investment to proceed. However, the irreversibility of investment also means that there is an opportunity cost to investing now rather than later. Hence, if the option to defer investment exists, the firm will not invest until the after-tax NPV it receives is substantially greater than zero.

Because of technical and commercial project uncertainties, project evaluation continues throughout the life of the project. Prior to each substantial investment of new capital, the firm will assess the technical and economic merits of the project on a go-forward basis. At the exploration stage, the evaluation is crude and subjective, with exploration dollars allocated based on the geological prospects of the exploration target. At successful exploration areas, mineral resources are declared. As the project advances further, rigorous technical studies are undertaken. These technical studies include scoping studies, preliminary economic assessments, pre-feasibility studies, and feasibility studies, each with increasing detail and sophistication. Each of these technical studies must show a substantially positive after-tax NPV for the project to advance to the next stage of capital spending. Because of the information disclosure requirements for mining companies listed on various stock exchanges, these technical studies are published by the listed companies and available for all to see.

These studies, being evaluations of the project rather than valuations of the project, typically do not estimate in any rigorous way the expected cash flows or the appropriate project discount rate. Rather, cash flows are estimated using a series of short cuts and rules of thumb. For example, costs are projected in today’s dollars, while metal prices are projected in inflated dollars. The project is evaluated at a series of routine discount rates for robustness, these discount rates having nothing to do with estimation via the CAPM. Project managers then evaluate the outcome of this exercise, looking at the project NPVs created by the exercise and use heuristics to decide whether to move the project forward. These heuristics include internal rate of return (IRR), payback period, size of NPV relative to investment cost, and project life (longer being more desirable).

_Figure 7: Copper Mine Copper Grades vs. Ease of Doing Business Scores, By Country_ Political risk is not explicitly _Figure 7: Copper Mine Copper Grades vs. Ease of Doing Business Scores,_ considered in this project _By Country_ evaluation exercise. That is, 10.0 political risk is not factored into Size=Production any of these project evaluation cash flow calculations or, as a short cut, the project discount rate. A project that faces political risk must simply reach higher hurdles in terms of the heuristics, 1.0 such as a higher IRR and faster DRC payback, or more upside Myanmar geological potential. These higher hurdles are not written down Mauritania anywhere, but we can observe Chile USA their manufacture through 0.1 0 10 20 30 40 50 60 70 80 90 100 operational metal grade, with projects in more risky countries _Source: Martin Lokanc and Sven Renner, 2022._ only being pursued when the production grade upon project success is estimated to be sufficiently high 24