Taking the importance of time and risk into account has a significant impact on the value of

investment projects. Investments in the energy sector are long-term projects and, as such, are burdened

with uncertainty associated with the long-term freezing of capital and obtaining the expected

return. In the power industry, this uncertainty is increased by factors specific to the sector,

including in particular changes in the political and legal environment and the rapid technological

development. In the case of discounted cash flow analysis (DCF), commonly used for assessing the

economic efficiency of investments, the only parameter expressing investor uncertainty regarding

investment opportunities is the discount rate, which increases with the increasing risk of the project.

It determines the value of the current project, thus becoming an important criterion affecting

investors’ decisions. For this reason, it is of great importance for the assessment of investment

effectiveness. This rate, usually in the form of the weighted average cost of capital (WACC), generally

includes two elements: the cost of equity capital and borrowed capital. Due to the fluctuant

relationship between these two parameters in project financing, performing a WACC analysis in

order to compare the risks associated with the different technologies is not completely justified.

A good solution to the problem is to use the cost of equity. This article focuses on the analysis of this

cost as a measure of risk related to energy investments in the United States, Europe and worldwide.

The problem of research undertaken in the article concerns the adaptation of traditional models of calculating the cost of capital to the specifics of mining companies. Solutions known from the literature do not give reasonable results. This is due to the uniqueness of the activities of mining companies, in which case we are dealing with a lack of reference to the typical market situations. The aim of this article is to identify solutions that allow rational and reliable results to be obtained. One of the proposals is a modified Fama-French method. The article was tested by calculating the cost of capital in the largest Polish mining enterprises. The problem of calculation of the cost of capital is particularly important in the area of assessing the effectiveness of investment projects. The cost of capital is used as the discount rate in dynamic measures of performance, such as NPV.

The corporate cost of capital is used by valuators to discount future flows of income from an entity in order to derive a present-day, forward-looking value of that entity. The cost of capital is therefore determined as the weighted cost of the various sources of funding, being typically equity, debt and preference instruments. The tricky and important part is estimating the cost of equity, which usually needs the application of finance models. The study on the texts on mineral valuation or mineral project evaluation demonstrates that the capital asset pricing model (CAPM) is a general model for estimating the cost of equity. However, according to shortfalls and problems relating to it a relatively similar and simpler model i.e. the single-index market model is proposed. The single index market model is an important tool in contemporary research in finance. Much of the importance of the model follows from its 'beta' parameter which, ideally, measures the sensitivity of returns on a security to changes in a market model. To estimate the cost of equity of the mining and cement companies listed in Tehran Stock Exchange (TSE) The single-index market model is selected because of the shortfalls and problems of the CAPM as well as the lack of commercial services for determining the market premium. The regression analysis as well as the statistical analysis is carried out using Excel spreadsheet. The statistic significance of the model is tested using t and F test statistics. The results showed that the independent variable (the rate of return on the market index) has a genuine effect on the dependent variable (the rate of return for the stock) and there is a statistically significant linear relationship between the two variables at significance level of 5%. Finally, the cost of equity formining and cement companies is estimated 25.0% and 31.0% respectively. Knowing the cost of equity, calculating the discount rate will not be very difficult.

Because of the value of time, investors are interested in obtaining economic benefits rather early and at a highest return. But some investing opportunities, e.g. mineral projects, require from an investor to freeze their capital for several years. In exchange for this, they expect adequate remuneration for waiting, uncertainty and possible opportunities lost. This compensation is reflected in the level of interest rate they demand. Commonly used approach of project evaluation – the discounted cash flow analysis – uses this interest rate to determine present value of future cash flows. Mining investors should worry about project’s cash flows with greater assiduousness – especially about those arising in first years of the project lifetime. Having regard to the mining industry, this technique views a mineral deposit as complete production project where the base sources of uncertainty are future levels of economic-financial and technical parameters. Some of them are more risky than others – this paper tries to split apart and weigh their importance by the example of Polish hard coal projects at the feasibility study. The work has been performed with the sensitivity analysis of the internal rate of return. Calculations were made using the ‘bare bones’ assumption (on all the equity basis, constant money, after tax, flat price and constant operating costs), which creates a good reference and starting point for comparing other investment alternatives and for future investigations. The first part introduces with the discounting issue; in the following sections the paper presents data and methods used for spinning off risk components from the feasibility-stage discount rate and, in the end, some recommendations are presented.