Geomaterials, 2011, 1, 14-20
doi:10.4236/gm.2011.11002 Published Online April 2011 (
Copyright © 2011 SciRes. GM
Engineering Economy Analysis on the Production of Iron
Ore in Nigeria
R. A. Adebimpe1*, J. M. Akande2
1The Federal Polytechnic, Ado-Ekiti, Deparment of Mineral Resources Engineering, Ado-Ekiti, Nigeria
2Federal University of Technology, Akure, Dept of Mining Engineering, Ado-Ekiti, Nigeria
Received February 24, 2011; revised March 2, 2011; accepted March 22, 2011
In line with the Federal government decision to attract direct foreign investment to the solid mineral sector
and to further diversify the Nigerian economy; this study used the discounted cash flow micro-economic as-
sessment to evaluate large-scale iron ore production in Nigeria. The iron ore project has an initial investment
cost of US$ 73.934 m, annual expenditure and benefit of US$ 48.128 m and US$ 270 m respectively. The
net present value (NPV), internal rate of return (IRR) and payback period of financial analysis at 100% ca-
pacity utilizations are US$ 833.10 m, 444.36% and 6 years respectively. The economic assessment also
shows a positive NPV at both 75% and 60% capacity utilizations. The study further show that the iron ore
project has good economic potential and will also guide potential investor(s) in making decision on whether
or not to commit resources to the project.
Keywords: Iron Ore, Micro-Economic Assessment, Solid Mineral Sector, Nigeria
1. Introduction
The decision to develop a particular deposit is based on
the net present value (NPV) 1. NPV is one of the mi-
cro-economic assessment tool used to evaluate the feasi-
bility of project and it must be positive for a project to be
considered worthwhile. The use of discounted cash flow
analysis is a tool in the economics of the mining industry
in the last 30 years, it has become common to define an
ore reserve as that part of a mineral resource whose ex-
ploitation can generate maximum net present value (NPV)
or return on investment 2. NPV entails forecasting the
stream of future net revenues a mineral resource would
generate if exploited optimally, and then discounting this
revenue stream using appropriate cost of capital 3.At
the planning stage of a mining project it is necessary to
gather relevant data and also determine factors that
would influence the attainment of the highest NPV.The
objective of the planning process for an open pit mine is
usually to find optimum annual schedules that will give
highest net present value(NPV) while meeting the vari-
ous production, blending, sequencing and pit slope con-
stra ints 4. Determining the feasibility of a mineral
property may be simple or sophisticated but has one pri-
mary goal and this is to demonstrate that the project is
economically viable if it is designed and operated appro-
priately 5. Iron ore occurrence has been established in
Itakpe, Ajabanoko, Agbaja, Chokochoko, Agbade Okude
and Nsude hills (Figure 1; Table 1). The ore reserves
vary from two billion tons to thirty million tons and the
deposits are of the type’s hematite-magnetite, heama-
tite-geothite and siderite goethite 6. However out of the
iron ore deposits listed above only the Itakpe iron ore
mine have so far been developed and it started produc-
tion in 1979.The exploitation of the iron ore includes the
following process: i) development of the access roads,
the creation of benches,platforms,safety ramps and the
development of safe and economically acceptable slope
faces; ii) drilling and blasting of the benches; iii) truck
haulage of the run-of-mine to the crushing plant; iv)
truck haulage of the crushed rock to the beneficiation
plant, and v) beneficiation of the iron ore. The National
Iron Ore Mining Project (NIOMP) was established to
exploit the Itakpe iron ore deposit. The corporate objec-
tives of NIOMP are listed as follows 7: i) to produce
and supply 100% of the iron ore requirements of the
Ajaokuta Steel Company Limited (ASCL) amounting to
2.15 × 106 tons per year assaying 63% Fe ii) to produce
and supply 40% of the iron ore requirements of the Delta
Steel Company, Aladja (Warri) (DSC) amounting to
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0 1
2 3 400 km
SCALE: 1: 100 000 000
Figure 1. Location of the study orea.
Table 1. Iron ore reserves in Nigeria.
S/No Location % Fe Content Reserve (tons)
Nsude Hills
45 - 54
2 billion
200 million
70 million
70 million
60 million
Mines Department 6
550 000 tons per year assaying 67% to 68% Fe as per
initial design of Itakpe plant iii) to export the concen-
trates to the international market after local needs have
been satisfied iv) to represent the interest of the Federal
Government of Nigeria in foreign iron ore mining pro-
jects v) to arrange and coordinate the exploitation of
other locally available raw materials required by the ma-
jor steel plants. To achieve the objectives listed above, a
careful investment analysis must be carried out. Mine
investment analysis is a complex exercise because of
project uncertainty; such as mineral price and deposit
quality and physical structure of the mineral deposit 8.
