NPV and Sustainable Mining – Friends or Foes

I recently wrote a blog about the term “sustainable mining” and the different perspectives to it. Does sustainable mining mean having a long term sustainable mining industry or does it mean providing sustainable benefits to local communities? There are two ways you can look at it. If interested, the link to that blog is here.
It’s no surprise that the mining industry wants to promote more sustainable mining practices. It’s the right thing to do. However, in my experience, sometimes NPV analysis can be at conflict with sustainable mining practices. That opinion is from my engineering perspective.  Those working in the CSR field may have a different view on it.

Majors, mid-tiers, juniors see things differently

There are essentially three different types of mining companies; majors; mid-tiers, and junior miners. They have different financial constraints imposed upon them and these constraints will impact on their decision making.
In general to get financing and investor interest, development projects must demonstrate a high NPV, high IRR, and short payback period. This requirement tends to apply more to the small and mid tiered companies than to the major companies.  The majors normally have different access to financing.
A characteristic of NPV analysis and cashflow discounting is the penalizing of higher upfront costs whilst reducing the economic impacts of longer term deferred costs. This feature, combined with the need to manage NPV, will influence design decisions and operating philosophies.  Ultimately this will impact on the rate of adopting of sustainable mining practices.
Mining companies often have two masters they must try to satisfy. One master is the project investor(s) that wants their investment returns quickly and with limited risk. The second master is the local stakeholder that wants a safe project with long lasting benefits to the community.  NPV analysis often requires trading-off the needs of one master over that of the other. This trade-off is neither right nor wrong; it is simply a reality.
Major miners now seem to have a third master; i.e large pension funds. These funds are now demanding for more sustainable mining practices (mainly tailings related) and mining companies are trying to comply. Smaller mining companies thus far don’t have this third master to satisfy, although that may come soon. Hence smaller miners are apt to follow a somewhat different path with regards to sustainable mining implementation. NPV plays a significant role in their decision making.

NPV…friend or foe

executive meetingThere are several scenarios where NPV analysis decision making may conflict with the objectives of sustainable mining. Here are a few examples.
1. Minimizing capital expenditures at the expense of operating costs. The likelihood of success in creating a long life sustainable mine will improve by having low metal cash costs. Naturally there will be a benefit in having low operating costs. However sometimes achieving low operating costs will require higher capital investments. For example, this could involve using large capacity material handling mining systems (IPCC) to lower unit costs.
NPV analysis will tend penalize these large investments by discounting the future operating cost savings. Being in the lowest cost quartile is good thing; being in the highest cost quartile isn’t.  Higher operating costs can hurt the long term sustainability of an operation, especially during downturns in commodity prices.
2. Tailings disposal method trade-offs are affected by NPV analysis. Currently there is an industry push towards safer and sustainable tailings storage methods, like paste or dry stack. However the upfront processing and materials handling capex can be significant. Hence less desirable conventional style tailings disposal may often be the winners in tailings trade-off studies due to NPV.
3. Closure considerations incorporated in the early mine design stage are affected by NPV analysis. A large cost component of mine closure is related to waste rock and tailings reclamation. However since final closure costs are  deferred, they might be given less consideration in the initial design. In many studies, high closure costs can be deemed insignificant in the project NPV due to discounting. Eventually these high costs will need to be incurred.  Unfortunately they might have been mitigated by wise decision making earlier in the project life.
4. Low grade ore stockpiling can help to increase early revenue and profit, thereby improving the project NPV and payback. Stockpiling of low grade and prioritization of high grade means that lower grade ore will be processed in the later stages of the project life.  Who hasn’t been happy to develop a mine schedule with the grade profile shown on the right?
If low grade years are coupled with a dip in metal price cycles, the mine could become economically unsustainable.  Shutting down a mine and putting it on “care and maintenance” is short term in intention but often long term in duration (over 30 years in some cases).
Mark Bristow of Barrick briefly discussed the issue of high grading in this interview.
5. Low strip ratios in the early stages of a project are often a feature of the ore body itself. However mine plans can also be designed to defer high strip ratios into the future via the use of proper pit phasing. This is another way to defer operating costs into the future. The NPV will see the benefit, long term sustainability may not.
6. Project life selection based on NPV analysis may not show significant economic difference between a 15 year project and one with a life of 25 years. Project decisions could then favor a short life project. This could relate to smaller pit pushbacks, smaller tailings ponds, smaller waste dumps, and easier permitting.  Possibly the local community would prefer a long life project that provides more sustainable jobs and business opportunities. NPV may see it differently.
7. Accelerated depreciation, tax and royalty holidays are types of economic factors that will improve NPV and early payback. They are one tool governments use to promote economic activity. These tax holidays will greatly enhance the NPV when combined with high grading and waste stripping deferral.
Unfortunately reality hits once the tax holiday is over and suddenly taxes or royalties become payable. At the same time head grades may be decreasing and strip ratios increasing. Future cashflows may carry an additional economic burden, which may conflict with the goal of a sustainable mine.

