Articles for May 2015

23. Project Economics – Simple 1D Model

In a previous article I outlined my thoughts on the usefulness of early stage financial modelling (“Early Stage “What-if” Economic Analysis – How Useful Is It?”).     My observation was that it is definitely useful to take a few days to build a simple cashflow model yourself to help you understand the project.  By “simple” I mean simple.
This article describes one of the techniques that I use to take a quick look at any project; whether it is for a client wishing to understand his project at a high level; or whether it is a project that I have read about and am curious about its viability.    It takes about 10 minutes to plug the numbers into the template to get quick results.  The image below is an example of the simple model that I use.

1D Cashflow Model

I term this a one dimensional (“1D”) model since it doesn’t require the typical X-Y matrix with years across the top and production data down the page.   The 1D model simply relies on life of mine (“LOM”) totals to estimate the total revenue, total operating cost, and total profit in order to determine how much capital expenditure the project can tolerate.  I do this analysis on a pre-tax basis to keep things simple.
Using estimated metal prices and recoveries, the first step is to calculate the incremental revenue generated by each tonne of ore (see a previous article “11. Rock Value Calculator – What’s My Rock Worth?”).   Next that revenue per tonne is multiplied by the total ore tonnage to arrive at the total revenue over the life of mine.
The second step is to determine the life of mine operating cost, and again this simple calculation is based on estimated unit operating costs multiplied by the total tonnages being handled.
The third step is to calculate the life of mine profit based on total revenue minus total operating cost.
The potential net cashflow would be calculated by deducting an assumed capital cost from the life-of-mine profit.  The average annual cashflow is estimated based on the net cashflow divided by the mine life.  An approximate NPV can be calculated by determining the Present Value of a series of annual payments at a certain discount rate.
One can easily evaluate the potential impact of changing metal prices, changing recoveries, ore tonnages, operating costs, etc. to show what the economic or operational drivers are for this project.  This can help you understand what you might need in order to make the project viable.
My bottom line is that a 1D economic calculation is simplistic but will still provide a conceptual vision for the project.  The next step in the economic modelling process would use a 2D model based on an annual production schedule, but the 1D approach is a good first step in looking at a potential project and it doesn’t take a lot of time.
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22. Oil Sands vs Tar Sands – Something I’ve Been Wondering About

Watching the television news in Canada these days, one sees the environmental opponents of the oil sands parading around with signs that say “Stop the Tar Sands”.  One way to distinguish whether someone is for or against the oil sands is to see what terminology they use.  Do they call them “oil sands” (i.e. pro groups) or “tar sands” (i.e.anti groups)?   Personally raw bitumen seems more tar-like than oil-like so the enviro’s seem to have it right.
Going back many decades the oil sands were originally called the tar sands.  I’m not sure when the terminology shifted, but in the mid-1960’s the first large scale mining operation was called Great Canadian Oil Sands (GCOS).  I’m also not sure about the reason for the terminology shift from tar to oil, but maybe it was related to the fact that “tar” was considered something of low perceived value while “oil” was considered something of high economic value.  Heck… look at what oil did for the economic situation of Jed Clampett on the Beverly Hillbillies.  How about the show “Dallas” – lots of money and scotch drinking.  We all wanted to discover an oil well in our backyard so perhaps at that time the term “oil” implied some level of elegance and prosperity.

Jed Clampett and family

These days when one sees the term “oil” in the news, it tends to be associated with negatives.  We see oil references to rail explosions, pipeline ruptures, tanker spills, off shore platform leakage, fracing, greenhouse gas emissions, Middle East wars, and environmental protests.   I don’t know if there is any intangible benefit in using the term “oil” to describe your product.  Maybe there is actually some intrinsic harm in doing so.
Tar (or bitumen) on the other hand, is a molasses-like substance generally viewed by the public as a material used to repair our streets and patch our roofs. A tar spill is not going to flow anywhere; it will barely flow out of the tank it is held in.  What is there not to like about tar?

Tar sand bitumen

So next time there is a protest with signs being held up to “Stop the Tar Sands”, the oil companies should shrug their shoulders and jump on the band wagon and say “yeah…tar…that’s us…what are you worried about?”.  They should try to commandeer the term “tar” back from the protest groups since there is nothing wrong with tar.

