Let me say the obvious; the state of the junior mining market is not great these days. The number of financings is down and it seems there are a lot of companies out there trying to get their piece of the financing pie. People say there actually is a fair bit of private equity funding available but only for the right projects.
I have heard from geologist colleagues that financing grass-roots exploration is extremely difficult to acquire unless company management has had past successes and is well connected to the money scene. I’m told that 43-101 resource estimates alone don’t generate much excitement and for projects to be “on the radar” they need to be advanced to at least the PEA stage. Investors want some vision of what the project will look like.
In the recent past I have become familiar with some junior mining company that were always struggling for cash while others seemed to have no problem in getting at least some funding to continue their efforts. The biggest differences between these two situations were; (a) the top level management in place, (b) the type of project they had, and (c) if their path forward plan made logical sense.
Management is what it is, although companies generally do attempt to bring in experienced people with track records on either the executive level or the Board of Directors level. Experienced management can hopefully establish if their projects will have a high probability of success or if the project is going to be a hard sell. This will determine whether they should continue to spend money on the project.
In my experience, when in the financing mode, it is important that company management have the ability to present an orderly, practical, and realistic path forward for the project to demonstrate what they will do with the money. I have participated in due diligence meetings and listened to a management team tell us they will have a resource estimate this year and be in production in two years. Those around the table look at one another knowing that they will be lucky to have a feasibility study completed by that time and lucky to have their environmental permits in place.
Keep the plans realistic
It does not help the perception of a management team (or the project itself) if the path forward is unrealistic and unattainable, unless the management team have done it before. Similarly low-balling cost estimates and presenting fantastic NPV’s will fool no one with experience and ultimately may do more harm than good towards credibility.
My bottom line is that in order for a project (and the management team) to get serious attention from potential investors is to make sure there is a realistic view of the project itself and have a realistic path forward. Even a good property can be tarnished by making the technical aspects look over-promotional rather than real. Make sure the right technical people are involved in the entire process and that company management are willing to listen to them. Clearly explain how the money will be spent.
The two key nature-driven factors in the overall economics of a mining project are the ore grade and the ore tonnage. In simplistic terms, the ore grade will determine how much incremental profit can be generated by each ore tonne processed. The ore tonnage will determine whether the total profit generated all the ore will be sufficient to pay back the capital investment for the project plus provide some reasonable financial return to the investor.
Focusing on the first factor of ore grade, in order to understand the incremental profit generated by each ore tonne one must first convert the ore grade into a dollar revenue value. This calculation will obviously depend on metal prices and the amount of metal recovered. For some deposits with multiple metals, the total revenue per tonne will be based on the summation of value from each metal, some of which may have different process recoveries and different payable factors.
I have created a simplistic interactive spreadsheet at this link (Rock Value Calculator). A screenshot is shown below. The user simply enters their data in the yellow shaded cells and the rock value results are calculated. One can zero out values for the metals of no interest.
Price: represents the metal prices, in US dollars for the metals of interest.
Ore Grade: represents that head grades for the metals of interest in the units as shown (g/t and %).
Process Recovery: represents the average percent recovery for each of the metals of interest.
Payable Factor: represents the net payable percentage after various treatment, smelting, refining, penalty charges. This is simply a rough estimate depending on the specific products produced at site. For example, concentrates would have an overall lower payable factor than say gold-silver dore production.
Insitu Rock Value: this is the dollar value of the insitu rock (in US dollars), without any recovery or payable factors being applied.
NSR Rock Value: this represents the net smelter return dollar value after applying the recovery and payable factors. This represents the actual revenue that could be generated and used to pay back operating costs.
The final profit margin will be determined by subtracting the operating cost from the NSR Rock Value. These costs would include mining, processing, G&A, and offsite costs. Typically large capacity open pit operations may have total costs in the range of $10-15/tonne while underground operations could be much higher.
My bottom line is that very early on it is important to understand the net revenue that your project’s head grades may potentially deliver. This will give sense for whether you are a high margin project from an operating cost perspective or whether the ore grades are marginal and higher metal prices may be required. The more one understands the potential economics of the different ore types, the better.