Conclusion

NPV is one of the standard metrics used to make project decisions. The deferral of upfront costs in lieu of future costs is favorable for cashflow and investor returns. Similarly, increasing early revenue at the expense of future revenue does the same.   Both approaches will help satisfy the financing concerns. However they may not be advantageous for creating long term sustainable projects.
Riskier projects will warrant higher discount rates.  This can magnify the importance of early cashflows even more and future cashflows become even less important.
It will be interesting to see how we (the mining industry) respond as industry leaders make greater commitments to sustainable mining. Both majors and juniors will equally need to work on keeping those commitments.  Will NPV analysis help or hurt?

 

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Sustainable Mining – What Is It Really?

We hear a lot about the need for the mining industry to adopt sustainable mining practices. Is everyone certain what that actually means? Ask a group of people for their opinions on this and you’ll probably get a range of answers.   It appears to me that there are two general perspectives on the issue.
Perspective 1 tends to be more general in nature. It’s about how the mining industry as a whole must become sustainable to remain viable. In other words, can the mining industry continue to meet the current commodity demands and the needs of future generations?
Perspective 2 tends to be a bit more stakeholder focused. It relates to whether a mining project will provide long-term sustainable benefits to local stakeholders. Will the mining project be here and gone leaving little behind, or will it make a real (positive) difference? In other words, “what’s in it for us”?
There are still some other perspectives on what is sustainable mining. For example there are some suggestions that sustainable mining should have a wider scope. It should consider the entire life cycle of a commodity, including manufacturing and recycling. That’s a very broad vision for the industry to try to satisfy.

How might mining be sustainable?

The solutions proposed to foster sustainable mining depend on which perspective is considered.
With respect to the first perspective, the solutions are board brush. They generally revolve around using best practices in socially and environmentally sound ways. A sustainable mining framework is typically focused on reducing the environmental impacts of mining.
Strategies include measuring, monitoring, and continually improving environmental metrics. These metrics can include  minimizing land disturbance, pollution reduction, automation, electrification, renewable energy usage, as well as proper closure and reclamation of mined lands.
Unfortunately if the public hates the concept of mining, the drive towards sustainability will struggle. Trying to fight this, the industry is currently promoting itself by highlighting the ongoing need for its products. Unfortunately some have interpreted this to mean “We make a mess because everyone wants the output from that mess”. I’m not sure how effective and convincing that approach will be in the long run.

Focusing on localized benefits

If one views sustainable mining from the second perspective, i.e. “What’s in it for us”, then one will propose different solutions. Maximizing benefits for the local community requires specific and direct actions. Generalizations won’t work.  Stakeholder communities likely don’t care about the sustainability of the mining industry as a whole.
They want to know what this project can do for them. Will the local community thrive with development or will they be harmed? Are the economic benefits be short lived or generational in duration? Can the project lead to socio-economic growth opportunities that extend beyond the project lifetime? Will the economic benefits be realized locally or will the benefits be distributed regionally?
One suggestion made to me is that all mining operations be required to have long operating lives. This will develop more regional infrastructure and create longer business relationships. A mine life of ten years or less may be insufficient to teach local entrepreneurship.  It maybe too short to ensure the long term continuation of economic impacts. Mine life requirement is an interesting thought but likely difficult to enforce.
Nevertheless the industry needs to convince local communities about the benefits they will see from a well executed mining project. Ideally the fear of a mining project would be replaced by a desire for a mining project. Preferably your stakeholders should become your biggest promoters. Working to make individual mining projects less scary may eventually help sustain the entire industry.

