Risk-adjusted discount rate estimation for evaluating mining projects

While the preferred methods of mining project evaluation (net present value and internal rate of return) require the definition of an appropriate risk-adjusted discount rate (RADR) to establish investment criteria, most of the literature focuses on the calculation of the company's cost of capital. This approach, however, can create problems if the company's new projects do not have the same risk as its existing business. This paper discusses the methods for selecting the discount rate - in theory and in practice, both for mining and general projects - and proposes some guidelines for selecting the RADR.