 

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21. 3D Printing – A Simple Idea

These days we hear more and more about 3D printing and what it is able to do. 3D printers are coming down in price and can be under $2000.   I don’t know how many real applications there are for the mining industry but here is an example from a recent project that I consulted on.
The open pit project was going to be located in hilly terrain, and issues related to haul road access, waste dump sites, and leach pad location were all going to be of importance.   The client used a 3D printer to create a small and simple desktop model of the terrain that was given to each of the consulting firms.  The photos below show the size of the model (click on image for a large image).
3D printed topography

3D printed model of the mining project topography

3D printed mining topography

3D printed model of the mining project topography


Numerous members of the engineering team were each given their own 3D model to take back to their offices.  Putting one of these on your desk helps with familiarity of the overall site and allows you to better understand the siting and drainage issues.  Topographic maps may give data on actual elevations and distances, but the 3D model gives you a feel for the site.    The model shown above was created for the undisturbed topography but one could probably print off a similar model once the final pit and dump design is done.
My bottom line is that with the current 3D printing capabilities, creating a simple 3D topographic model for each member of the engineering team is possible and I recommend doing so.  Also provide the Owner’s management team with their own models, helping them understand the issues the geologists and engineers must deal with.
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20. Work Breakdown Structures – Don’t Forget About The WBS

Typically at the start of many mining studies, the team members receive a matrix of responsibilities.  This table shows which people or groups are responsible for the different aspects of the study, i.e. who is responsible for geology, for mine design, for process design, infrastructure, etc.  This is great tool and a necessity in making sure that everyone knows what they are supposed to do.  However it doesn’t really tell them “how” they need to do it.  How is their deliverable to be structured? How is it to be developed?
What often gets forgotten in the early stage studies is providing the team members a Work Breakdown Structure (“WBS”).   I consider the WBS an equally important component as the responsibility matrix and the two should always be provided together.
The WBS is a hierarchical breakdown of the project into phases, deliverables, and work packages usually associated with cost estimation. It is a tree based structure, developed by starting with the final objective and then dividing that into manageable components based on size, duration, and responsibility.  Typically this is done for the capital cost estimate, breaking it down into individual cost areas and cost components.
The WBS can provide the following information to the team:
  • It assigns the costing responsibility to specific people or group so they know what they must deliver.
  • It provides a consistent format for how to develop and report the capital costs (and operating costs).
  • It helps to ensure that no costs get omitted and that no costs get double counted.
  • It provides the cashflow modeller with a format to help import the total capital cost estimate into the cashflow model.
Typically a WBS is developed for pre-feasibility and feasibility studies but often ignored at the PEA stage, where some feel it is overly detailed for that level of study.  I don’t feel this is the case and even a simplified WBS is valuable at the PEA stage.
In some cases where a WBS is created, it does not get wide distribution to the entire study team.   The WBS should be provided to everyone and ideally a working session be held to walk through the WBS structure with the team.  The idea is not make everyone a costing expert, but to ensure they understand how the project cost estimate will be structured and developed.
My bottom line is that regardless of the level of study, a WBS should always be created.  Some will say the WBS is not required for early stage studies but I have found benefits in having one, at least for the capital cost estimate.   Obviously the level of detail in the WBS should be appropriate to the level of study.  It should not be difficult for your Study Manager to create an appropriate WBS early on and avoid headaches in the later stages when the final study is being assembled.
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19. Potash Ore Grades – Check the Units

Having worked in the potash industry for many years, I have reviewed numerous geological reports for projects in Canada, Asia, Russia, and Africa.  One of the curious things that I have seen is the reporting of resource  grades in two different units; either as potassium oxide (K2O) or potassium chloride (KCl).    Standard practice in the Saskatchewan potash mines is reporting ore grades using K2O units, with typical head grades in the range of 25% K2O.  It seems that many of the international projects, but not all, use the KCl units. Therefore when comparing potash resource grades between deposits, one must be cognizant of the units being used since there is a significant difference between the two.
The conversion from K2O to KCl is based on the formula K2O = 0.6317 x KCl.   So a grade of 25% K20 is equal to 25/0.6317 = 39.6% KCl.  The KCl grade value is significantly higher, easily recognisable on a high grade deposit.  The issue is more relevant with a low grade deposit, with say an actual grade of 15%K2O, which may be reported as 23.7% KCl.  One could conceivable see the ore grade in KCl and assume it is comparable to Saskatchewan potash grades, when in reality it is quite different.
When looking at various potash projects, particularly those involving underground mining, a key economic factor is the concentration ratio.  This ratio represents the tonnes of ore that need to be mined and processed to produce a tonne of final saleable product.   Typically the final potash product has a grade of 60% K2O, so an ore with a head grade of 25% would have a concentration ratio of about 2.4:1 (60%/25%).  This means that 2.4 tonnes of ore must be processed to produce 1 tonne of product (ignoring the process recovery factor).   For a lower grade ore with a head grade of say 15% K2O, the concentration ratio is 4:1 (60%/15%).   This gives a rough sense for the comparable operation size required to meet the same final product production levels.  This also gives a indication for the relative amounts of salt tailings requiring disposal for both high grade and low grade potash ores.  Low grade ore can generate a lot of tailings, the disposal of which is becoming a bigger issue on the environmental permitting side.
In the past gold grades have been reported as “oz/ton” or as “g/t”, but most geological reports today use “g/”t.  Sometimes US based projects may still use “oz/ton” however the differences in reported grade are fairly obvious between grams and ounces.  That is not necessarily the case with potash grades.
My bottom line is that potash is one of the commodities that will use different units when reporting ore grades and the investor or reviewer must be aware of which ones are being used.

