Articles for June 2015

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

A few months ago there were some discussions on the 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 that have occurred.   The logic behind the idea was that the potentially high cleanup cost for tailings failures could be beyond the financial capacity of smaller mining companies and then the failure cleanup cost would need to be borne by the taxpayer.
It was recognized that closure bonds for final reclamation are common practice in current EIA 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 theoretical failure.  This has not been part of the environmental approval process as far as I know. Depending on the type of failure scenario one envisioned, the theoretical cleanup cost could range from low to enormous.
One of the options being proposed is that the various mining companies in a jurisdiction each contribute funding to a failure reserve account that would be used to clean up for their industry colleagues when required.   The ultimate goal of this approach may truly be better environmental practice or possibly this is simply being used as a means to curtail some mine development by handcuffing the smaller mining companies.   Many of such deposits may be too small for the major miners so the intermediate companies may be the only companies interested in them.  However if they don’t have the financial reserves in the corporate bank account, then the mine could not be approved.  Goal achieved!
I am fairly certain that if the corporate bank account of the parent company does become a key part of the mine permitting process then it will impact on the ability for the smaller or intermediate miners to develop new mines.  Not only would they need to finance their capital cost for construction, which is not easy these days, but they would also need to finance their tailings failure reserve fund.   It will be interesting to see if this suggested permitting approach gains any traction in the future because it could have a big impact on the junior industry.
One fallout from this might be that new operators will be pushed towards using a dry stack tailings approach because the added costs for dry stacking could be offset against the need for the tailings failure reserve fund.  Regardless of how it is 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

I have read numerous 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 of life and there is a gap in the number of experienced people following behind.  I also hear anecdotally that there is a lack of engineers interested in taking on remote or international assignments, which really does become more difficult when a senior level person has a family.   I don’t work in the recruitment industry so I can only report what I have heard.
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 friends 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.  The work can be either full time or part time and working independently or 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 (www.linkedin.com) currently seems to be the only global network for technical people and it is a great way to connect with engineers and geologists industry wide.  LinkedIn members typically work everywhere, at mine operations, consulting firms, financial houses, or are independently employed. Almost every technical person I know is now registered on LinkedIn although with varying degrees of LinkedIn activity or biographic detail posted.
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 with people you already know seems to be the most common approach, however what if you need someone with particular knowledge and you don’t want to involve an entire engineering firm at this stage?
LinkedIn can be a great search mechanism for technical experts, and a keyword search can identify a lot of experts with very specific skill sets.  The downside of this is that many of these experts highlighted by the LinkedIn search may be fully employed at mining operations or with large consulting firms and may not be the independent consultant that you are looking for.
To my knowledge, there is no searchable online registry solely intended for independent geologists and engineers (if anyone knows of the existence of such an online registry…please let us know).   It is in the best interests of the entire mining industry to have some type of easily searchable independent consultant directory to be able to tap into the expertise that is out there.
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26. Cashflow Sensitivity Analyses – Be Careful

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 usual main 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 myself have created the same chart in several economic studies so I understand the limitation with it.   The main assumption is that sensitivity economics are generated on the exact same reserve and production schedule as for the base case.  That assumption may be applicable when applying a variable capital cost but may not be applicable when applying varying metal prices and operating costs.   Does anyone think that in the example show, the NPV is still $120M with a 20% decrease in metal price or 20% increase in operating cost? Potentially a project could really be uneconomic with such a significant decrease in metal price but that is not shown by the sensitivity analysis.
Increasing the operating cost changes the cutoff grade, which changes the waste-to-ore ratio within the same pit.  So assuming the same the life-of-mine production tonnage is not entirely correct in this scenario.
Reducing the metal price would also result in a change to the cutoff grade.  If one were to go all the way back, these changes in economic parameters would impact on the original pit optimization used to define the pit upon which everything is based.  A smaller pit size results in a different pit tonnage, which may require a smaller processing plant, which would then have new (higher) operating and lower capital costs than assumed.  A smaller reserve would produce a different production schedule and shorter mine life.  It can all get quite complex.
So due to all the changes these sensitivities generate, it does require a lot of work to properly examine them. However generally the project proponent does not want to incur the costs necessary to run multiple pit designs and multiple life of mine plans simply to examine sensitivities.  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?