In a previous article (3. Site Visit – What Is the Purpose?) I briefly discussed the requirements for a site inspection to be completed by one or more Qualified Persons (“QP”) in a 43-101 compliant study. Unfortunately the entire study team does not participate in the site visit; however the next best thing may be a viewing with Google Earth. Here are the possibilities with Google Earth:
It can be used to fly-around the project area examining the 3D topography across the site.
It can be used to view regional features, regional facilities, land access routes, and existing infrastructure.
It has the capability to measure distances, either in a straight line or along a zigzag path.
It has the ability to view historical aerial photos (if they exist) to show how the project area might have changed over time.
It can import GPS tracks and waypoints. If a member of the study team has visited the site with a GPS, they can describe their route and their observations.
As an aside, also check the aerial photos and Bird’s Eye views on the Bing Maps website (www.bing.com/maps). Sometimes those images can be different than what you will find in Google Maps or Google Earth.
My bottom line recommendation is to have a Google Earth session with your engineering team to view the project site and the regional infrastructure. A viewing session ensures that everyone sees and hears the same things about the site. It’s like taking a helicopter tour of the site with your entire team at once! If people are working in different offices, this can be done via screen sharing in Skype, Glance, GoToMeeting, or any of the other online conferencing methods.
A “helicopter tour” like this would be a good agenda item at the first study kickoff meeting and is useful when done as a group with a “tour guide”.
I have come across some junior mining companies that have based the selection of their engineering consultant on the assumption that they needed a “big name” firm on the cover page to give credibility to the study. This is an interesting dilemma that many smaller mining companies run into and also a dilemma for the smaller engineering firms trying to win jobs. Large consultants may ultimately be higher cost due to their overheads, however their name on the study may bring some intangible value.
Based on my experience I feel that larger consultants are best suited for managing large scope feasibility level studies. This isn’t because they will necessarily provide a better technical product, but rather they tend to have the management and costing systems in place to undertake the larger studies. The larger firms will be able to draw in more management resources; for example, project schedulers and document control personnel. Ultimately one will pay for all of these people, which may help in getting to the endpoint of the final study but it will come at a cost.
For certain aspects of a feasibility study, one may actually get better technical services from smaller specialized engineering firms. However the overall coordination of a large feasibility study can be an onerous task and the large firms may be well positioned to do this.
In my view, likely the best result will come from a combination of a large firm managing the feasibility study but undertaking only the technical work where they can be deemed to be experts in. The large lead firm would be supported by smaller firms for the specialized aspects, as per a previous article “Multi-Company Engineering Studies Can Work Well..Or Not”.
For smaller studies, like scoping studies (i.e. PEA’s) which can be based on limited amounts of technical data, I personally don’t see the need for the large engineering firms. The credibility of such early studies will largely be based on the amount of data used to support the design assumptions; for example how much metallurgical testing has been completed; how much geotechnical investigation been completed; how much inferred resource is being used in the mine plan (see “PEA’s – Not All PEA’s Are Created Equal”). A large firm’s use of limited data may be no more defensible than a small firm’s use of the same data.
One of the purposes of an early stage study is to see if the project has economic merit and would therefore warrant further expenditures in the future. An early stage study is generally not used to defend a production decision. In addition, the objective of an early study is not necessarily to terminate the project outright unless it is obviously highly uneconomic.
I have seen cases where larger firms, in order to protect themselves from limited data, were only willing to use the most conservative design assumptions. This may not be helpful to a small mining company trying to decide what to do with a developing project.
My bottom line is that for early stage studies like a PEA, smaller engineering firms can do as good a job as larger firms. However one must select the right firm, review some of their more recent 43-101 reports to gauge their quality of work, and don’t hesitate to check their client references. For the more advanced feasibility level studies, if the small firm indicate they can do the entire study too, one should be wary. Perhaps they can do parts of the feasibility study by sub-contracting to a larger firm but managing such large study may be beyond their internal capabilities.