 

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18. Importance of a Study Manager – He’s the Key

Over my career I have worked as an engineering team member on numerous projects and studies.  Some studies went better than others.  Unfortunately some dragged on, ran over budget, and ended up delivering a less than optimal product once all was said and done.  There are numerous factors that will have influence on the successful completion of a study.   Some of them are related to the quality of the technical team, the allowable budget and time window, and the type of direction provide by the Owner, however the key factor that I observed is the competency of the Study Manager (or Project Manager).
The Study Manager must wear many hats.  He will be responsible for being the main liaison with the Owner. He must herd a bunch of geologist and engineers in the same direction. He must ensure that technical quality and consistency is maintained by the entire study team.  He is responsible for ensuring that budgets and timelines are being met.   Depending on the quality of the Owner’s team and the consulting team, the combination of all of these responsibilities can be an onerous mission.
Every technical team has those team members that will deliver quality within timelines consistently.  There will also be team members that have difficulty in meeting quality and deadline targets for various reasons.  The Study Manager early on needs to figure out who fits into which category and must be able to work with them.   An entire study can quickly grind to a halt simply because one key component has become bogged down. A good Study Manager, who may occasionally ruffle some feathers, is generally appreciated by the team since they know that the entire team will be held to account.
The Study Manager also needs to understand the objectives of the Owner and ensure the study team is working towards those objectives.  The Study Manager however must also be honest with the Owner, keeping him informed of the true progress and warn if their objectives are achievable or not.
The Study Manager is responsible for coordinating the communications amongst the team and with the Owner.  Some managers are excellent at this while others fall into the trap of communicating on a “need-to-know” basis or “too late” basis.   Timely and thorough communication is important; avoid thinking that one is hampering the progress of others by involving them in frequent communications.
If an Environmental Impact Assessment is being conducted concurrently with an engineering study, the level of internal and external communication becomes even more critical due to the large number of technical disciplines and people involved.  Deadlines also become critical in such situations due to the size of the team.
When selecting a Study Manager, keep in mind that in some instances you may find that different managers in the same organization can have different amounts of internal authority.  For example, if technical people are needed on another other project, some managers can keep their team together while other managers will lose team members to the other project.  Losing manpower doesn’t help a study so, if possible, try to get a sense of the role that Study Manager has in their organization.
My bottom line is that when an Owner has received proposals for a study and is in the process of awarding that job, the most important consideration is who will be the Study Manager.  Meet and chat about how they will manage the study and what their experience is.  Check references if possible.   The voluminous proposals provided by consulting firms can contain a lot of information like Gantt charts, organizational charts, cost estimates, team resumes, safety plan, and corporate project experience.  Focus some time on the Study Manager; don’t assume he’s simply an administrative person that will be scheduling meetings and issuing monthly reports.
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17. Directional Drilling Open Pit Dewatering Wells – Great Idea

I recently read an interesting article in the Mining Magazine May 2015 edition called “Top 10 Technologies”.  One of the new technologies that jumped out at me is the capability to directionally drill pit dewatering wells.   This is an oil field technology from Schlumberger Water Services that is being applied to mining.  More information is at this link (see Well Placement Technology for Mine Dewatering).
http://www.slb.com/services/additional/water/mines.aspx
One of my past projects was a diamond mine in northern Canada.  The granitic rock mass was geotechnically very competent with limited jointing and fracturing. Groundwater seepage into a partly permafrost could create a host of operational problems in winter as well as affect pit wall stability.  Most of the groundwater flows were predicted to be along a few main structures or along single open joints.   These structures were near vertical, which created a problem when trying to intercept them with vertically drilled pumping wells.  Either you hit one or you don’t.
The use of directional drilling of pumping wells can be a great innovation.    It gives the opportunity to bend the pumping well to a more horizontal orientation, allowing the well bore to cut across vertical structures rather than parallel to them.   In addition, one can drill wells near the pit crest bending them in towards the ultimate pit bottom.  This may help improve drainage near the operating benches in the pit as it deepens and may eliminate the need to install inpit pumping wells.
In addition, some open pits have constructed underground drainage galleries around the pit circumference to help intercept groundwater seepage.  Possibly directionally drilling aligned parallel to the pit wall can replicate these drainage galleries at a much lower cost.
My bottom line is that the directional drilling innovation makes a lot of sense to me and mine operators should take a look at it, it might improve their pit dewatering systems.
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16. Request For Proposal (“RFP”) – Always Prepare One

