MINING AFRICA LONDON 30 NOVEMBER 2009 WHY MINING
MINING AFRICA LONDON 30 NOVEMBER 2009 WHY MINING INVESTORS NEED ENGINEERS
OBJECTIVE
The objective of this presentation is not, within 20 minutes, to examine in detail the reasons why projects fail to meet the targets promised in the feasibility study. . . but to leave you with an appreciation of the role engineers play in the early analysis of a mining project, and the impact this has on its successful development
I will first discuss a the life-cycle of a project and the importance of minimising risk through a phased development of a mine. I will then present two examples of projects that failed to meet their promised targets, and one that looks as though it may do so. I will then relate these to a phased development flow sheet
PROJECT PHASES
All project pass through five distinct phases Conceptual Pre-feasibility Feasibility Construction Operation Of these the most important is the prefeasibility stage, because this is where we do all the trade-offs, separate the wheat from the chaff and select one option to take into the expensive feasibility study.
TOTAL PROJECT LIFE CYCLE PLAN PHASE 1 Concept OPERATIONAL PHASE 2 PHASE 3 Pre Feasibility TIME PHASE 4 Construct PHASE 5 Operate
If we look at the first four in more detail we find that the outputs of each phase are increasingly accurate capital estimates and the cost of moving to the next phase
PHASE 1 Concept study output: Conceptual study Order of Magnitude Estimate (OME) +/-30% Cost of Pre-feasibility study +/-90% PHASE 2 Pre -feasibility study and Trade –off studies Pre-feasibility study output Preliminary Cost Estimate (PCE) +/-15% - 25% 40% Engineering PHASE 3 Cost of Feasibility study +/-90% Feasibility study output Feasibility study Control Budget Cost Estimate (CBE) 80% Engineering +/- 5% to 10% accuracy This is the final pre-decision cost estimate PHASE 4 Construction Budget control Design Changes; Scope Changes
The purpose of this phased approach is to reduce risks
PHASE 1 RISK 1 KICK OFF Conceptual study Concept study output: Order of Magnitude Estimate (OME) +/-30% Cost of Pre-feasibility study +/-90% RISK 2 Cost of Studies PHASE 2 Pre -feasibility study and Trade –off studies 40% Engineering Pre-feasibility study output Preliminary Cost Estimate (PCE) +/-15% 25% Cost of Feasibility study +/-90% RISK 3 Cost of CBE PHASE 3 Feasibility study output 80% Engineering Control Budget Cost Estimate (CBE) +/- 5% to 10% accuracy PHASE 4 This is the final pre-decision cost estimate RISK 4 construction Construction Budget control Design Changes; Scope Changes
The first risk is obviously the decision to initiate the project. . Followed by the cost of the various studies. . . And finally the cost of construction, and it is here that things can go horribly wrong. .
We should also note the difference between • A Point Estimate • An Interval Estimate
A Point Estimate has a fixed degree of accuracy. If an estimate has an accuracy of say 15%, this means that the estimate could be E or E plus 15%
An Interval Estimate has a degree of accuracy over a given range, i. e. , say +/15% This means that it could be E, or anywhere between E + 15% and E – 15%
The accuracy of an estimated depends on the amount of engineering completed
Anything less than 10% of the engineering will guarantee a sizable error, but completing 100% of the engineering will not produce a 100% accurate estimate, because there will always be changes. The idea, however, is to reduce these changes to a minimum.
As we move through the phases, so does the opportunity to add value decrease, and the cost of making changes increases
TOTAL PROJECT LIFE CYCLE PLAN O P P O R T U N I T Y PHASE 1 Concept OPERATIONAL PHASE 2 PHASE 3 Pre Feasibility PHASE 4 Construct Destructive Intervention Constructive Opportunity TIME PHASE 5 Operate C O S T
The opportunity to add value to a project by optimising the design, production profile and supporting infrastructure is a period of constructive opportunity.
