Module 5: Economic Studies (Scoping, PFS, DFS)

Why this matters

Economic studies are the company's formal pitch that a deposit can be turned into a profitable mine. They are also where the most consequential lies-by-omission happen — base case prices set 30% above spot, capex estimates that consistently understate by 30–50%, NPV calculations that ignore real-world ramp problems.

Read every study with the assumption that it represents the company's most optimistic internally-defensible case. Then mentally degrade it.

The three studies, in order

Scoping Study (in Canada: PEA — Preliminary Economic Assessment)

Accuracy: ±35–50%
Cost: $200k – $1m
Timeline: 3–6 months
Resource categories allowed: Inferred, Indicated, Measured (yes, Inferred is allowed at this stage — important caveat)
Purpose: "Is this worth taking further?"
Output: rough capex, opex, NPV, IRR, mine plan concept
NOT bankable. Cannot be used to raise project debt.

PFS (Pre-Feasibility Study)

Accuracy: ±20–25%
Cost: $2m – $10m
Timeline: 9–18 months
Resource categories allowed: Indicated and Measured only (Inferred excluded from reserves and economics)
Purpose: "Is this technically and economically robust?"
Output: maiden Ore Reserves declared, refined capex/opex, NPV, IRR with sensitivities
Bankable for some lenders, but most still want DFS.

DFS / BFS (Definitive / Bankable Feasibility Study)

Accuracy: ±10–15%
Cost: $10m – $50m+
Timeline: 12–24 months
Resource categories allowed: Indicated and Measured only
Purpose: "This is the project we will build."
Output: detailed engineering, procurement-ready BOMs, refined reserves, lender-grade economics
Bankable for project finance. The basis for FID (Final Investment Decision).

Key outputs in every study

NPV (Net Present Value)

The discounted value of all future cash flows from the project, minus initial capex.

Usually presented as post-tax NPV at 5–8% discount rate
Pre-tax NPV is also often shown — pre-tax NPV is always higher; companies sometimes lead with pre-tax for the bigger number
Sensitive to commodity price assumption and discount rate

Rule of thumb: project NPV should be at least 2–3x capex for a developer-stage company. NPV = capex means barely worth building.

IRR (Internal Rate of Return)

The discount rate at which NPV = 0. Measures capital efficiency.

<15% IRR: marginal, hard to finance
15–25%: solid project
25–40%: strong project
40%+: excellent (or assumptions are aggressive)
60%+: assumptions are almost certainly aggressive — verify the price deck and capex

Capex

Initial capital expenditure to build the project.

Pre-production capex: actual build cost
Sustaining capex: ongoing capital to maintain production through mine life (added separately to AISC)

Always check what's included. Some studies exclude:

Owner's costs (the company's own salaries, financing fees)
Working capital
Contingency below industry-standard levels
Land acquisition / royalty buyouts
Power/water infrastructure if "to be provided by third party"

Opex (Operating Cost)

Cost per tonne of ore processed or per unit of metal produced. Usually presented as:

$/t ore (mining + processing)
C1 cash cost (direct production cost per unit)
AISC (all-in sustaining cost — see below)

AISC (All-In Sustaining Cost)

Originally a World Gold Council metric (2013), now used loosely across commodities. Includes:

Cash production costs
Royalties
Sustaining capex
Site G&A
Reclamation accruals

It does NOT include:

Initial capex
Exploration capex (unless sustaining)
Corporate G&A (sometimes)
Income tax
Interest expense

Different companies calculate AISC differently. Compare AISC across companies with caution.

For a project to be robust, AISC should sit comfortably below the long-term commodity price. AISC at 80% of spot = healthy margin. AISC at 95% of spot = no margin, no resilience.

Payback Period

Years until cumulative cash flow recovers initial capex.

<2 years: excellent
2–4 years: solid
4–6 years: marginal
6+ years: high risk in a cyclical commodity

Mine Life (LOM — Life of Mine)

Years of production at planned throughput based on current reserves.

<5 years: short, hard to attract debt
7–15 years: typical for mid-tier projects
20+ years: tier-1 reliability

LOM extends if exploration adds resources and conversion to reserves continues.

Sensitivity tables — where to focus

Every study includes a sensitivity table showing how NPV/IRR changes with input changes:

Sensitivity	-20%	Base	+20%
Commodity price	$X	$Y	$Z
Capex
Opex
FX rate
Discount rate

Where to focus:

Commodity price assumption. What price did they use? If the base case price is above current spot, the project is more sensitive than it appears at first glance. Recalculate NPV at current spot prices.
Capex sensitivity. A project with NPV that flips negative on +20% capex is a very fragile project, given that 30–50% capex blowouts are normal.
Discount rate. Most companies use 5–8%. Use 10% as a stress test for junior/risky projects.