When it comes to time to solicit prices for any type of engineering study, whether small or large, whether sole sourced or competitively bid, it is always a good idea to prepare a Request For Proposal (“RFP”) document. An RFP is better than an informal phone call to a consultant asking for a proposal and better than a cursory email outlining what you want. In many cases the RFP doesn’t need to be a complex document; however RFP’s are appreciated by everyone involved.
From a company perspective, preparing an RFP gives the opportunity to collect the thoughts on the scope of study needed, on the deliverables wanted, and on the timing required.   The RFP will outline this out for the consultants and simultaneously helps company management get on the same page themselves.  The RFP is the opportunity for the company to tell the consultants exactly what they are looking for in the study and what they want to see in the proposal itself.
From a consultant’s perspective, receiving an RFP is great since having a detailed scope of work laid out means you don’t need to guess when preparing a cost estimate.  It will be clear to the consultant what work is “in scope” and if ultimately extra services are required then “out-of-scope” work can easily be defined.   An RFP gives the consultant some reassurance that the company has put consideration into exactly what they want to do.
The RFP that is sent to bidding consultants should contain (at a minimum) the items listed below. A sole sourced study can have a scaled back RFP but some of the key items should still be maintained.   Much of this RFP information can be built into a single template that will simply be modified if different scopes of work will be sent to different consultants (e.g. tailings design, pit geotechnical, groundwater, feasibility study, etc.).
  • Project Introduction (an overview of the project).
  • Table of Responsibilities for the Study (if other consultants are being involved in different areas).
  • Scope of Work (for this Proposal), and highlight any specific exclusions.
  • Additional Requirements (update meetings, monthly reports, documentation requirements).
  • Schedule (what timing the owner wants for the return of proposal, when the job will be awarded, when the study will kickoff, and when completion is required).
  • Instructions to the Bidder (e.g. what information should be provided in each proposal and in what format).
  • Other (the legal rights of the Owner, confidentiality statement, how proposals will be evaluated, etc.).
If a company is competitively bidding the study, it can be easier to compare multiple proposals if certain parts are presented in the exact same format.  Usually different consulting firms have their own proposal format, which is fine, however certain sections of the proposal should be made easily comparable.   The RFP can request that each proposal should contain (at a minimum):
  • Confirmation of the scope of work based on the RFP, which may be more detailed than the RFP itself.
  • List of exclusions.
  • List of final deliverables.
  • Proposed Study Manager, resume and relevant study management experience.
  • Proposed team members, organizational structure by areas of responsibility, and resumes.
  • Cost estimate on a not-to-exceed basis for each area, subdivided by team member, hours and unit rates ,and possibly in a specific table format.
  • A fee table for the various job classifications that would be applied to out-of-scope additional man hours.
  • All indirect costs, administrative costs, indicating mark-ups (if any).
  • Miscellaneous disbursements (i.e., airfares, hotel, vehicles) and indicate if there are mark-ups.
  • Detailed study schedule to completion.
  • Payment schedule.
  • Specify if there are any potential conflicts of interest with other projects.
My bottom line is that a company should always take the time to prepare some type of RFP for any study they wish to undertake.  The company should also request a proposal from the consultant based on that RFP, even if it is being sole sourced to one company.  Depending on the size and nature of the study, one can use judgement on how detailed the RFP or consultant’s proposal must be, but I suggest that one always gets the proper documentation into place beforehand.
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15. Data Rooms – Help!

