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Re: "NPV @ 8% (after tax) $1,597,500,000, IRR 18.6%

These two methods (NPV and IRR) are related and come from the same calculation process.

To calculate net present value (NPV), you must discount the timeline of the project’s net cash flows. The discount factor (%) you use can be considered as cost of capital which varies according to both the risk of the project and the cost of getting capital for it. Higher risk jurisdictions will have higher costs of getting capital to invest. If we had two identical projects, one in Canada and the other in Mongolia, we would use a higher cost of capital for the Mongolian project to reflect higher risk (and the associated higher cost of getting capital). The higher the discount factor used in the calculation, the lower the NPV.

In the above, "NPV @ 8% (after tax) = $1,597,500,000”, means that the sum of discounted cash flows is positive and yields a profit at that 8%cost of capital. A 10% or 12% cost of capital would yield a NPV less than $1,597,500,000. In this manner, the cost of capital (like the CAPEX or price of copper) has a major effect upon the indicated economics for the project.

Notice that as the cost of capital goes up, NPV goes down. If the discount rate used for the cost of capital goes up as high as 18.6% the NPV eventually becomes zero. This NPV=0 discount rate is called the internal rate of return (IRR). We can interpret the IRR=18.6% as the return on investment for the project. So long as the IRR is greater than our cost of capital, then we should be willing to make the investment. Put differently, any cost of capital less than 18.6% will indicate a positive NPV (i.e. a profitable project).

Assuming the appropriate cost of capital for Schaft is 10%, the IRR=18.6% gives us more than that and we would undertake the project. Assuming the appropriate cost of capital for Mongolia is 20%, we would not take the project.

In summary, NPV tells you present value of the project at some cost of capital. IRR tells you the return expected on the investment and that return must exceed the cost of capital.

Note: simple NPV/IRR analysis has some imperfections, but it is widely used and understood. Companies frequently use a risk free cost of capital and then demand a higher IRR that reflects and covers the overall risk of the project. Thus, a firm may require a 12% IRR before investing in Canada but at least 20% for investing in Mongolia.