Capex blowout — the pattern that always repeats

Capex estimates almost always rise from study to study, then again from DFS to actual build:

Stage	Typical capex vs final actual
Scoping	40–70% of final actual
PFS	60–85% of final actual
DFS	75–95% of final actual
Final actual	100% (often more)

This is not because companies are stupid. It's because:

Engineering detail increases over time, finding scope that wasn't visible earlier
Inflation in steel, copper, labour, EPC contracts
Permitting conditions add infrastructure (water treatment, dust suppression, road upgrades)
Currency moves
Site conditions different from assumed (geotech, hydrology)

Stress-test every DFS by adding 25–35% to capex and see if the project still works at current spot commodity prices.

Hidden games to watch for

1. Optimistic commodity price deck

The most common manipulation. Industry-standard practice is to use the consensus 5-year forward curve or current spot, whichever is more conservative. Some studies use:

Long-term incentive prices (the price required to justify new supply) — fine in theory, but optimistic
"Analyst consensus" cherry-picked from bullish forecasts
Spot price during a temporary price spike

Always recalculate NPV at current spot. If the project doesn't work, the study is selling you a price view, not a project.

2. Aggressive recovery rates

Met testwork on a few drill samples extrapolated to 90%+ recovery. Real plants typically achieve 5–10% below pilot test rates in early years, sometimes never reach pilot rates.

3. Optimistic ramp profile

Assuming nameplate capacity in Year 1 or even Year 2. Most plants ramp slower — especially complex flowsheets. Stress test with a 12–24 month ramp.

4. Excluding pre-production capitalised costs

Owner's team costs during construction, working capital, financing fees can add 10–20% to total capital required to first cash flow.

5. Cherry-picking the best mine plan years for production guidance

"Average annual production: 200 koz Au" might be true over 10 years but Year 1–3 might be 280 koz (high-grade core mined first) and Year 8–10 might be 130 koz. Most analyst valuations rely on the headline number.

6. Single-product NPV when by-products are required

A copper project with by-product gold credits often shows two NPVs — copper-only and copper+gold. The copper+gold NPV is usually headlined. If the gold credit doesn't materialise (lower grade than predicted, lower recovery), the project economics collapse.

7. "Phased development"

Splitting the project into Phase 1 (small, low-capex) and Phase 2 (larger, capex deferred to later years from operating cash flow). Looks fundable. In reality, Phase 2 often gets indefinitely deferred when commodity prices fall, leaving a sub-scale operation.

What a good study looks like

Green flags:

Base case commodity prices at or below current spot
Conservative ramp assumption (12+ months to nameplate)
Adequate contingency (15%+ on capex)
Met recoveries based on locked-cycle pilot tests, not just bench-scale
Reasonable strip ratio assumptions through life of mine, not just early years
Sensitivity to -20% commodity price still shows positive NPV at 8% discount
AISC well below long-term commodity price
Published assumptions fully transparent

When you see all of that, the study is being run as engineering, not marketing.

How to read a study in 30 minutes

Read the announcement headline numbers (NPV, IRR, capex, AISC, LOM)
Find the commodity price assumption. Compare to current spot.
Find the discount rate. Re-mentally apply 10% if 5–8% used.
Read the capex breakdown. Note contingency level and what's excluded.
Read the sensitivity table. Stress to -20% commodity price and +25% capex simultaneously. Does NPV survive?
Read the production schedule. Is Year 1 production materially higher than LOM average? (High-grading early years.)
Compare PFS → DFS capex if both are out. What was the blowout?
Check who did the study. Tier-1 consultancy (SRK, AMC, Lycopodium, GR Engineering, etc.) carries more weight than in-house or unknown consultants.

Practical exercise

For any study published on a stock you follow, answer:

What commodity price was used vs current spot?
What's the NPV/capex ratio?
What's the IRR pre-tax and post-tax?
What contingency was applied to capex?
If you stress capex +25% and price -20%, does NPV stay positive?
What's the AISC vs current commodity price?

If those answers don't make the project look investable, the company will need either a commodity price tailwind or a M&A bid to make money for shareholders.

What I'm uncertain about

"Industry-standard" capex contingency varies (10–25%) and there's genuine disagreement among consultants about the right level.
AISC methodology variations between companies are significant enough that direct comparisons require careful normalisation. World Gold Council guidance helps for gold; less standardised for other commodities.
Specific consultant reputations shift over time. A few prominent names have had project blowouts that hurt their credibility — worth checking recent track record on similar projects.