Economic feasibility study of a quarry mine under contractual risk in probabilistic approach

An economic feasibility study must consider parameters and uncertainties inherent to a mining project, in which the risks must be properly quantified. An economic viability study by Discounted Cash Flow (DCF) elaborated for the implementation of Mega Mineração, in Pernambuco, Brazil, indicates a positive Net Present Value (NPV) of the deterministic scenario whose Internal Rate of Return (IRR) was higher than Minimum Acceptable Rate of Return (MARR), which indicates the project to be highly profitable. The probabilistic analysis, however, considered several risks in its assumptions and displayed that there was a 99.77% probability for the NPV to be positive and 49.98% to be greater than the deterministic NPV. Although more robust and reliable, the possibility of breaking the contract by either party was not considered in this analysis, which would make it impossible to obtain the results predicted for some scenarios. This study aims to assess the consequences of a breach of contract in each of the 15 years foreseen for the project through a probabilistic approach regarding risk and sensitivity analysis. The results indicate catastrophic consequences for the enterprise if the breach occurs in the first year of the project and suggest that the probability of achieving higher rates is attached to longer scenarios, by postponing or avoiding the breach of contract.