August 2009

Teaching the business of the mineral resources industry

Mineral economics at Queen’s University

By J. Martin

Teaching mineral economics at the undergraduate level has been a tradition at Queen’s University for many decades. Committed to offering top-ranked mineral economics training to complement its strong mining and geological engineering programs, the university prides itself on having faculty with deep, real-world understanding of the subject, and places the emphasis on the application of economic analysis techniques in the resources industry.

Mineral economics is taught as a core undergraduate course within the Faculty of Applied Science to mining and geological engineering students and is also open to geological sciences students from the Faculty of Arts and Sciences. A graduate-level course is also taught within the mining engineering program. Queen’s places the emphasis on the application of economic analysis techniques within geological exploration, mine development and equipment replacement.

The undergraduate course imparts important skills to aid students in their engineering design courses and projects. It is also a vital part of preparing them for their careers when, as engineers, many will be involved in project management, enterprise management and strategic planning  processes at mineral resources companies.

At a business-enterprise level, students are introduced to how capital is raised and used, the various sources of capital and the calculation of associated costs. This prepares future engineers to understand and calculate the minimum rate of return firms will find acceptable for making project decisions. This is central to the economics of running a mineral resources business.

Built on lectures, individual assignments and a group project, the undergraduate course, in which 75 students were enrolled last year, uses examples of current business situations to generate discussion. This past year, students looked at the proposed capital injection by Chinalco into Rio-Tinto (which has since been cancelled). Students have the added benefit of closely studying potential future employers, gaining knowledge that can be very useful when they start their careers.

The program covers a range of topics including an introduction to economic evaluation; the concepts of cash flow and its estimation; the time value of money and net smelter return; determining costs; understanding taxation; the effects of inflation; risk and sensitivity analyses; the basics of exploration economics; the equipment replacement decision-making process; financial analysis of mining companies; and the valuation of projects and firms.

The group project encourages long-term thinking about operations and finance as a counterbalance against the short-term cyclicality of certain enterprises, commodity markets and the stock market, generally. Teams of four members, comprised of a mix of mining and geological engineers, each choose a mining company and an oil and gas company to review. This past year, the companies reviewed included Barrick Gold Corporation, BHP Billiton, Canadian Natural Resources Ltd., Chevron, EnCana, ExxonMobil, Husky Energy, Kinross Gold Corporation, Nexen Inc., Petro-Canada, PotashCorp, Suncor, Vale Inco and Xstrata. The first part of the project required teams to present a company-wide summary of their subject companies’ operating strategies and results over the 2007 to 2009 YTD period.

The second part focused on the financial implications of the operating results and the entity’s financial strategy. Needless to say, in the 2009 winter term, the students were analyzing companies during a very turbulent period. The point of the project is to observe and understand the interconnection between operating and financial strategies at an enterprise-wide level. A brief report, with backup, is required for each of the operations and financial sections.

At the graduate level, the course is more intensive and includes such topics as accounting, economics and financial analysis in geologic and mining situations; economic analysis methods used in the resources industry; considerations of business structure, legal issues and taxation; the financial management of the mining and oil and gas enterprises; comprehensive mineral project and enterprise valuation; and strategic business planning. There is also a group project in which students study a major Canadian mining company (this past year it was Teck) and the class prepares a business plan based on public information, their undergraduate engineering training and the techniques taught in the course.

Thus, the Queen’s University program provides students with a deep theoretical and strongly practical understanding of the role of finance and economics in the mineral resources industry. Teaching the practical application of mineral economics remains a key part of Queen’s long-term strategy for its Department of Mining Engineering. We believe that it is vital for our future engineers and geologists to understand the monetary side of the business as thoroughly as they comprehend its technical and scientific aspects.

Queen’s University welcomes enquiries from prospective undergraduate and graduate students, alumni, researchers, government and industry.

Jim Martin started teaching mineral economics at Queen’s University recently, bringing with him more than 30 years of industry experience. He holds a B.Sc. Eng. (geological engineering) from Queen’s University, an M.Sc. in mineral engineering from Stanford University, and an MBA from the University of Toronto. He was elected by alumni in 2006 for a six-year term on the Queen’s University Council.

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