Early Stage “What-if” Mine Economic Analysis – Its Valuable

Over my career I have worked with large and small mining companies and seen how they studied projects and potential acquisitions.

Large mining companies have their in-house evaluation teams that will jump on a potential opportunity that comes around and start examining it quickly.  These evaluation teams may consist of a specialized head office group supported by people temporarily pulled in from their mining operations.

They are experienced at what they do and can provide management with solid advice even if working with only limited data.  This help management decide very early on whether to further pursue the opportunity or walk away immediately.

Early stage economics are normally part of this evaluation approach.   Although they are not correct all of the time, more than often they save their company from wasting money on projects unlikely to fly.

However if you are a small mining company, what are your options?

You don’t have an in-house technical team sitting around ready to go.  Management still needs to know if this project has a chance.  If the project is early stage, sometimes management thinks its fine to take a gamble, acquire the project, and then put money into the ground rather than spending on early studies.

It is possible to do both

Management and the exploration team usually have a vision for their projects, even those projects with only limited information.   Each person may have a different opinion on the potential size and scope of what may ultimately exist there.  However the question is whether any of those visions have sufficient accuracy 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 basic internal cashflow model on hand.   If properly constructed, these are simple to tweak to examine “what-if’s” scenarios.  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 to make it work?   The simple cashflow model can tell you all of this.

Early stage modelling adds value

The tangible benefits to very early financial modelling are:

• It helps management to conceptualize and understand their project.  If done honestly, it will reveal both the opportunities and threats to success.

• It helps management to understand what technical parameters will be most important for them to resolve and what technical factors can be viewed as secondary. This helps guide the on-going exploration and data collection efforts.

• Periodically refreshing the economic model with new information will reveal if the economic trends are getting better or worse.

Its not 43-101 compliant

I must caution that this type of early stage economic analysis is not 43-101 compliant and hence can not be shared externally, no matter how much one might wish to.

Another caution is that in some cases these early stage un-engineered projections become “cast in stone”, with management treating them as if they are accurate estimates.  Then suddenly all subsequent advanced studies must somehow agree with the original cost guesses, thereby placing unreasonable expectations on the project and the people doing the work.

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.  That is not an onerous exercise compared to the overall benefit they can provide.

The 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 to be modeling expert on hand at all times.  “Simple” means the model should be well.  In another block post I discuss why to avoid demonstrating one’s Excel skills in building models. Read more on that at this link  Financial Spreadsheet Modelling – Think of Others.

Most companies have a CFO that can easily undertake this type  of modelling, with the help of some technical input.  Be careful though, often CFO’s take the simple cashflow model to an unwarranted level of complexity.

The simplest of all models is the one-dimensional approach.  To learn more about the concept behind a simple 1D financial models, read the blog post “Project Economics – Simple 1D Model” .

The entire blog post library can be found at this LINK with topics ranging from geotechnical, financial modelling, and junior mining investing.

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