Articles for April 2015

5. PEA’s – Not All PEA’s Are Created Equal

A Preliminary Economic Assessment (“PEA”) is defined in NI 43-101 as “…a study, other than a pre-feasibility or feasibility study, that includes an economic analysis of the potential viability of mineral resources”.  This is a fairly broad definition that provides for plenty of flexibility.  While there are generally accepted industry norms for a pre-feasibility or feasibility study, the PEA can have a wide ranging scope.
Some PEA’s can be based on a large database of test work and site information while others may rely on very preliminary data and require design projections based on that data. Some PEA’s may have production schedules consisting largely on Inferred resources while other schedules may be based on higher proportion of Indicated resource.   Some PEA’s are able to incorporate information from advanced socio-environmental work while other PEA’s may not have access to such information.  Therefore one should not view all PEA’s are being created equal.
The PEA can be developed at a fairly early stage in the project life.  That initial PEA may then be superseded with a series of updated PEA’s as more data is acquired.  Typically one would expect to see changes in project size or scope in these updates and hopefully improved economics.  Shareholders generally will appreciate being kept updated on positive growth trends.
The sequential PEA approach is a good way to continue advancement of the project without making the big step to a pre-feasibility or feasibility study.  Perhaps the project is still growing in size and a feasibility study at this stage would not be presenting the true potential, hence going with an updated PEA.  On the downside of the sequential PEA approach is that investors may get tired of hearing about PEA after PEA and want to see a bigger step in advancement leading towards a production decision.  How long can you keep studying this project they ask?
With regards to the content of a PEA, there is essentially no right or wrong with regards to what constitutes a PEA.   Hence the Securities Commissions consider the cautionary language an important component of the PEA Technical Report and may red-flag you if it’s not in all the right places.   However this cautionary language is generally focused on the resource.  For example “The reader is cautioned that Inferred Resources are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as Mineral Reserves, and there is no certainty that value from such Resources will be realized either in whole or in part.”   In this cautionary statement there is no mention of all the other speculative assumptions that may have been used in the study.  For example, the Inferred resource may not be that significant however the amount of metallurgical testwork might be a bigger uncertainty.  The previous cautionary language doesn’t address this issue and therefore it is important that one reviews the chapters in the Technical Report pertaining to risks and recommendations to get a more complete picture of the situation.
My bottom line is that when reviewing a PEA report, be aware of all the uncertainties and assumptions that have been incorporated into that study.   The report may be well founded or built on a shaky foundation.  No two PEA’s are created alike and this must be clearly understood by the investor.   Perhaps develop a PEA “checklist” for yourself that can be used to rate the amount and quality of data used for the various aspects of study to help understand where gaps may exist.

4. Four Study Stages (Concept to Feasibility) – Which Should We Do?

Over my career I have been involved in various types of front end mine studies, ranging from desktop conceptual to definitive feasibility.    Each type of study has a different purpose and therefore requires a different level of input, effort, and cost.  I have sat in on a few junior mining management discussions regarding whether they should be doing a PEA or a Pre-Feasibility Study, or Feasibility instead of a Pre-Feasibility Study.    Everyone at the meeting had their opinion on how to proceed based on their own reasoning.   Ultimately there is no absolute correct answer but there likely is one path that is better than the others.  It depends on the short term and long term objectives of the company, the quality and quantity of data on hand, and the funding available.
In my opinion there are four basic levels of study, which are listed below.  My intention is not to provide a detailed comparison between the different studies although such matrix tables are readily available (contact me for an a copy of the table excerpt shown below).

