's economic climate, GoodOil continues to ask: "What are mining executives' concerns? What is their focus? And what role can Dingo play in helping them achieve their goals?"
As the world leader in offering solutions to heavy asset-intensive operations, Dingo utilizes many of the economic and financial evaluations processes taught by John Stermole in the Economic Evaluation and Investment Decision Methods course. We asked John Stermole, president of Investment Evaluations Corporation, and lecturer at the Colorado School of Mines, for his views of these issues.
GoodOil: Who is Investment Evaluations Corporation?
JS: "Investment Evaluations Corporation was formed in 1974 as a privately held company involved in publishing our textbook, Economic Evaluation and Investment Decision Methods. IEC also promotes short courses and consulting related to economic evaluation of investments."
GoodOil: Can you briefly explain the framework of the Economic Evaluation and Investment Decision Methods course offered to students and industry leaders through Colorado School of Mines?
JS: "The course is designed to introduce participants to the concepts of time value of money and the decision criteria used to evaluate investments, including net present value, rate of return, ratios and other methods.
"These concepts are applied to a variety of investment scenarios both on a before-tax and then after-tax basis with a focus on the effects of inflation, uncertainty, risk and tax policies. It really is a course explaining the ‘black box' of the economic evaluation process."
GoodOil: In what ways is the material in this course useful for engineering students in mining curriculums?
JS: "Actually, the concepts are useful for students in any curriculum. That's what makes it a fun subject to teach. It doesn't matter if you are working for a major mining company and trying to determine whether you should replace or rebuild a haul truck or looking at the effects of refinancing your home loan or trying to decide whether to lease or buy a car. The evaluation concepts are based on the same economic principles centered on discounted cash flow."
GoodOil: What services do you supply to the mining world?
JS: "We provide training to those who make economic evaluations, as well as to those who simply want a better understanding of what goes into the process. Participants include not only engineers, but also geologists, geophysicists, accountants, managers and those involved in operations.
"The course focus is on discounted cash flow concepts applied to acquisition, development or expansion of properties, as well as decision making related to replacement analysis and financial decisions, such as whether to lease or purchase equipment. The process is applicable for any application in which measuring economic equivalent investments is required in a before-tax or after-tax environment.
"The consulting business services may involve anything from an independent assessment of an applied process, opinion on a parameter that is part of a model or justification of a parameter, or a complete appraisal of an investment opportunity."
GoodOil: How is the evaluation process used by mining executives?
JS: "Well, I can't speak for all mining companies, but most executives use these concepts to guide their decision making to maximize value to the firm and get the most of the limited capital budget dollars they have to invest. There are always questions of what is optimal in terms of relevant parameters in a discounted cash flow model, but equally important is a consistent application of those parameters to the evaluation process.
"I believe the evaluation process should trickle up through company personnel. Internally in every company, when employees understand the process of decision making, there is an element of team building. I think people like to know they had a role in that process, whether it's an idea to lower costs, provide data input, processing or evaluating -- even if the decision is not what someone wants to hear. If they understand the process, they can accept it more easily and move on.
"Finally, it is equally important to understand the difference between ‘economic' and ‘financial' decisions. Both are important but driven from different perspectives. Economic measures base decisions on expected future cash flow and costs. However, financial measures often look back and assess performance of recent investments and net income generated. Sometimes they don't reach the same conclusion. Selling long-term, economically viable projects in light of short-term, financial difficulty requires not just knowledge of the facts, but also an ability to convey that message to employees and investors."
GoodOil: How many mining and oil/gas companies have you worked with in the past 20+ years?
JS: "I've provided training and/or consulting to more than 50 companies in the mining and oil and gas industries, with another grouping in chemical/refining, pipelines and energy."
GoodOil: In these challenging financial times, how critical is it for mining companies to revaluate how they make investment decisions?
JS: "Making good investment decisions is always critical, especially in financially challenging times. Hopefully, no one spends the kind of money we're talking about without being aware of the economic consequences of the decision. Shareholders expect and even demand that.
"But that said, being able to convey the economics as they relate to the cyclical nature of commodity prices is equally important, as Washington and the political crowd tend to look at high-cycle pricing as an opportunity to tax profits with new taxes, but fail to recognize how those same, ‘incrementally taxable' cash flows may be required to maintain projects and jobs when pricing is not as lucrative.
"Discounted cash flow requires long-term thinking, and it is management's job to sell that to the politicians, lenders and communities of the world. Since most commodities are priced at a discount to the long-term effects of inflation, a level tax playing field is an important consideration in looking at the economics' natural resource projects and even replacement analyses."
John Stermole, president of Investment Evaluations Corporation, serves as lecturer in the division of Economics and Business at Colorado School of Mines, teaching engineering economics to junior, senior and graduate-level students. John earned an MS in mineral economics from CSM and an undergraduate degree in finance from the University of Denver.
Frank Stermole is professor emeritus from Colorado School of Mines where he has taught since 1963 in the department Chemical Engineering and the division of Economics and Business. Frank has a PhD, MS and BS in chemical engineering from Iowa State University and is chairman of Investment Evaluations Corporation.
For more information about the Investment Evaluations Corporation, go to http://www.stermole.com.
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