Over the years I have worked with both large and small mining companies and watched how they studied potential acquisitions.  Large mining companies often have internal evaluation teams that can jump on a potential opportunity that comes in the door and they start examining it quickly.  These evaluation teams are experienced at what they do and can provide their management with advice even if working with only limited data.  This help management decide early on whether to pursue the opportunity or walk away.  They are not right all of the time but more than often they save their company from wasting money on projects unlikely to fly.
If you are a small mining company, what are your options?  You don’t have an in-house technical team ready to hit the ground running.    If the project is early stage, management often feels it is better to put money into the ground rather than on early “studies”.   However my experience tells me how do you know if you have arrived at your destination if you don’t know what your destination is.  Early stage modelling can help define your destination.
The exploration team and upper management will have some overall vision of the potential project, even for those projects at the exploration stage.   They may all have opinions on the potential size and scope of what may exist on the property.  However the question is whether it has sufficient potential to warrant spending more shareholder money on the project.
Some of the junior mining management teams that I have worked with have found it beneficial early on to have a simple internal cashflow model that is easy to tweak to examine “what-if’s” for the project.  Input the potential deposit size and mine life, potential head grades, expected metallurgy, and typical costs to see what the economic outcome is.  Does this project have a chance and if not, what tonnage, head grade, recovery, or metal price is required?
The tangible benefits from such an exercise are:
  • It helps management to think about and better understand their project, both the good and the bad aspects of it.
  • It helps management to understand what parameters are most important to resolve and what technical factors can be considered secondary. This helps guide on-going exploration and data collection efforts.
  • Periodically updating the economic model with better information as it becomes available will show the trends how economics are getting better or worse and the potential magnitude of those changes.
I must caution that this type of early stage economic analysis would not be 43-101 compliant and hence could not be shared externally, no matter how much one might wish to.  Another caution is that in some cases such early stage un-engineered production or cost projections start to become “cast in stone”, treating them as if they are accurate estimates.  Then all subsequent advanced studies somehow need to agree with the original cost guesses, thereby placing unreasonable expectations on the future studies.
The early stage economic models can consist of simple one-dimensional tables using life-of-mine tonnages or two-dimensional tables showing assumed annual production by year.  Building simple cashflow models may take only 2-3 days of effort – not an onerous exercise compared to the overall guidance they can provide to management.
My bottom line is that it is useful to take a few days to develop a simple cashflow model.  “Simple” also means that management themselves can tweak the models and don’t need a modeling expert on hand at all times.  “Simple” means the model should be well written and understandable (see the article Financial Spreadsheet Modelling – Think of Others).  Most companies have a CFO that can undertake this modelling, with the help of some technical input.
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