The economic analysis must answer to two important
questions i) does the investment project satisfy the objec-
tives of the firm? ii) and how does this project compare
with other investment opportunities? 9.
The Itakpe iron ore deposit comprises of twenty- five
(25) ore layers. According to dip, strike, attitude and
location, fourteen (14) layers of iron ore have been
grouped, they can be found within four (4) groups;
Northern, Central, Intermediate and Southern.
From a tectonic point of view, the Itakpe deposit is
confined to the southern limb of a large Itakpe-Aja-
banoko anticline with enclosing rocks and conformable
ore layers striking sub-latitudinally and slightly bending
to the north and dipping southward at angles ranging
from 40˚ to 80˚ with local minor-fold complications 10.
The average iron ore content of the ore deposit was de-
termined to be approximately 35% 11. It has an esti-
mated iron ore reserve of 200 million tons. The study
therefore is to determine the economic viability of iron
ore production in Nigeria. It is expected that the result
will guide prospective investors or entrepreneurs before
committing their resources into iron ore production in
2. Methodology
2.1. Engineering Economy Studies
The purpose of engineering economic studies is to estab-
lish whether a technically feasible project is also eco-
nomically viable 12,13.
2.2. Data Collection
The study assessed a large scale iron ore production from
Itakpe iron ore deposit. The annual run-of-mine produc-
tion per year is 7.374 million tons while the annual pro-
duction at the beneficiation plant is 2.7 million tons (Ta-
ble 2). Facilities for the project were identified and their
cost estimates were obtained from equipment fabricators
and suppliers. The operating (equipment running, drilling.
blasting, loading, haulage, maintenance costs, office
overheads and other administrative charges) were esti-
mated and categorized as production and overhead cost.
The gradient series model was used to estimate the
annual operating cost over the economic life cycle (n) of
the iron ore mine. In the model, the annual operating cost
of the project was assumed to be A1 in the first year and
G more naira for each additional year until the end of the
twenty-seventh year for Itakpe iron ore mine. The Pre-
sent Worth-Cost (PW-C) of annual operating expenses
was first estimated and there-after converted to Annual
Worth-Cost (AW-C) using the expression, after DeGarmo
et al., (1979).
-,,PWCAPAinGP Gi n
,, (1)
WCPWCxAPin (2)
Where: i is the Minimum Attractive Rate of Return
(MARR), and the factors (P/A, i, n), the uniform series
present worth factor, (P/G, i, n), the gradient worth con-
version factor, and (A/P, i, n), the capital recovery factor
were obtained from the interest table. A1 and G were es-
timated by the author as US$ 48.128 million and US$
16.043 million respectively, for the Itakpe iron ore mine
operating at full capacity. The MARR, i, of 9.44% as
calculated below was used in the analysis. It was ad-
justed for inflation using Equation 3:
100100100 100iPa
the average marketrate ofinterest24%P
rate ofinflation13.3%a
10024100 13.31001009.44%i 
The number of employees required for the project at
various capacity utilization was estimated and their
wages also estimated on the basis of experience, qualifi-
cation and situation at the Nigerian labour market. All
estimates were made in dollars. The economic output
expected from the project is the sales of 64% Fe at the
international market price of US$100/ton. This and the
salvage value at the end of the project life cycle, put at
27 years for Itakpe iron ore mine. The financial estimate
of the output was based on the prevailing market price,
exclusive of VAT.
2.3. Approach to Data Analysis
2.3.1. Net Present Value (NPV)
The model was used to determine the profitability of the
project before tax 12. The NPV model refers to the
equivalent of a single sum of money to be received or
disbursed at t = 0, if all future receipts and expenses over
time are discounted to the present time. The model is
specified as
, (4)
where At is the net cash flow in the year (t), i is the
cut-off discount rate while n is the economic life cycle,
and the factor (P/F,i,n), the single payment per cent
worth, is also obtained from the interest table. If NPV is
positive, then the project can be accepted.
Table 2. Open pit technical parameters.
Parameter Itakpe iron ore mine
i. Pit length
ii. Pit depth
iii. Ore reserve
iv. Life span
v. Annual rom production
vi. Annual waste production
vii. Waste to ore ratio
viii. Daily ore production
ix. Daily waste production
x. Average ore grade
xi. Minimum width of pit bottom
xii. Ultimate pit slope
4 km
250 m
200 million tons
27 years
7.373 million tons
29.492 million tons
30 721.44
122 885.76
50 m
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2.3.2. Internal Rate of Return (IRR)
The IRR solves for the interest rate that equates the
equivalent of cash inflow to the equivalent worth of cash
outflow 13. Using the present worth model after 16,
the IRR is the discount rate, irr that makes the NPV equal
to zero. Its calculation formula is:
 
to to
AirrAP Firrn
 
,0 (5)
The IRR criterion reflects the profitability of the pro-
ject 16. The project is acceptable when the irr i, the
MARR, otherwise not accepted 12,13,16.