What can the industry do?

We have all heard about the actions the industry is considering when working with local communities. Some of these actions might include:
  • Being transparent and cooperative through the entire development process.
  • Using best practices and not necessarily doing things the “cheapest” way.
  • Focusing on long life projects.
  • Helping communities with more local infrastructure improvements.
  • Promoting business entrepreneurship that will extend beyond the mine life.
  • Transferring of post-closure assets to local communities.
There are teams of smart people representing mining companies  working with the local communities. These sustainability teams will ultimately be the key players in making or breaking the sustainability of mining industry.  They will build and maintain the perception of the industry.
While geologists or engineers can develop new technology and operating practices, it will be the sustainability teams that will need to sell the concepts and build the community bridges.
The sustainability effort extends well beyond just developing new technical solutions. It also involves politics, socio-economics, personal relationships, global influences, hidden agendas. It can be a minefield to navigate.

Conclusion

As a first step, the mining industry needs to focus more on local stakeholders and communities. Remove the fear of a mining project and replace it with a desire for a mining project. Mining companies must avoid doing things in the least expensive ways. They must do things in ways that inspire confidence in the company and in the project.
The ultimate goal of sustainable mining will require changing the public’s attitude about mining. Perhaps this starts with the local grass roots communities rather than with global initiatives. As a speaker said at the recent Progressive Mine Forum in Toronto, the mining industry has lost trust with everyone. It is now up to the mining companies, ALL OF THEM, to re-establish it. Unfortunately just one bad apple can undo the positive work done by others.  The industry is not a monolith, so all you can do is at least make sure your own company inspires confidence in the way you are doing things.
As an aside, I have recently seen suggestions that discounted cashflow analysis (i.e. NPV analysis) and sustainable mining practices may be contradictory. There may be some truth to those comments, but I will leave that discussion for a future blog.  You can read that blog at this link.
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43-101 Reports – What Sections Are Missing?

Recently as part of a due diligence I was reviewing a couple of 43-101 technical reports and something jumped out at me. There were pages and pages of statistical plots. The plots included QA/QC and check assay diagrams, variograms, box plots, swath plots, and contact plots. There was no lack of statistical information. However, as a mining engineer, there was something missing that was of interest to me. Good geological sections were missing.
Its seems that most technical reports focus heavily on describing the mathematical aspects of the resource, but spend less time describing the physical aspects of the geology and the mineability.

Who is the audience

It’s always open to debate who these 43-101 technical reports are intended for. Generally we can assume correctly that they are not being written mainly for geologists. However if they are intended for a wider audience of future investors, shareholders, engineers, and C-suite management, then (in my view) greater focus needs to be put on the physical orebody description.
Understanding the nature of the orebody brings greater understanding of the entire project.

Everyone likes geology

Whenever I listen to investor conference calls, many of the analyst’s questions relate to the resource and the mining operation. Essentially the participants want to know if this will be an “easy” mine or a “hard” mine.
One simple way to explain this is with good geological sections. They help everyone understand any potential issues; i.e. a picture is worth a thousand words. Good cross-sections will describe the following aspects.
  • The complexity (or simplicity) of the ore zones,
  • The width of the ore zones,
  • The vertical extent of geological information,
  • The drill spacing and drilling density,
  • The spatial distribution of assay information,
  • The grade distribution laterally and vertically,
  • The waste distribution throughout the mine,
  • The mining block size in relation of the ore zone dimensions
One can learn a lot just by looking at well presented cross-sections.  The nice thing is that they are generally understood by non-technical people.

