Articles for June 2015

28. Mine Approvals May Be Hinging on the Corporate Bank Account

EIA EIS EISA
A few months ago there were some discussions on a now defunct blog site  “I THINK MINING” and on a website (https://lindsaynewlandbowker.wordpress.com) regarding whether mine environmental approvals should be linked to the overall financial health of the parent company.
This point was raised in regards to the Mount Polley tailing dam incident as well as other notable tailings failures.   The logic behind the idea was that the potentially high cleanup cost for tailings failures could exceed the financial capacity of a small mining company and then the failure cleanup cost would need to be borne by the taxpayer.

Are reclamation bonds of sufficient size?

Closure bonds for final reclamation are standard practice in current permitting approvals and part of the normal course of business.  However what is being newly proposed is the requirement to have sufficient corporate funds in the bank account to pay remediation costs for some hypothetical failure.  This has not been part of the current environmental approval process as far as I know. Depending on the type of failure scenario one envisioned, the hypothetical cleanup cost could range from low to enormous.

A failure cleanup fund

One of the options being proposed is that the various mining companies in a jurisdiction each contribute money to a failure cleanup fund that could be used for mitigation purposes.
The ultimate goal of this idea may be better environmental practice or simply as a means to curtail mine development by handcuffing smaller companies.
Many deposits are too small for the major miners so the intermediate companies are the only ones interested in them.  However if they don’t have the financial reserves in the corporate bank account, then their projects would not get approved.

Small companies would only be explorers

It would impact on the ability for the smaller or intermediate miners to develop new mines if the corporate bank account of the parent company becomes a large part of the mine permitting process.  Not only would they need to finance the construction capital cost, which is not easy these days, but they would also need to finance a tailings failure cleanup fund.
It will be interesting to see if this suggested permitting approach gains any traction in the future because it could have a significant impact on the operating approach of the junior industry.  Perhaps everyone could really only be exploration companies.

Filtered tailings stack

One impact from this might be that new operators will be pushed towards dry stack tailings.  Possibly the added costs for dry stacking could be offset against the need for the tailings failure fund.
Regardless of how it would be done, this would become an added cost to the mining industry at a time when it doesn’t need more cost pressures.
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27. Independent Consultants Are Growing

I have read quite a few articles indicating that the mining industry is seeing a shortage of experienced people, on both the technical and management side of the business.  Apparently the baby boomer generation is now nearing their retirement or early-retirement stage and there is a gap in the number of experienced people following behind.
Many of these retirees enter the “independent consultant” stage of their careers.
I also hear from recruiters that there is a shortage of engineers willing to take remote or international assignments.  This is particularly difficult when a senior level candidate has a growing family.

Can the independent engineers help out?

In a previous article (14. Miners – Why Have Your Own Independent Consultant?) I discussed why mining companies (or even consulting firms) should make use of the independent engineers as advisers or Board members.
I understand from colleagues in the mining industry that many of the people nearing retirement are willing to take on consulting assignments or board or directors roles or other management roles.  They are often willing to work part time and independently.  Or they may work as “associates” with engineering firms.
So there likely is a significant network of experienced people out there.  It’s just a matter of being able to tap into that network when someone needs specific expertise.
So how can one do this?
LinkedIn currently seems to be the only global network for technical people.  It is a great way to connect with engineers and geologists industry wide.
LinkedIn members work everywhere, at mine operations, consulting firms, financial houses,  as independents, or even retired. Almost every technical person I know is registered on LinkedIn.
The question is how to find these people when you are looking for a specific independent expertise for a short term or over the longer term.

Networking

Networking with people you already know is the most common approach.  However what if you need someone with particular knowledge?
LinkedIn is a great search mechanism for technical experts.  With a keyword search one can identify a lot of experts with very specific skill sets.  The problem is that many of the experts highlighted by the LinkedIn search may be fully employed at mining operations or with large consulting firms and may not be the person you are looking for.
To my knowledge, there is no searchable online registry solely intended for independent geologists and engineers.  It would be in the interests of the mining industry to have some type of easily searchable independent consultant directory to be able to tap into the expertise that is out there.  I understand that MineLife.org  is attempting to build such an online service but it still appears to be early in the development stage.
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26. Cashflow Sensitivity Analyses – Be Careful

