Articles for May 2015

11. Rock Value Calculator – What’s My Rock Worth?

rock economic value
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.

Does the Ore Grade Generate a Profit ?

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 net smelter payable factors.
To help calculate the value of the insitu rock, 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 values are calculated as a “$ per tonne”. One can zero out the values for the metals of no interest.

 

Rock Value Calculator Pic

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.

Profit = Revenue – Cost

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.
The bottom line is that very early on it is important to understand the net revenue that your project’s head grades may 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 or low operating costs will be required by a project.
The earlier one understands the potential economics of the different ore types, the better.
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10. Google Earth – Keep it On Hand

Mining studies
In a previous article (3. Site Visit – What Is the Purpose?) I briefly discussed the requirements for a site visit to be completed by one or more Qualified Persons (“QP”) in a 43-101 compliant study.    Unfortunately the entire study team cannot participate in a site visit; however the next best thing may be Google Earth.

Lets fly around with Google Earth

Gather your team around their computers and fire up screen sharing software like Glance, GoToMeeting, Skype, or Cisco Webex.   Here are some of the things your group can do with Google Earth:
  • It can be used to fly-around the project site examining the topography.
  • 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 provides the capability 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 survey waypoints.  If a member of the study team has visited the site with a GPS, they can illustrate their route and their observations.
My recommendation is to always have a Google Earth session with your engineering team to examine the project site and the regional infrastructure.
A group session like this ensures that everyone sees and hears the same thing. It’s like taking a helicopter tour of the site with your entire study team at once!   A “helicopter tour” would be a good agenda item at the very first kickoff meeting.
Another option is to check the aerial photos and Bird’s Eye views on the Bing Maps website (www.bing.com/maps).  Sometimes those images will be different than what you will find in Google Maps or Google Earth.
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9. Large Consulting Firms or Small Firms – Any Difference?

Mining feasibility pre-feasibility
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.
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8. PEA’s – Is it Worth Agonizing Over Details

Mining PEA
As stated in a previous article (“PEA’s – Not All PEA’s Are Created Equal“) different PEA’s will consist of different levels of detail.  This is driven by the amount of technical data available and used in the study.    The same issue applies to 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 some of the chapters were fairly high level based on limited data, while other parts of the same study went into great depth and detail. This may not be necessary nor wise.

Think about the level of detail justifiable

If the resource is largely inferred ore, then the mine production plan will have an inherent degree of uncertainty in  it.  So there is not a lot of justification for other engineers (for example) to prepare detailed tailings designs  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 technical exercises may be a waste of time and money, adding to the study duration, increasing engineering costs, and giving the unintended impression that the study is more accurate than it really is.
Different levels of detail in the same study can crop up when diverse teams are each working independently on their own aspect of the study.   Some teams may feel they are working with highly accurate data (e.g. production tonnage) when in reality the data they were provided is somewhat speculative.
The 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 technical detail in 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.
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7. Multi-Company Engineering Studies Can Work Well…or Not

Mining studies
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 approach gives the opportunity to use  experts for different parts of a study.
My recollection is that years ago larger consulting firms would offer to do an entire study in-house.  That now seems to have changed and the multi-company approach seems to be the norm.
This is partly being driven by the clients who wish to work with  consultants they are familiar with and have existing relationships. It
In some instances, larger firms may still make the argument they can take on all of the project scope themselves.  However reflect on such offers, the danger being a less qualified team seconded from offices that are not busy.  Possibly you won’t get the best team; you  get who is available.
In many joint company studies, often few of the team members will have ever worked together before.  It may be 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 working with different offices of the same firm, things may not go as planned.  Some of those in-house teams may not have previously worked together.

The Study Manager is Key

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 blog discussing the Study Manager role).  A single team member delaying their deliverables will delay others on the team.
Some consulting firms have multiple client projects underway at the same time.  Unexpected delays in one study may cause them to shift personnel onto other clients.  Unfortunately sometimes it is difficult to bring the team back together on your project at a moment’s notice.
The Study Manager must 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”) assigning the costing responsibilities.  Given that the 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 blog on the subject of WBS ).
Team communication is vital and there are different ways to do it.   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 too much technical detail versus not enough detail.
On some studies I have seen a weekly call restricted to one-hour long and then everyone flees until next week’s call.  At the end of these conference calls, one might have an uneasy 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.

The bottom line is that multi-company teams will work fine as long as the study manager is capable.  Its not a simple task, and not everyone can do it well.  However everyone (client and the other team members) appreciate working under a really good study manager.
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6. Metal Equivalent Grade versus NSR for Poly-Metallics. Preference?

NSR for poly-metallics
Some of the mining studies that I have worked on were for deposits containing multiple recoverable metals.  For example Ag-Pb-Zn mineralization or Cu-Pb-Zn-Au-Ag mineralization.    Discussions were held regarding whether to use a “metal-equivalent grade” to simplify the deposit grade or to use a Net Smelter Return (“NSR”) dollar value.

The NSR represents a $/tonne recovered value rather than a head grade.

I have found that the geologists tend to prefer using a metal-equivalent grade approach.  This is likely due to the simpler logic and calculation required for an equivalent grade formula.  At an early stage it’s simpler to select the cutoff grade based on similar projects.
Generally I have no concerns on the metal-equivalent approach at the resource estimate stage.   However from an engineer’s view, an equivalent-grade does not provide a meaningful representation of the ore quality.   It is more difficult to relate the head grade to an operating scenario which may rely on different mining or processing methods generating different final products (e.g. dore versus concentrates).   The NSR makes it easier to understand the actual ore quality.
On the downside, the NSR calculation will require more input data.  Information such as metallurgical recoveries, concentrate characteristics and costs, and smelter payable parameters will be needed.  However the end result is an NSR block value that can be related directly to the operating costs.
For example if a certain ore type has an on-site processing cost of $20/tonne and G&A cost of $5/tonne, then in order to breakeven the ore NSR block value must exceed $25/tonne.   If one decides to include mining costs and sustaining capital costs, then the NSR cutoff value would be higher.   In all cases one can directly relate the ore block value to the operating cost and use that to determine if it is ore or waste.  This is more difficult to do with equivalent grades.

Using the NSR approach, the operating margin per block is evident.

If using pit phases to start mining in high grade areas, one can immediately get a sense for the incremental benefit by looking at the profit margin per pit phase.
One drawback to the NSR block value approach is that the calculation will be based on specific metal prices.  If one changes the metal prices, then one must recalculate the NSR block values.
In some studies, I have seen higher metal prices used for resource reporting and then lower metal prices for mine planning or reserves.  In such cases, one can generate two different NSR values for each block.  One can use the same NSR cutoff value for reporting tonnages.   This two NSR approach is reasonable in my view.

Pit Optimization

Pit optimizations can also be undertaken using the block NSR values rather than ore grade values, so the application of NSR’s should not create any additional problems.
For projects that involve metal concentrates, the cashflow model usually incorporates detailed net smelter return calculations, which include penalties, deductions, different transport costs, etc.  The formula used for the calculation of NSR block values can be simpler than the cashflow NSR calculation.   For example, one could try to build in penalties for arsenic content thereby lowering the NSR block value; however in actuality such ore blocks may be blended and the overall arsenic content in the concentrate may be low enough not to trigger the penalty.
Since the NSR block value is mainly being used for the ore/waste cutoff, I don’t feel it is necessary to get too detailed in its calculation.
The bottom line is that from an engineering standpoint and to improve project clarity, I recommend the use of NSR values rather than equivalent grades.   Geologists may feel differently.
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