Any design and or scope changes made in the late stages of a feasibility study or during the construction phase negate all previous work in terms of both time and money, and are destructive interventions.
The key to a successful project lies in the first two phases, where engineers do all the basic work
TOTAL PROJECT LIFE CYCLE PLAN O P P O R T U N I T Y PHASE 1 Concept OPERATIONAL PHASE 2 PHASE 3 Pre Feasibility PHASE 4 Construct Destructive Intervention Constructive Opportunity FRONT END LOADING TIME PHASE 5 Operate C O S T
A SCHEMATIC FEASIBILITY FLOW-SHEET
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis YES Preliminary mine design Resource/reserve conversion Initial Risk Assessment Fatal YES Flaws? NO Prepare and optimise Confirm resource/reserve conversion Life of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO Criteria • Positive net cash flows • Discounted Cash Flow Analysis • Funding requirements • Debt/Equity Structure • Environmental • Corporate business plan • Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
During this process we produce three classes of estimate. . OME PCE CBE
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
These are some of the things we look for in a risk analysis. .
CRITICAL ENGINEERING ASPECTS • Resource/Reserve conversion • Is the mine design practical? • Is the CBE based on a well-defined Scope of Work? • What is the potential for scope changes/ • What percentage of the CBE is factorised? • Is the capital expenditure benchmarked? • What is the operating cost basis?
CASE STUDY 1
A PLATINUM MINE IN SOUTHERN AFRICA
One day an announcement appeared telling us that, owing to geotechnical issues attributable to a shear zone above a decline, a mine had temporarily suspended operations Rock engineering specialists are currently assessing the situation. It was expected that the suspension will be for at least a week
A week later we found out that the suspension would be for a minimum of six months.
The Annual Report subsequently attributed the subsidence to exceptionally high levels of rainfall which affected ground conditions specific to the affected area.
The same Report informed shareholders that a R 250 million, two-phase project was required to resume both underground and open-pit mining This would start in June 2009. The first phase will last six-months The second phase will last ten months.
During its five months of operation in 2009 the Mine produced 64, 068 oz PGM and received R 274 million in revenue, i. e. , an average of R 54. 8 million per month So, in the 21 lost months the mine stands to lose R 1, 634 million in revenue! A rather expensive exercise.
Let us go back to our flow sheet. . .
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
It would appear that the company failed to complete a specialised aspect of the geology, i. e. , the geotechnics
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model GEOTECHNICAL Initial desk-top studies Preliminary. MODEL financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
CASE STUDY 2
A COAL MINE FEEDING A POWER STATION
The owners claim they had completed the following feasibility studies:
Feasibility studies: • An NI 43 -101 compliant mineral resource • Mineral resource modelling and mine planning • Environmental studies • Mine beneficiation plant design • Design of common infrastructure
Risks identified in 2008 Annual Report • Resource estimates • Cash operating costs • Tonnages and grades of coal • Ground conditions • Coal seam configuration • Recovery rates • Climatic conditions
A prudent engineer must ask: Why are there risk remaining if they have completed all the feasibility studies?
As a matter of passing interest; if ground and climatic conditions have the same effect on this project as in our first case study, someone is in for a big surprise!
Risks identified in 2008 Annual Report • Resource estimates • Cash operating costs • Tonnages and grades of coal • Ground conditions • Coal seam configuration • Recovery rates • Climatic conditions
Capital equipment and infrastructure costs related to the power station and the mine were estimated at approximately C$3. 15 bn. An Analysis published on SEDAR in October 2009 indicates that capital expended thus far totals C$39. 7 million. This is presumably since listing in March 2006, i. e. , an average of C$922, 765 per month
In September 2009 Capital costs are estimated at approximately US$3 billion. MD&A (October 2009): Capital expended is C$39. 7 million. Since March 2006, i. e. , an average of C$922, 765 per month
Operations are to start in early 2013. This would require a capital spending rate of US$75. 8 million per month for 41 months, which, as any engineer will confirm, is a formidable task.