Suggestions

I would like to suggest that every technical report includes more focus on the operational aspects of the orebody.
My recommendation is that the following information becomes standard in all technical reports.
  1. At least three to five cross sections through the deposit. Don’t just present a best case typical cross-section.
  2. At least one or two longitudinal sections.
  3. At least three level or bench plans, showing the drill hole pierce points.
Each cross section/bench plan should consist of two parts.
Part 1 shows the drill holes with color coded grade intercepts, ore zone wireframes, and lithology or rock types.
Part 2 should be a block model cross section showing the wireframes, drill holes, and color coded block model grades using the ore/waste cutoff grade as one of the clearly defined grade bins.
It doesn’t really matter if the cross- sections are included in Section 14 or Section 16 of the Technical Report. However if they are included in Section 16 then one should overlay the pit design and/or underground stope shapes onto the sections.
I also recommend NOT incorporating these cross-sections in the appendices since they are too important to be hidden away. They should be described in the main report itself.

Conclusion

Improving the quality of information presented to investors is one key way of maintaining trust with investors. Accordingly we should look to improve the description of the mineable ore body for everyone. In many cases it is the key to the entire project.
I am not suggesting that one needs to remove the statistical plots since they do have their purpose and audience. I am simply suggesting that we should not forget about everyone else try to figured out the viability of the project.
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43-101 and the Shrinking Feasibility Study

There is current sense that advanced mining studies are suffering from a lack of credibility with investors. Curiously it seems to me that many feasibility study documents are getting smaller at the same time. Might there be some link between the two?
My personal exposure to feasibility studies extends from managing them, participating in them, and undertaking due diligence reviews of them. Earlier in my career mining feasibility studies typically consisted of comprehensive documents, often contained in several binders of information. The study could generate a lot of paper. However currently it seems that often (not always) the 43-101 Technical Report can be the “final” feasibility study document.
In the past there would be binders with detailed calculations and backup for the different parts of the study. Typically there was a binder for the Executive Summary and separate sections (i.e. binders) for Geology, Mining, Processing, Infrastructure, Capital Cost, Operating Cost, Environmental, Project Execution, and Economic Analysis, etc.
The comprehensive report normally had both the report text and the details of the work done. This might include hand sketches, haul cycles, vendor price quotes, spec sheets, email correspondences, the WBS cost estimate detail, and so on.
The section appendices also included 3rd party reports like pit slope geotechnical studies, hydrogeological analysis, tailings dam designs, etc. The feasibility document might have included CD’s with the entire study in electronic format.
Generally all the supporting information for the study was in that comprehensive document. They were great. You knew you were somebody if you were given a personal copy of the entire report for your office.

43-101 Technical Report

The original intent of the 43-101 Technical Report was for it to be a summary document, only about 80-150 pages in length. The intent was to simplify all the technical work for the benefit of non-technical investors. Currently I have noticed that in many cases the 43-101 report is now the entire feasibility study document.
These 43-101 reports contain a fair amount of detail and they can exceed 400 pages in length. I’m not sure how many non-technical people actually read them beyond the Executive Summary or even read them at all.
Unfortunately if one is undertaking a due diligence review of a project, the 400 page Technical Report won’t contain the detail needed for a proper technical review. When more detail is requested, we are usually provided with a series of production and cost spreadsheets that need to be deciphered.  Furthermore the spreadsheets themselves don’t give the sources or basis for all the input data.
In my view the 400 page Technical Report is too confusing for the investing public and not detailed enough for technical review, thereby really satisfying no one.
Why aren’t the comprehensive feasibility study documents being completed all the time? I would suggest it is because of the effort and cost. It takes time to properly document all aspects of a study, creating legible tables, scanning files, and merging it all into a single PDF document. Preparing a 43-101 Technical Report can be a chore, as many of us have experienced in trying to meet the 45 day deadline. So who wants to take on the task of preparing an even larger document?

