By Deborah Spicer

It would be wrong to adjust the costs involved in a project for inflation if the costs were calculated some time previously.

This is the view of Venmyn mathematician Iaan Myburgh, who spoke at Venmyn and Pretoria University’s Compliance and Reporting in the Minerals Industry Course last month.

He noted that Statistics South Africa has indicated that the Consumer Price Index (CPI), calculated for an average basket of goods that the average South African is likely to use, increased by 80.9% between 2002 and 2012, translating into a 6.1% increase in CPI on an annualised basis.

However, if one looked at individual items that South Africans purchase, some of these items showed cost increases in excess of 80.9% over the period.

This included fuel, which increased by 239%, or from ZAR3.61/l to ZAR12.22/l, between 2002 and 2012, said Myburgh, quoting an insert in FinWeek.

A 2,5kg bag of maize meal also showed a price increase that outstripped the CPI, increasing by 213% over the period, while a 750g can of Ricoffy had a 191% increase in price, increasing from ZAR21.99 to ZAR63.99 over the period.

Myburgh noted that, in a similar way that the price of individual grocery items may have increased at a much higher rate than the CPI, so items that are in a “mining project basket” may have also demonstrated price increases well above inflation.

It is important to assess all the items that are necessary for a project and not to simply apply an unadjusted inflation figure to capital and operating costs which have been calculated at some time previously, he stressed.

Mining projects are typically assessed for viability in the scoping, prefeasibility and feasibility stages, and at each stage it is important to have a realistic assessment of the likely costs involved in that project to see whether an orebody can be profitably mined.

“If a nominal cash flow model is used to assess a project, an unreliable inflation figure will skew the results,” commented Myburgh.

He proposed assessing a project using a real cash flow model and to use Monte Carlo simulations to investigate the effects of inflation on the economics of the project.

To discuss this issue further, contact Iaan Myburgh