The general consensus these days is that the junior mining sector is in a state of flux and decline.  I briefly touched on this in a previous article “12. Financings – It Helps to Have a Credible Path Forward”.   Currently it is difficult for junior miners to get funding and the stock prices of many are on a steady downward trend.   Some observers say this just a temporary phase and the industry will cycle out of it as it always has in the past.   I’m not fully convinced that this will be the case, although I am hoping so since my employment is in the mining industry.
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 general paradigm shift as to how personal investments are being made and how the mining industry is being viewed by the public.  The following article has my personal opinions on the present and the future.
Mining companies have been in the media with stories of cost over-runs, mine shutdowns, fatalities, protests, and environmental incidents.   In addition, the junior mining sector has had a few notable scams and companies have gone bust with little to show to investors.  In some instances company management were over promoting  sub-optimal projects simply for the exercise of raising the stock price and cashing out.  Not all companies fell into this category, but enough to possibly give an unfavorable image of the investment side of the industry.  I think it may take more time for the industry to recover from the overall image being created by the events described above.  The implementation of sustainable mining practices is a real attempt by industry to rehabilitate its image, but is anyone out there listening?  Regarding that I have three general observations:
  1. Yield Investors: When many of us baby boomers were younger, in our 30’s to 40’s and working with a steady income, we were willing to speculate on the mining stocks hoping for the big payoff, and there were many payoffs in the past. Also there wasn’t much else to speculate on. Now those same baby boomer speculators are moving into early retirement and financial planners push them into fixed income and dividend paying investments with 2% to 4% yield.  The risk tolerance profile for many of these investors has been shifted from speculation & growth to income & capital retention. Retirement is not that far away and therefore I am unsure how many of these people will ever re-enter into the junior mining stocks if metal prices do improve.  The majority don’t pay any yield.   Some do; looking at the yield for Barrick (1.7%), Goldcorp (3.2%), and Yamana (1.6%), yield seeking investors would view their stock prices at their current levels as being adequately priced.   If their share prices rise, yield goes down and makes them less attractive to those yield investor.
  1. Where to speculate now? So where are the 30 to 40 year olds speculating 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 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 seemed like the junior mining companies and their investors trying to jump into technology and it was mainly a bust at that time.  However these days several of the new breed of dot-com companies are getting huge share price jumps for speculators.  Is it a tech bubble – maybe so.   I don’t know whether the younger speculators will ever have interest in the junior mining sector since they never heard of it and there is so much more happening out there.  Anecdotally I have heard that retail investor attendance at the Toronto PDAC and the various road-shows has been declining over the last couple of years, which may confirm a general lack of interest in mining sector investment.
  2. The perception of mining: The mining and energy news shown in the media is not helping the industry, focusing mainly on the negative aspects. The resource business appears to be somewhat analogous to the meat industry. Everyone like their aisles of nicely packaged sushi, chicken, and beef at the grocery store but nobody wants to see how it actually gets to the store shelf.  Millennials also love their metallic gadgets and the energy used to power them up, but please don’t show how it actually gets from mine to smelter to store shelf– it’s quite upsetting to them.
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 such companies shares will perform since they don’t satisfy the yield investor at this stage of their life nor may they satisfy the pure speculator looking for order of magnitude 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 the long term solutions since they are a developing field.  I have heard that one geological consulting firm already has a plan in place 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 two private stock exchanges that allow private equity to change hands, which may facilitate more private equity involvement in the future.
My bottom line is the junior mining industry needs to have a self-examination with respect to what the future holds.  The changing population demographics and society’s urbanization may result in fundamental and permanent changes to how the financial side of the junior mining industry will function.  Just my opinion.
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24. Pit Optimization – How I View It

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 then 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 mine engineer positions the haul ramps, the pit design may or may not very closely resemble the original shell.  So the actual tonnage mined will likely 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 around the pit or vertically by elevation; 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 personal view is that overly detailed pit optimization is likely not required, other than if someone simply wants to test the impacts of parameter variability.
Some of the uncertainties related to the optimization process are described below:
  • Pit optimization can generate large pits that would ultimately have a long life.  However one doesn’t know what the metal prices will be in the future, so be careful in worrying about a high level of accuracy on the initial optimization.
  • Operating costs will also change in the future, and so again the optimization is just a snapshot using current information.
  • Some of the nested smaller pits, if developed, would likely be smaller operations and therefore would have different operating costs than assumed in the original optimisation.   Similarly some of the larger pits would have different sized throughputs and hence have different operating costs than assumed in the optimisation.
  • The ore and waste tonnages reported within the pit will be based on a specific life-of-mine cutoff grade, which again has the metal price and operating cost assumptions factored in.
  • Overall pit wall slopes may differ for shallow or high pit walls, or above the groundwater table and below it, but in many instances during optimization the pit wall angles are maintained the same regardless of the pit depth.
  • Dilution may be applied the same everywhere during pit optimization unless one is working with a diluted block model.  In reality, dilution may be different in different parts of the ore body, but that may not be considered in the optimization stage, thereby adding another uncertainty to the final result.
My bottom line is that pit optimization should be viewed as a guide to the pit design, but not viewed 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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