THE PREDICTABILITY PREMIUM — 2/5: Leverage
In a mine with high fixed costs, increasing production by 20% can lead to a 120% increase in EBITDA.
This happens because of operating leverage.
The fleet is already bought. The plant, roads, workshop and camp are in place. Most of the workforce, supervision, insurance and other fixed costs are already being paid.
So, producing one more tonne costs less than the average cost per tonne.
Consider a simple example.
Suppose a mine generates $10 million in revenue and has $9 million in cash operating costs. That leaves $1 million in EBITDA.
Now imagine the mine uses its existing capacity to produce and sell 20% more tonnes—without needing a larger fleet, plant or workforce.
This adds $2 million in revenue.
If the truly variable costs of those additional tonnes—fuel, consumables, royalties and incremental wear—absorb 40 cents of each additional revenue dollar, the additional EBITDA is $1.2 million.
EBITDA increases from $1 million to $2.2 million.
Production increased by 20%.
EBITDA increased by 120%.
The precise contribution will depend on grade, recovery, product price, haul distance, royalties and the mine plan. But the principle remains: recoverable tonnes should be valued according to their incremental contribution, not the average cost of all tonnes produced.
That is why using capacity that already exists within an operation can be a better investment than immediately buying more capacity. It can avoid many of the risks associated with permitting, construction, commissioning and ramp-up.
But producing more tonnes is not enough.
A buyer will not pay full value for one exceptional quarter if it is followed by another recovery plan. The improvement must be consistent enough to support the earnings story.
Where an earnings multiple is relevant, the effect can be magnified again at exit. At five times EBITDA, $1.2 million of sustainable additional EBITDA could support $6 million of additional enterprise value.
You buy the volatility.
You create the predictability.
You sell the credibility of the earnings.
For an active owner or board, the real question is not simply how many more tonnes the mine can produce.
It is how much recoverable capacity already exists on site—and what those tonnes are worth at the incremental margin.
You can estimate the recoverable capacity using six months of daily ROM production data:
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