2.3.3. The Discounted Payback Period (Pt)
This model determines the period of time, starting from
the first day of the investment period, required to fully
recover the investment and operation cost 16. And such
determination, to be meaningful, must be made on an
after-tax basis, sometimes with the project salvage value
ignored 12. The model is specified in present worth
bcbc t
 
make profit at 60, 75 and 100% capacity utilization.
where, Cb is the cash benefit of the investment, Cc is the
cash cost of the investment.
Payback as a decision tool is used to measure how
risky a project is 12. In evaluating the payback period,
a 30% corporate tax on gross earnings has being used;
with the project salvage value ignored. The iron ore pro-
ject is acceptable if the maximum acceptable payback
period, Pt(max) > Pt otherwise not. In this study Pt(max) has
being set equal to the life-cycle of the project .
2.4. Mine Economic Investment Model
The following mine economic investment model has
been used in the estimation of the various costs associ-
ated with exploitation of the iron ore 17-19.
Equipment cost ($m)
= 6000 (tons of deposit and waste mined daily)0.7
+ 5000 (tons of deposit and waste mined daily)0.5 (7)
Maintenance cost ($m)
= $ 150000 (tons of deposit and waste mined daily)0.3 (8)
Labour cost
= $ 58.563 (tons of deposit and waste mined daily)–0.5
+ $ 3.591 (tons of deposit and waste mined daily)–0.3
Supplies cost ($)
= $ 13.40 (tons of deposit and waste mined daily)–0.5
+ $ 1.24 (tons of deposit and waste mined daily)–03
+ $ 0.90 (tons of deposit and waste mined daily)–0.2
Daily crushing cost = $ 7.90 × T0.6 (11)
Daily grinding cost = $ 4.90 × T0.8 (12)
Daily processing cost = $ 54 × T0.6 (13)
Daily tailing cost = $ 0.92 × T0.8 (14)
Electrical power cost = $ 145 × T0.56 (15)
Drilling cost per ton = $ 1.90 (16)
Blasting cost per ton = $ 3.17 (17)
Loading cost per ton = $ 2.67 (18)
Haulage cost per ton = $ 18.07 (19)
2.5. Personnel Calculation
Number of open pit personnel (Nop) = 0.034 × Tp (20)
Number of mill personnel (Nmp) = 7.2 × T0.3 (21)
Number of service personnel (Nsv)
= 0.254 × (Nop + Nml) (22)
Number of administrative and technical personnel,
Nat = 0.11 (Nop + Nml + Nsv) (23)
3. Results and Discussion
Table 3 presents the list of facilities and civil structures
required for the iron ore project at a large-scale level.
The project is estimated to have a production capacity of
7 373 145.6 tons per annum working 6 days per week
running three shifts per day. The initial investment (or
first cost), US $ 73.934 m is made up of pre-production
expenses, which include site allocation (including mining
lease), prospecting activities and capital investment in-
cluding installation expenses (Table 4).The annual oper-
ating cost includes cost of labour, maintenance, field
consumables, raw materials and equipment running cost,
estimated at US$ 48.128 m for the first year at 100%
capacity utilization (Table 4). The iron ore mining pro-
ject will require 314 number of staff; this include 132
open pit personne l,94 mill personne l,57 service per-
sonnel and 31 administrative and technical staff. Their
wages in the first year will amount to $ 1.641 m while
ore processing costs were estimated at US$ 7.821 m.The
NPV of the iron ore project at 100% production capacity
is US$ 833.10 million which is greater than zero. The
profitability analysis as seen from Table 3 shows a posi-
tive NPV before tax when the mine is operated and will
.1. Sensitivity Analysis of Factors Affecting the
ensitivity analysis was carried out on the iron ore pro-
ructures (Itakpe iron ore mine).
S/No Equipment desc$m) Total cost(US$m)
The project IRR is 444.36%, which is greater than
esent cut-off discount rate of 09.4%. This indicates that
the project is worthy of investment and has the ability to
make profit. The payback period before tax is 6 years,
which shows that the project has a good feature of not
being a risk as first and operating costs of the project can
be recovered under a short duration of 6 years when
compared with the economic life cycle of the project of
27 years (Table 5).
Economic Benefit of the Iron Ore Project in
ject to determine its impact on the profitability of project.