The start of commercial operations at the power station is planned for early 2013. A capital spending rate of US$75. 8 million per month for 41 months. A formidable task.
Pertinent points from an MD & A • Although the regional government has indicated its support for the Project, the Company has not secured mining licences. • The government has not approved the revised Environmental Impact Assessments, occasioned by reducing the capacity of the power station and the relocation of the mining area • The Company has signed a contract with an EPC contractor to construct the first power station • The Company is currently conducting a tender process for the construction of the mine, beneficiation plant and the required infrastructure
The flow sheet again. .
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
They do not have a confirmed right to mine, they have not cleared the environmental hurdles, they have not validated the geology nor have they completed a geostatistical analysis
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
Without these basis steps, what is the worth of all that follows?
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure
CASE STUDY 3
ANOTHER PLATINUM MINE
This project started off in the normal way. . . . with boreholes that intersected a reef
Because the continuity of this reef horizon is a common factor, the tendency would be to accept this as fact.
So without much more ado, we could lay out and construct a mine
However, someone decided to run a seismic survey. .
. . . . and found a discontinuity!
This called for another borehole, which changed the whole picture
. . . . and prevented some very embarrassing questions
Back to the flow-sheet
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
So far, they have got it right!
Confirmation of right to mine ABORT NO Validation of Geological Data Base Meet Criteria? Discipline Inputs • Mine engineering • Rock Engineering • Ventilation • Refrigeration • Metallurgical engineering • Electrical engineering • Mechanical engineering • Civil engineering • Structural engineering • Environmental • Economic & Financial analysis • Marketing • Human Resources • Socio-Political aspects Geological Block Model Initial desk-top studies Preliminary financial analysis Preliminary mine design Resource/Reserve conversion Criteria • Positive net cash flows Initial Risk Assessment • Discounted Cash Flow Analysis YES OME +/-30 -40% YES Fatal Flaws? NO Prepare and optimise PCE to 25% Life+/-15 of Mine Plan Full Risk Analysis Generate Alternative LOM Plans YES Geostatistical Analysis Fatal Flaws? NO CBE >10% • • • Funding requirements Debt/Equity Structure Environmental Corporate business plan Technically feasible Deliverables • Mine Design • Depletion Plan (Tonnage Profiles) • Production build-up • “Pipeline”-locked up value • Construction program • Working Costs • Tax & Royalties • Risk assessment • Cash Flows • Environmental Management Plan • Capital expenditure FINAL DELIVERABLE - Full Feasibility or Study
The financial crisis has left investors in the mining industry with an acute awareness of the dangers inherent in accepting feasibility studies at face value.
A lender would rarely accept a study prepared by a borrower or the borrower’s consultants as the basis for financing a project. At the very least, the knowledgeable lender, experienced in lending to mineral projects, will require that independent consultants and its own internal research departments review the study. (Johnson & Mc. Carthy. Parsons Behle & Latimer , 2001)
Feasibility Studies are formal, highly technical reports. They are compiled by specialists, and require interrogation by specialists.
Analysis of a feasibility study does not stop with confirmation of the resource, or elaborate financial models based on that resource.
It requires vigorous interrogation by engineers who have developed resources into producing mines, and who know all the pitfalls along the way.
Unless you get the basics right your project will fail!
TOTAL PROJECT LIFE CYCLE PLAN O P P O R T U N I T Y PHASE 1 Concept OPERATIONAL PHASE 2 PHASE 3 Pre Feasibility PHASE 4 Construct Destructive Intervention Constructive Opportunity FRONT END LOADING TIME PHASE 5 Operate C O S T
“We will make the geology fit the design”. This is an actual quote from the CEO of a JSE and AIM listed mining company, whose Board has recently, and not surprisingly, relieved him of his post.
CONTACT DETAILS: Dr Lancelot Stilwell lances@rsv. co. za +27 (0)83 692 9230
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