cashflow sensitivity
One of the requirements of NI 43-101 for Item 22 Economic Analysis is “sensitivity or other analysis using variants in commodity price, grade, capital and operating costs, or other significant parameters, as appropriate, and discuss the impact of the results.”
The result of this 43-101 requirement is typically the graph seen below, which is easily generated from a cashflow model.  Simply change a few numbers and then you get the new economics.  The standard conclusions derived from this chart are that metal price has the greatest impact on project economics followed by the operating cost.   Those are probably accurate conclusions, but is the chart itself telling the true story?
 DCF Sensitivity GraphI have created the same chart in several economic studies so I understand the limitations with it.   The main assumption is that sensitivity economics are based on the exact same mineral reserve and production schedule.
That assumption may be applicable when applying a variable capital cost but is not applicable when applying varying metal prices and operating costs.   Does anyone really think that in the example show, the NPV is $120M with a 20% decrease in metal price or 20% increase in operating cost?
Potentially a project could be uneconomic with such a significant decrease in metal price but that is not shown by the sensitivity analysis.  Reducing the metal price would result in a change to the cutoff grade.  This changes the waste-to-ore ratio within the same pit.  So assuming the same the  mineral reserve is not correct in this scenario.
These changes in economic parameters would impact the original pit optimization used to define the pit upon which everything is based.  A smaller pit size results in a smaller ore tonnage, which may justify a smaller fleet and smaller processing plant, which would have higher operating costs and lower capital costs.
A smaller mineral reserve would produce a different production schedule and shorter mine life.  It can  get quite complex to do it properly.
Hence the shortcut is to simply change inputs to the cashflow model and generate outputs that are questionable but meet the 43-101 requirements.
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25. Junior Mining – Are People Still Investing?

small mining companies
Update: This blog was originally written in June 2015, however many of the observations made then still hold in late 2018.
The general consensus over the last couple of years is that the junior mining sector is still in a state of flux.
I briefly touched on this in a previous article “12. Financings – It Helps to Have a Credible Path Forward”.
It is still difficult for junior miners to get funding and the stock prices of have been on a downward trend.   Some observers say this just a temporary phase and the stock prices will cycle, as they have in the past.   I’m not convinced that this will be the case, although I am hoping.

Metal prices may recover, but will stock prices?

I am reasonably confident that metal prices will improve over time, but I am not sure that alone will result in the junior mining sector invigorating.  I think there is a long term shift in how personal investments are being made and how the mining industry is being viewed.  The following blog has some personal opinions on the present and the future.
Mining companies are constantly in the media with stories of cost over-runs, mine shutdowns, fatalities, strikes & protests, and environmental incidents.
In addition, the junior mining sector has had a few notable scams that nobody ever forgets about.
In some instances management were over promoting sub-optimal projects simply for the purpose of raising the stock price and cashing out.  Not many companies fell into this category, but enough to create an unfavorable image of the industry.
I think it will take time to recover from the image being created by the events described above. Unfortunately new incidents only build on the perceived legacy.
The implementation of sustainable and green mining practices is an attempt to rehabilitate the image of mining, but is anyone out there listening?

Are investment practices changing?

Regarding today’s investment practices, I have three general observations:
  1. Yield Investors: When many of us baby boomers were younger with a steady job, we were willing to speculate on the mining stocks hoping for the big payoff.  At the time there were some well publicized payoffs. Also there wasn’t much else to speculate on.
    Now those same baby boomers are moving into retirement and financial planners are push them into fixed income and dividend paying investments.  Be happy with a 2% to 5% yield.  The risk tolerance for many of these investors has shifted from speculation / growth to income / capital retention.
    I’m not sure how many of these people will ever re-enter the mining stock market.  The majority of miners don’t pay any significant yield.   Looking at the yield for Barrick (2%), Goldcorp (0.8%), and Yamana (0.85%), their yields are lower than those for the more conservative bank stocks (4%-6%).
  1. Where to speculate now?  Where might the 30 to 40 year old’s speculate today? Younger people today may still speculate with their free cash, but they are not hoping to be investors in the next Voisey’s Bay, Kidd Creek, or Hemlo.  They have never even heard of them.
    They are hoping to be investors in the next Apple, Google, or Facebook.  The dot.com bubble of 1999–2000 were  case of junior mining speculators jumping into technology.  It was a bust.  However currently several of the new breed of dot.com companies that have IPO’d are getting huge share price increases.  Is it still a tech bubble? Not so much anymore.
    I don’t know whether the younger speculators will ever have interest in the mining sector since they never heard of it.  There is so much other investing activity happening out there.
  2. The perception of mining: The mining and energy news shown in the media is not helping the industry by focusing mainly on the negative aspects. The resource business appears to be somewhat analogous to the meat industry. Everyone likes their nicely packaged rows of chicken and beef at the grocery store but nobody wants to see how it actually gets to the store.  Everyone also loves their metallic gadgets and the energy used to power them, but please don’t show how it actually gets from mine to store shelf.  It can be quite upsetting.