Two factors affecting the IRR at 100% capacity utiliza-
tion were considered (Table 6).The two sensitivity fac-
tors are initial investment and price of iron. The IRR of
the project was evaluated using a 20% variation. The IRR
of the project will decrease from 444.36% to 424.42% if
the initial investment cost is increased by 20% and will
increase to 456.80% if the initial investment cost de-
crease by 20%. Also the IRR of the project will increase
to 469.60% if the revenue from sales of iron ore is in-
creased by 20% while it will decrease to 331.13% if the
revenue from sales of iron ore decrease by 20% With the
IRR of varied factors greater than 9.44%, the MARR,
this shows that the two factors if varied in cost by 20%
will affect the IRR and or the profitability of the project
significantly. Hence the order of sensitivity factors af-
fecting the economic benefit of the project is: the price of
iron ore, followed by the initial investment cost. The
result of this sensitivity analysis shows that a decrease in
costs and an increase in price of iron ore increase the
project’s profitability, while an increase in costs and a
decrease in price of iron ore decrease the profitability of
the project.
Table 3. Facilities and civil st
ription Capacity Quantity Unit price(US
1 Dump truck 100 tons 20 0.78 15.6
2 Wheel Loader
M3 2
drill rig
5000 gallon
r 0
T 7
8 m3
6 0.973 5.84
3 Excavator 5.6 m 3 0.42 1.26
4 Bulldozer ax 15 m0.46 0.92
5 Scraper
15 /h
2 0.1 0.2
0.6 Pneumatm8 0.1 80
7 Rotary drill rig
3 h
2 0.86 1.72
8 Jack Hammer m/8 0.003 0.027
9 Compressor
8 bar 4 0.047 0.187
10 Water tanker2 0.047 0.094
11 Admin. Car 6 0.04 0.24
12 Workshop va 6 0.033 0.2
13 Gyratory crushe 1 0.689 .689
14 Primary crushing p 1 20.76 20.76
15 Process capital cost
1 21.21 21.21
16 Construction access km0.163 1.304
17 Staff buses
ing and offices
4 0.08 0.32
18 Factory hous 1 0.133 0.133
19 Incidental 1.77
otal 3.274
Table 4. Cashflow (US $m) for Itakpe iron ore project.
Cost factor Capacity C Capacity A Capacity B
Initial investmvestment ent Capital in 73.274 73.274 73.274
Pre-production expenses 0.66
7 Sub total
eration expenses Pr
3.934 3.934 3.934
Annual Opoduction costs
1.168 1.460 1.947
ech. staff
Drilling costs
Blasting cost 1.949 2.437 3.249
Loading cos1.642 2.052 2.737
Haulage costs
11.11 13.891 18.521
General service4.089 5.112 6.816
Maintenance cost
3.238 4.047 5.396
Ore processing cos4.693 5.866 7.821
Salary of admi. and t0.985 1.231 1.641
Sub total
venue Sales of iron or
28.874 36.096 48.128
Annual Re162 202.5 270
Savage value
33 606.
76 833.
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Table 5. Result of other ecc assessment of the I iron ore mine.
Profi essment
onomi takpe
tability index at i = 9.44%, n = 27 years Economic ass
Internal rate of return IRR(%) 444.36
Payback period (Years) 6
Table 6. Result of sensitivity analysis of Itakpe iron ore mine.
Factor Varied rate of IRR(%) IRR(%)Original state Variation
incr% ease by 20424.42
Initial int cost nvestme444.36 decrease by 20% 456.80
increase by 20% 469.60
Revenue from iron ore 440.36 decrease by 20% 331.13
From the results of this micro-economic analysis, in-
ulate Growth in
he as wo
firmed that the production of iron ore
and R. Moles, “Investment decisions of
international mining firms: Policy approaches,” Sim
tion. Vol. 78, No. 6, 2002, pp. 362-379.
. 243.
a, United States,
ncentrate,” Maejo International
vstment in this large-scale iron ore project in Nigeria
becomes infeasible in financial terms of IRRfinance <
09.44%, the MARR of the project.
.2. Government Policy to Stim3
the Solid Mineral Sector of Nigeria
ministry of mines and steel development hT
[4] K. Dagdelen, “Open pit optimisation –Strategies for im-
proving economics of mining projects through mine
planning,” .17th International Mining Congress and Exhi-
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package of incentives for potential investors in the
solid mineral sector and is embedded in the Mineral Act,
2007 20 .Some of these include: i) Exemption from
payment of customs and import duty in respect of plant ,
machinery, equipment and accessories imported specifi-
cally and exclusively for mining operation ii) expatriate
quota and resident permit in respect of the approved ex-
patriate personnel iii) personnel remittance quota for
expatriate for personnel, free from any tax imposed by
any enactment for the transfer of external currency out of
Nigeria iv) the Act provides a tax relief period of 3 years
for any company granted a Mineral Title under the Act
and can be extended for a further period of 2 years v)
Section 30 of the Act provide for deductibility of envi-
ronmental cost.
. Conclusion4
he study has conT
in Nigeria is economically viable. With the introduction
of non-renewable period of a 5-year tax holiday on cor-
porate income in Nigeria, the micro-economic profitabil-
ity of the project is expected to increase, therefore mak-
ing investment in the iron ore enterprise more worth-
while for investors.
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