Articles for April 2015

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

Mining Preliminary Assessments
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 mining PEA can have a broad scope.
Some PEA’s might 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 advanced information.
Therefore one should not view all PEA’s are being created equal.
The PEA is normally developed at a fairly early stage in the project life.  The initial PEA may then be superseded with a series of updated PEA’s as more data is acquired.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 appreciate being updated on positive growth trends.

Sequential PEA’s

The sequential PEA approach is a convenient way to continue advancement of the project without making the step to a Pre-Feasibility study or bigger step to a Feasibility study.  Maybe the project is still growing in size and a feasibility study at this stage would not be presenting the true potential, hence the updated PEA.
On the downside of the sequential PEA approach is that investors may get tired of hearing about PEA after PEA.  They may want to see a bigger advance towards a production decision.  They ask “How long can they keep studying this project?”.

There is no right or wrong to what constitutes a PEA.

The securities commissions consider that the cautionary language an important component of the PEA Technical Report and may red-flag it if it’s not in all the right places.   However this cautionary language is generally focused on the resource.
For example the typical “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 that 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 test work might be a more significant uncertainty.  The previous cautionary language doesn’t address this issue.  Therefore it is important to consider the chapters in the Report pertaining to risks and recommendations for a more complete picture of the entire report.

Conclusion

The bottom line is that when reviewing a PEA report, be aware of all the uncertainties and assumptions that have been incorporated into the study.   The report may be well founded or built on a shaky foundation.  No two PEA’s are the same and this must be clearly understood by the reviewer.
Perhaps one should develop a PEA “checklist” that can be used to rate the amount and quality of data used for the different parts of the study to help understand where gaps may exist.
For more about preparing a mining PEA, read the blog “PEA’s – Is it Worth Agonizing Over Details“.
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4. Four Study Stages (Concept to Feasibility) – Which Should We Do?

Over my career I have been involved in various types of 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 and effort, and can have hugely different costs.
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 a Feasibility instead of a Pre-Feasibility Study.    Everyone 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.

Four basic types of studies

In my opinion there are four basic levels of study, which are listed below.  My objective to simply provide an overview of them.  Detailed comparison tables are readily available, and anyone can contact me for an a full copy of the table  shown below).

Four Studies Table

1. Desktop or Conceptual Study
This would likely be an in-house study, non-43-101 compliant, and simply used to test the potential economics of the project.  It lets management know where the project may go (see a previous blog at the link “Early Stage “What-if” Economic Analysis – How Useful Is It?”.    I recommend doing a documented desktop study.  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 and lets one test different scenarios.
2. Preliminary Economic Assessment (“PEA”)
The PEA is 43-101 compliant and presents the first snapshot 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 (+/- 40%) since not all the operational or environmental issues are known at this time.   Please do not sell the PEA as a feasibility study.

Don’t Announce a PEA Until You Know the Outcome

I recommend not announcing or undertaking a PEA until you are confident in what the outcome of the PEA will be.   A reasonable desktop study done beforehand will let a company know if the economics for the PEA will be favorable.  I have seen situations where companies have announced the timing for a PEA and then during the study, have seen things not working out as well as envisioned.  The economics were poorer than hoped and so a lot of re-scoping of the project was required.  The PEA was delayed, and shareholders and financial analysts negative suspicions were raised in the meantime.
The PEA can be used to evaluate different development scenarios 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 scenario analysis only be used to discard obvious sub-optimal cases.  Scenarios that are economically within a +/-30% range of each other many be too similar to discard at the PEA stage.
3. Pre-Feasibility Study (“PFS”)
The PFS will be developed using only measured and indicated resources (not inferred) so the available ore tonnage may decrease from the PEA study.  The PFS costing accuracy will be better than a PEA.  Therefore the PFS is the right time to evaluate the remaining development scenarios.  Make a decision on the single path forward going into the Feasibility study.

Use the PFS to determine the FS case

More data will be required for the PFS, possibly a comprehensive infill drilling program to upgrade the resource classification from inferred.  Many companies, especially those with smaller projects might skip the PFS stage  and move directly to Feasibility.  I don’t disagree with this approach if the project is fairly simple and had a well defined scope at the PEA stage.
4. 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 scenario analysis at this time.
Smaller companies should be careful entering the FS stage since, once the FS is complete, shareholders will be expecting a production decision.  If the company only intends to sell the project with no construction intention, they now hit a wall.  What to do next?

Sometimes management feel that a FS may help sell the  project.

I don’t think a FS is needed to attract buyers and sell a project.  Many potential buyers will do their own in-house due diligence, and possibly some design and economic studies.   Likely information from a PFS would be sufficient to give them what they need.  A well advanced Environmental-Socio Impact Assessment may give as much or more comfort than a completed Feasibility Study would.

Conclusion

executive meetingMy bottom line recommendation is that there is no right answer as to what study is required at any point in time.  Different paths can be followed but consideration must be given to future plans for the company after the study is completed.   Also consider what is the best use of shareholder money?  Company management may see pressure from retail shareholders, major shareholders, financial analysts, and the board of directors.  Management must decide which path is in the best longer term interests of the company.
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3. Site Visit – What Is the Purpose?

Mining due diligence
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 technical reports one may see a long list of QP’s but often only one or two have actually made a site visit. I have worked on numerous mining studies and not been involved in the site inspection.
In most cases the limited number of people completing a site visit may be due to the high cost for travel to a remote site, the logistics of travelling around with a large team, and the associated fees for the personnel to attend.  In some cases the site visit personnel may be restricted simply because there isn’t much to see at the property. In other instances, only a few persons were able to coordinate schedules given the timing of visit.