Can mining companies provide more yield?

An interesting group of companies are the mid tier producers that have operating mines and generate profits, but do not pay a dividend.  I will be curious to see how these companies shares will perform since they don’t satisfy the yield investor nor may they satisfy the pure speculator looking for order of magnitude capital gains.
The larger mining companies will always have their investors like pension funds and mutual funds, however the junior miners may be a different story.
Possibly private equity and equity-based crowdfunding will be one of the long term solutions.
I have heard of one geological consulting firm that was trying to foster a plan to help crowdfunders with their 43-101 report even though they don’t yet have the money to pay for the report.
I also understand that Canada now has a few private equity stock exchanges that allow PE to change hands, which may facilitate more private equity involvement.

Conclusion

The bottom line is the mining industry needs to have a self-examination with respect to what the future holds.
The changing population demographics, competition for equity funding, and society’s urbanization may result in fundamental, and permanent, changes to how the financial side of the junior mining industry can function.  Just my opinion.
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24. Pit Optimization – How I View It

Mining feasibility study
One of the first steps in open pit mine design is the completion of a pit optimization analysis.  Pit optimisation is used to define the most profitable pit shell (or nested pit shells) for a given set of economic parameters.  The economic parameters generally include the metal prices, process recoveries, and operating costs. Normally when optimization is done, a range of metal prices or revenue factors is used to develop a series of nested shells to understand how the mine will expand or shrink with increasing or decreasing metal value.
Once optimization is complete, the mine engineer will design a pit with benches and ramps that mimics the optimized shell as closely as possible.
Depending on the slope angles used in the original optimization and where the  engineer positions the haul ramps, the pit design may or may not very closely resemble the original shell.  So the actual tonnage mined will be different that the tonnage defined by the optimizer.
Various experts in pit optimization will use approaches of differing complexity.  Some may apply variable mining costs with pit depth; apply variable recoveries link to head grade; apply variable pit slopes; etc.   One can make the pit optimization step as simple or as complex as one wants it.
The question is whether complex pit optimization is warranted.  My view is that overly detailed pit optimization is likely not required, other than if someone wants to test the impacts of parameter sensitivity.

Pit Optimization Has Many Uncertainties

A few of the uncertainties related to the optimization process are described below:
  • Pit optimization can generate large pits that would have a long life.  However one doesn’t know the metal prices in the future, so think about the need for high accuracy for the initial optimizations.
  • Operating costs will change in the future, and the optimization is just a snapshot using current information.
  • The nested smaller pits, if developed, would likely be smaller operations and have different operating costs than assumed in the original optimization.   Similarly some of the larger pits may have different throughput rates and  operating costs than assumed in the optimization.
  • The ore and waste tonnages reported within the pit will be based on a specific life-of-mine cutoff grade, which again has the fixed metal price and operating cost assumptions factored in.
  • Overall pit wall slopes may differ for shallow pits versus deep pits.  Slopes may vary above the groundwater table and below it.  In many instances during pit optimization the wall angles are maintained the same irrespective of the pit depth.
  • Dilution may be applied globally during pit optimization unless one is working with a diluted block model.  In reality, dilution may differ in different parts of the ore body, and that may not be considered in the optimization stage. For more discussion on dilution in general, read the blog “Ore Dilution Prediction – Its Always an Issue“.

Conclusion

The bottom line is that pit optimization should be viewed as a guide to the pit design, but not as a highly precise calculation.   Having said that, one should definitely understand how foreseeable changes in metal price will impact on the pit size, and then determine whether practical pushbacks are possible should metal prices increase.
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