The statement “Have a look in the data room, it’s all in there” can bring a cold sweat to many an engineer undertaking a due diligence or updating a study from a previous consultant.  How many of you, during a due diligence, recall being given FTP access to a data room that is full of highly disorganized folders and sub-folders, files with cryptic names, different updates of the same file in different folders?  It can be like looking for a needle in a haystack.  It can be difficult to determine which files are actually important and still relevant today and which files have been simply dumped into the room. There is nothing worse than spending a day reviewing an Excel model only to find out that wasn’t the latest version and a different un-related folder has the correct file.
Data rooms are generally created for due diligence exercises or during an advance engineering stage (i.e. detailed engineering). Regardless of the purpose, it is helpful for all involved in the study to have some type of a document control person who understands what is in the data room, what is important, and what is non-essential.
Large companies or large projects may often have an dedicated document control person to manage the data room.  However smaller companies simply in a due diligence phase may tend to dump all the electronic files they have into the dataroom, sort them into different folders hopefully, but it’s still up to the reviewer to dig through the files to find what they need.  This can be a time consuming task, costing the client money in wasted time. Therefore organization of the data room is key.
Comprehensive searchable document management systems such as Aconex, SharePoint, and others are available, but they can be pricey and do require a team mindset to organize and catalogue the information put into them.  However a properly implemented system like these can make it easier to search for files, keywords, and the latest versions of files. “Properly implemented” means that the entire team takes the time to put the information in and ensure it is properly tagged. However even these systems can become repositories for hundreds or thousands of files.
As an aside; when using a cloud-based dataroom or FTP site, try to select one that allows bulk downloading of documents rather than only allowing one file at a time.
My bottom line is that data room management is important although I don’t know if there is any single magic solution.  Small mining companies may have tight budgets and a small management team so organizing data properly isn’t high on their priority list.   I suggest to anyone setting up a data room, please take the time to properly set up the folder structure, develop a single bibliography of what files are in there, and assign a person to be familiar with the general contents of the data room.  Also don’t just dump in everything like unnecessary data or working files that may not actually be required by anyone.
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14. Miners – Why Have Your Own Independent Consultant?

Over the years I have worked in many situations; as an independent consultant, as a member of a consultant’s study team, and as the owner’s representative managing consultants.   I have learned that there is a role for both the independent consultant and the consulting firms with mining companies.
A previous article (“9. Large Consulting Firms or Small Firms – Any Difference?”) discusses where I feel the large and small consultants fit into the overall picture.  Large or small technical teams are required where there are broader scopes of work, significant effort levels, and multiple technical skills are needed.   Independent consultants are a different option again, best suited for assisting the owner directly on either an independent or not basis. Sometimes the independent engineer might be on the Board of Directors or he might be part of an owner’s advisory panel.  Either way, management should have their own in-house advisory capability to bounce ideas off of and review the work being done.
Areas where the smaller independent consultants can differentiate themselves are as follows;
  • They don’t bring a lot of extra personnel onto the job.  They keep the work only to those that are needed and can usually pull in other experts as needed for specific tasks.
  • They can provide frank and straightforward advice without worrying about larger firm constraints, both legal and  business development related.  The independent consultant generally does not have the objective of trying to win a big feasibility study or EPCM job.
  • One can develop a good working relationship with the consultant, and everyone gets familiar with each other’s objectives and goals.
  • They can work efficiently at a pace of their own choosing, possibly resulting in lower costs and better timelines.  I know of independent consultants that work nights and weekends to meet deliverable schedules compared to those in larger firms who may tend to follow the Monday to Friday regime.
  • They can provide long term stability since they won’t have much turnover.  I know of a personal case where I was technically involved from afar in an international operating mine for over 15 years.  The technical staff at the mine site had significant turnover (partly due to promised corporate relocations), but I was a constant able to provide history (and backup reports) as to why and what was done previously, avoiding re-inventing the wheel with each new technical leader coming to site.
Stock Options: A point of discussion is whether the independent consultants should receive some type of stock option compensation.  I have worked in both situations; where I have received stock options and where I haven’t.   Awarding stock options would removed the “independent” nature of the relationship and hence negated the ability to sign off as an independent QP.  In some circumstances, the company may not require the independent consultant to be an independent QP since they fulfill more of an advisory role for the company.   One advantage of awarding stock options is the engineer may become more beholden to the project since he feels it is his project too, rather than simply being an advisor.  Conversely the company may prefer the consultant doesn’t have any direct ownership so that their advice can be viewed as being more independent.   I personally feel that awarding stock options is a good idea to help foster long term commitment from the consultant.
My bottom line is that the small independent consultants have a role to play and should be part of most owner’s teams, whether on the Board or on an Advisory Panel.   The independent consultants can be selected based on their technical specialization (i.e. exploration, resource modelling, mining, metallurgy, environmental) and provide valuable part time guidance to the company.   Please make sure that your consultant is capable; I have seen cases where a member of the advisory panel was actually giving the company bad advice and the others could see it but wouldn’t say anything since it’s not their area.
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