Given the logistics of a site inspection, get the best bang for your buck

Site inspections that I have taken part in ranged from simple tours of the property taking photographs to more detailed data room reviews, meeting the owner’s team, meeting with vendors and contractors.
Exploration Program in AndesIn my opinion the more advanced the study the more important the site visit becomes.  This includes optimizing the scope of the visit.
At the feasibility stage it is important that several QP’s complete one or more site visits at the same time if possible.  They need to see and hear the same things.  Obviously the QP’s will eventually focus on different areas of responsibility, but the over-riding message should be consistent to the entire team.
For an earlier study stage (e.g. PEA), it is less critical that a large team complete the site visit.   However I would recommend that the QP making the site visit be in prior contact with the team members to determine what information they will want to see.
The visiting QP is responsible to collect their data.  Sorting through information files covering different disciplines may be difficult for one person, but inspecting and photographing key sites may be of value to everyone.
In addition making first contact with local vendors and contractors on behalf of others will be useful.   Ultimately spending an extra day or two at site is relatively inexpensive compared to the fixed cost of the travel. Once back at the office, the QP should distribute his findings to the rest of the team, benefiting the team with better information.   I have often seen that this post-visit information sharing does not happen.

Conclusion

The bottom line is that rarely I have seen pre-site visit data gathering lists prepared for the QP .  In many cases the QP simply collects the information they need.  Generally the pre-trip planning is focused on travel and hotel logistics and less so on team information needs.
Quick drive-by site visits meet the requirements of NI 43-101 but they don’t add much to the study quality.  One way to partly enhance team awareness is with Google Earth; read the blog “Google Earth – Keep it On Hand” to learn more on this.

 

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

Mining study economics
Over the years I have worked with both large and small mining companies and watched how they studied potential acquisitions.
Large mining companies have their in-house evaluation teams that will jump on a potential opportunity that comes in the door and start examining it quickly.  These evaluation teams are experienced at what they do and can provide management with solid advice even if working with only limited data.  This help management decide very early on whether to pursue the opportunity or walk away.
Early stage economics 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 sitting around ready to hit the ground running.  Management needs to know if this project has a chance.  If the project is early stage, sometimes management thinks it is better to put money into the ground rather than on early studies.

It is possible to do both

I feel that you won’t know if you have arrived at your destination if you don’t know your destination.  Early stage financially modelling can help define that destination.
The exploration team and management usually have a vision of the potential project, even those projects with only an early resource estimate.   Each person may have a different opinion on the potential size and scope of what may eventually exist.  However the question is whether any of those vision have 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 simply to tweak to examine “what-if’s” scenarios 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?

Early stage modelling adds value

The tangible benefits to early financial modelling are:
  • It helps management to think about and better understand their project.  If done honestly, it will reveal both the good and the bad aspects.
  • It helps management to understand what parameters will be most important to resolve and what technical factors can be viewed as secondary. This helps guide the on-going exploration and data collection efforts.
  • Periodically updating the economic model with new information will show the if economic trends are getting better or worse.

Its not 43-101 compliant

I must caution that this type of early stage economic analysis is not be 43-101 compliant and hence can not be shared externally, no matter how much one might wish to.
Another caution is that in some cases these early stage un-engineered projections become “cast in stone”, treating them as if they are accurate estimates.  All subsequent advanced studies somehow need to agree with the original cost guesses, thereby placing unreasonable expectations on the project.
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.  That is not an onerous exercise compared to the overall guidance they can provide.
The 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 easily undertake this modelling, with the help of some technical input.
To learn more about simple 1D financial models, read my blog “Project Economics – Simple 1D Model” .
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1. Financial Spreadsheet Modelling – Please Think of Others

Mining Cashflow modeling
In my current role as a mining consultant I am often required to review spreadsheet cost models or cashflow models built by others.  Some of these spreadsheets can be monsters, using numerous worksheets, cross-linking between worksheet cells, and having hard wired numbers inside cell formulas.
Some of the models I have reviewed will build the entire operating cost (mining, processing, G&A) in one file.  They will build in the capital cost too and finally provide the economic model… all in one!
This makes the model very complex 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 formula logic than actually looking at the validity of the inputs and output.
It seems that only the model developer can really work with these spreadsheets and the rest of us can just hope they have  done everything correctly.

Cleverness is not a virtue

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 is not an example of someone saying “look how clever I am”.
In building the spreadsheet 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 foundation.   Other suggestions are:
  • Color coded input cells differently than formula cells.
  • Carry over values rather than linking to other worksheets.
  • Highlight cells that are carried over from other worksheets.
  • Never hardwire numbers into a formula.
  • Use conditional formatting when possible to help identify errors.
I won’t go into detail on good spreadsheet practices, but you can check out the instructional presentations prepared by Peter Card at Economic Evaluations (http://economicevaluation.com.au).
He has some excellent practical recommendations that all financial modellers should consider.  It doesn’t take long to review his online courses and it’s worth your time to do it.  His recommendations can generally apply to any Excel modelling exercise, whether its costing, scheduling, or economic analysis.

Try to help by building in clarity.

The bottom line is that you must build your spreadsheet models compatible with the way you think.  However not everyone thinks the same way so try to keep all aspects easily identifiable and traceable.  Be consistent in the model format from worksheet to worksheet. Be consistent in methodologies on all worksheets and with all your models.   Your client, colleagues, and reviewers will thank you.
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