BDR Basics (FA), page-10

Hi Riverred,

The discount rate essentially represents the weighted cost of capital (WACC). If you don't know much about this a google read should get you up to date in a few short minutes.

Interestingly enough a friend of mine who has been reading my FA posts but not posting argued that my discount rate should potentially be higher to represent the high inflation rates in Brasil, Sovereign risk etc which was an alternative perspective to the one I took.

The approach I took was to decrease it because with low yields globally risk free returns are for us in Australia about 2% maybe and lower elsewhere. So using 8% still represented a risk premium of 6%.

Hard to argue with him though. Maybe 10% would be more appropriate.

The reason bear and bull case were close is the extra ore is added to cashflows 9 or 10 years out with a discount rate of 8%. It means they add marginal amounts.

But in saying that if we get to year 3 producing 200k and add 2 more years to LOM then the DCF will be higher than now all other things equal so it is a dynamic process