Four Studies Table

  1. Desktop or Conceptual Study
This would likely be an in-house study, non-43-101 compliant, simply used to test the project and let management know where the project may go (see a previous article at the link “Early Stage “What-if” Economic Analysis – How Useful Is It?”.    I always recommend doing one of these studies.  It doesn’t take much time and is not made public so the inputs can be high level or simply guesses.  This type of study helps to frame the project for management.
  1. Preliminary Economic Assessment (“PEA”)
The PEA is 43-101 compliant and would present the first snap shot of the project scope, size, and potential economics to investors.  Generally the resource may still be uncertain (inferred classification), capital and operating costs are approximate and may be on the low side since not all the operational or environmental issues are known at this time.   Please do not treat the PEA as a feasibility study.
I also recommend not announcing or undertaking a PEA until you are confident in what the outcome of the PEA will be.   A reasonably thorough desktop study done beforehand will let one know if the economics for the PEA will be good or bad.  I have seen situations where companies have announced the timing for completing a PEA and then during the study, things were not working out as well as planned.  The economics were looking poorer than hoped and so a lot of re-scoping of the project was required.  The PEA was delayed and shareholders and financial analysts were not impressed with the delay.
The PEA can be used to evaluate different development options for the project (i.e. open pit, underground, small capacity, large capacity, heap leach, CIL, etc.) .  However the accuracy of the PEA is limited and therefore I suggest that the PEA option analysis only be used to discard obviously sub-optimal scenarios.  Options that are within a +/-30% range of each other many be too close to discard at this stage.
  1. Pre-Feasibility Study (“PFS”)
The PFS will be developed using only measured and indicated resources (not inferred) and the costing accuracy will be better than a PEA.  Therefore the PFS is a good time to definitively evaluate the remaining development options and then make the decision on the single path forward.     More data will be required for the PFS, possibly including a comprehensive infill drilling program to upgrade the resource classification.  Many companies, especially those with smaller projects could skip the PFS stage entirely and move directly to Feasibility.  I cannot disagree with this approach if the project is fairly simple and had a well defined scope at the PEA stage.
  1. Feasibility Study (“FS”)
The Feasibility Study is the final stage study prior to making a production decision.  The feasibility study should preferably be done on a single project scope.  Try to avoid more option analysis at this stage.
Small companies must be careful entering the FS stage since once the FS is complete, shareholders will be waiting to hear about the production decision.  If the company had only intended to sell the project with no intention of going into production, they have now hit a wall.  What do they do next?   Sometimes management feels that a FS may be needed to better sell the  project, however I am not sure that is concern is real.  Many potential buyers would do their own in-house due diligence and possible design studies and likely information from a PFS would be sufficient to tell them what they need to know.  A well advanced Environmental-Socio Impact Assessment program may give as much or more comfort to them than a Feasibility Study would.
My bottom line recommendation is that there is no right answer as to what study is required at what point in time.  Different paths can be followed but remember that consideration must be given to the future and what is in store for the company after the study is completed.   Also what is the best use of shareholder money?  Company management may see pressure applied from retail shareholders, majority shareholders, financial analysts, and the board of directors, and management must decide what path is in the best interests of the company.

3. Site Visit – What Is the Purpose?

National Instrument 43-101(6.2) specifies that “before an issuer files a technical report, the issuer must have at least one qualified person (“QP”) who is responsible for preparing or supervising the preparation of all or part of the technical report complete a current inspection on the property that is the subject of the technical report.”  In some study reports one may see a long list of QP’s but only one or two have made an actual site visit. I have worked on numerous studies and not been involved in the site inspection.
In most cases the limited number of people attending the site inspection may be due to the high cost for travel to a remote site, the logistics of travelling with a larger team, and the associated fee cost for the personnel.  In some cases the site visits personnel may be controlled simply because there isn’t much to see at the property. In other instances, only a few persons on the team are physically available given the timing of visit.  Therefore given the limitations on the site inspection, it is important to get the best bang for the buck.
On the site inspections that I have been involved in, they ranged in scope from a simple tour of the property taking photographs to more detailed data room reviews, meeting the owner’s team, meeting with vendors and potential contractors.
In my opinion the more advanced the study the more important the site visit becomes.  At the feasibility stage it is important that several QP’s complete one or more site visits if possible.  Also they should be there at the same time so that they see and hear the same things.  Obviously they will eventually split into groups to focus on areas of their responsibility but the general overall messages should be consistent to the entire team.
For an earlier stage (e.g. PEA), it is less critical that a large team complete the site visit.  However in some circumstances the travel and time costs can be significant for even one person to make the trip.  Therefore it is important to make the best use of the time.
I would recommend that the QP selected to make the site visit be in prior contact with other team members to determine what information they will require.  The QP is then responsible to go and collect that data if possible.  Obviously sorting through information files in different disciplines may be difficult for one person, but inspecting and photographing sites of interest to others may be of value.  In addition making first contact with local vendors and contractors may also be useful on behalf of others on the study team.   Ultimately spending an extra day or two at site or in-country can be relatively inexpensive compared to the fixed cost of the travel itself. Once back at the office, the QP should distribute his findings to the rest of the team, benefiting the team with better information.   Often this post-visit information sharing does not happen.
My bottom line is that I have rarely seen pre-trip data gathering lists for the QP site visits.  In many cases the QP simply goes to collect the information they personally need.  Generally the pre-trip agendas tend to focus on travel and hotel logistics and not so much on information gathering needs.   Quick drive-by site visits meet the legal requirements of NI 43-101 but don’t add much to the overall study but could be made more effective.