Whether considering a small or large engineering firm, one needs to be aware of their strengths and weaknesses as regards to the specific study.
As stated in a previous article (“PEA’s – Not All PEA’s Are Created Equal“) different mining PEA’s will contain different levels of detail. This is due to the amount of technical data available and used. The same idea holds within a single PEA whereby different chapters of the same study can be based on different degrees of data quality.
I have seen PEA’s where many of the chapters were fairly high level based on limited data sets, and then other parts of the same study go into great depth. This may not be necessary nor wise.
For example, if the resource is largely inferred then the mine production plan will have a fair degree of uncertainty built into it. So there is not a lot of value for the engineers (for example) to prepare detailed tailings designs or ditch design associated with that mine plan.
Similarly there is little value in developing a very detailed operating cost model or cashflow model for a study that has many underlying key uncertainties. Such efforts are a waste of time and money, adding to the study timeline, increasing engineering costs, and giving the overall impression that the study is more accurate than it really is.
Differing levels of detail in the same study can be a problem when diverse teams are each working independently on their own aspect of the study. Some teams may think they are working with highly accurate data (e.g. production tonnage) when in reality the data they were given by other members of the team is speculative.
My bottom line is that it is important for the Study Manager and project Owner to ensure the entire technical team is on the same page and understands the type of information they are working with. The final study should be consistent throughout.
Experienced reviewers will recognize the key data gaps in the study and hence view the entire study in that light regardless of how detailed the other sections of the report appear to be.
Most, if not all, advanced studies these days rely on engineering teams comprised of participants from different consulting firms or from different regional offices of the same company. This provides the opportunity to use specific expert consultants for different parts of the study, rather than simply pulling in a generalized team from a single firm. My recollection is that many years ago large consulting firms would offer to do the entire study in-house, however that has changed and the multi-company approach seems to be the norm. This is partly being driven by the clients who wish to maintain certain consultants that they are familiar with and may have existing relationships.
In some instances, larger firms will still make the argument they can take on more of the project scope themselves. However be careful in such offers because one can end up with less qualified teams seconded from their offices that are not busy. Possibly you won’t get the best team; you may simply get who is available.
In many joint company studies, few of the team members will have ever worked together before and so it’s a team building exercise right from the start. I have had both good and bad experiences with these types of engineering teams. Some of them work very well while others floundered. Even when using different offices of the same firm, things may not go as planned. Even those teams may not have worked together before.
To have a successful study team, in my experience the two key factors are; (1) the competency of the Study Manager; (2) the amount (and style) of team communication.
The Study Manager is vital to keeping everyone working on the same page and making sure timelines are met. (I have another article on the Study Manager role). A single team member delaying their deliverables can then delay others on the team. Some consultants have multiple projects underway at the same time. Unexpected delays in one study may cause them shift onto their other study and it sometimes is difficult to bring the team back onto your project at a moment’s notice.
The Study Manager must also ensure that everyone understands what their deliverables are. Generally this is done using a “Responsibility Matrix”, but these can sometimes be too general. Where cost estimation is involved, the Responsibility Matrix should be supported by a Work Breakdown Structure (“WBS”) where the costing responsibilities are assigned. Given that contentious parts of many studies are the capital and operating cost estimates, I personally view the WBS equally as important as the Responsibility Matrix. (I have another article on the WBS topic).
Team communication is vital and there are different ways to do this. Weekly or bi-weekly conference calls work well but these need to be carefully managed. With a large team on a conference call, there is a fine line between getting into too much technical detail on certain topics versus not enough detail or members won’t understand the nuances of the project.
On some studies I have seen a weekly call restricted to one-hour long and then everyone escapes until next week’s call. At the end of such conference calls, one has a feeling of it being incomplete. Perhaps people were not clear on something but hesitated to ask become the one-hour time is up. In such cases it is important for the relevant parties to continue on or have a separate call.
Make it apparent to everyone that they should speak up if something is not clear to them, regardless of the time remaining.