2. Early Stage “What-if” Economic Analysis – How Useful Is It?

Over the years I have worked with both large and small mining companies and watched how they studied potential acquisitions.  Large mining companies often have internal evaluation teams that can jump on a potential opportunity that comes in the door and they start examining it quickly.  These evaluation teams are experienced at what they do and can provide their management with advice even if working with only limited data.  This help management decide early on whether to pursue the opportunity or walk away.  They are not right all of the time but more than often they save their company from wasting money on projects unlikely to fly.
If you are a small mining company, what are your options?  You don’t have an in-house technical team ready to hit the ground running.    If the project is early stage, management often feels it is better to put money into the ground rather than on early “studies”.   However my experience tells me how do you know if you have arrived at your destination if you don’t know what your destination is.  Early stage modelling can help define your destination.
The exploration team and upper management will have some overall vision of the potential project, even for those projects at the exploration stage.   They may all have opinions on the potential size and scope of what may exist on the property.  However the question is whether it has sufficient potential to warrant spending more shareholder money on the project.
Some of the junior mining management teams that I have worked with have found it beneficial early on to have a simple internal cashflow model that is easy to tweak to examine “what-if’s” for the project.  Input the potential deposit size and mine life, potential head grades, expected metallurgy, and typical costs to see what the economic outcome is.  Does this project have a chance and if not, what tonnage, head grade, recovery, or metal price is required?
The tangible benefits from such an exercise are:
  • It helps management to think about and better understand their project, both the good and the bad aspects of it.
  • It helps management to understand what parameters are most important to resolve and what technical factors can be considered secondary. This helps guide on-going exploration and data collection efforts.
  • Periodically updating the economic model with better information as it becomes available will show the trends how economics are getting better or worse and the potential magnitude of those changes.
I must caution that this type of early stage economic analysis would not be 43-101 compliant and hence could not be shared externally, no matter how much one might wish to.  Another caution is that in some cases such early stage un-engineered production or cost projections start to become “cast in stone”, treating them as if they are accurate estimates.  Then all subsequent advanced studies somehow need to agree with the original cost guesses, thereby placing unreasonable expectations on the future studies.
The early stage economic models can consist of simple one-dimensional tables using life-of-mine tonnages or two-dimensional tables showing assumed annual production by year.  Building simple cashflow models may take only 2-3 days of effort – not an onerous exercise compared to the overall guidance they can provide to management.
My bottom line is that it is useful to take a few days to develop a simple cashflow model.  “Simple” also means that management themselves can tweak the models and don’t need a modeling expert on hand at all times.  “Simple” means the model should be well written and understandable (see the article Financial Spreadsheet Modelling – Think of Others).  Most companies have a CFO that can undertake this modelling, with the help of some technical input.

1. Financial Spreadsheet Modelling – Please Think of Others

As part of my current business, I am often required to review Excel cost models or cashflow models built by others.  Some of these models can be monsters in size, using multiple worksheets, cross-linking between worksheet cells, and having hard wired numbers inside cell formulae.  Some of the models I have reviewed will build the entire operating cost (mining, processing, G&A), build the capital cost, and finally present the economic model… all in one!  This makes the model very complex with lots of worksheets and difficult to follow the logic.  Sometimes your gut feel says there must be formula or linkage errors in there somewhere but you just can’t find them.   In these types of models more focus is spent trying to figure out the logic than actually looking at the validity of inputs and output.  It seems that only the model developer can really work with these spreadsheets and the rest of us can just hope he or she has done everything correctly.
Over the years, I have learned that there is an art to creating a clear, concise, and auditable cashflow model (or cost model). Once in awhile you come across one that is well crafted and not an example of someone saying “look how clever I am”.
In building the models I have learned to not try to do too much in the same model, especially if several different technical people are involved in its development.   I won’t go into detail here on good practices, but you can check out the instructional presentations prepared by Peter Card at Economic Evaluations (  He has some excellent practical recommendations that all financial modellers should consider.  It doesn’t take long to review his lessons and it’s worth the time to do it.  His recommendations can generally apply to any Excel modelling effort, whether it be costing, scheduling, or economic analysis.
My bottom line opinion is that you can and should build your spreadsheet models compatible with the way you think.  However try to keep all aspects identifiable and try to be consistent in your modelling format and methodologies on all worksheets and all your models. Not everyone thinks the same way so try to help everyone by taking the extra steps of building in some clarity.  Your client, colleagues, and reviewers will thank you.