Recommendation

My recommendation is that, where budgets permit, mining companies return to the days of preparing the comprehensive feasibility study document. It’s the right thing to do.
One doesn’t need to print the entire report on paper since PDF files will work fine. Scanning of some sketches, vendor quotes may add an extra step, but that is hardly a momentous chore. Most 3rd party documents are already been submitted in PDF format so coordinating and merging will be the main task.
The 43-101 Technical Report could return to being a more investor friendly summary style document rater than a full study report.
This comprehensive document approach would apply to both pre-feasibility and feasibility studies that are used for advanced financing purposes.  The re-adoption of the comprehensive report format should be consistent among both large miners and juniors.

What about the PEA

The preliminary economic assessment (PEA) likely does not warrant a comprehensive report. The PEA is not definitive. I have also heard that the PEA is losing some credibility with investors, with some people referring to it as mainly a sales document. I don’t necessarily agree with that sentiment, but I understand why some see it that way.
As an aside, an interesting panel discussion might be whether the PEA has actually lost credibility, and if so, how can we restore credibility. My thoughts on PEA’s were summarized in a previous blog “Not All PEA’s Are Created Equal”.

Conclusion

If any mining industry credibility has been lost, re-establishing it should be important. One way to start doing this is to focus on creating the type of reports that best serve the needs of the industry stakeholders.
Some may say returning to comprehensive reports are a step backwards while mining needs to move forward. In my opinion, moving forward is going from less documented studies towards well documented studies.
One of the most technically detailed feasibility studies that I worked on was for the Diavik diamond project. This was a one-of-a-kind project operated by a well run risk-averse company (Rio Tinto). Every aspect of the project was documented to the upmost extent, although the company had the deep pockets to do that.  Funny thing though, as part of the internal Rio Tinto engineering team I don’t recall ever producing a final report document there (perhaps my recollections have been blurred since 20 years ago).
Once you have established the type of report you want, make sure your consultants clearly understand the expected deliverable. I recommend that someone on your team prepares an RFP document to lay out your wish list, even if sole sourcing the study. A previous blog was written on this topic at Request For Proposal (“RFP”) – Always Prepare One
As an aside, it would be interesting to know if those undertaking due diligence’s in the UK or Australia (i.e. not under 43-101 domain) have seen any changes in the quality of feasibility study documentation.
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Global Risks – Our Fears Are Evolving

Recently I wrote a blog about how the adoption of new technology in the mining industry will increase the risk of cyber crime. However this is just one of many risks the industry faces today.  This raises the question as to what are the main risks impacting all global businesses.  Luckily for us, the World Economic Forum undertakes an annual survey on exactly this subject.
Each year business leaders are queried about what they view as their major risks. The survey results are summarized in the Global Risk Report.
The 2019 report can be downloaded at this link. http://www3.weforum.org/docs/WEF_Global_Risks_Report_2019.pdf.
The study rates risks according to the categories “likelihood” and “impact”. A risk could have a high likelihood of occurring but have a low economic impact. One might not lose sleep over these ones.
Another interesting feature in the report is seeing how the top risks change from year to year.  Some risks from 10 years ago are no longer viewed as key risks today.

2019 risk situation

In 2019 environmental related risks dominate the survey results. They account for 4 of the top 5 risks by “impact” and 3 of the top 5 by “likelihood”. Technology related concerns about data fraud and cyber-attacks were also viewed as highly likely (#4 and #5). See the image below for the top 5 risks in each category.
Although the Global Risk survey wasn’t specifically directed at the mining industry, all of the identified risks do pertain to mining.

 

10 year risk trend

It is also interesting to look at the detailed 10 year  table in the report to see how the risk perceptions have changed over the last decade.
None of the top five “Impact” risks from ten years ago are still in the top five now and only two from 2014 still exist. In the “likelihood” category, a similar situation exists.
It will be interesting to compare the 2024 list with 2019 list to see how risks will continue to evolve.

How about the mining industry

EY Global Mining & Metals also undertake a risk survey, focused on mining only. You can read their article at this link “The Top Risks Facing Mining and Metals”.  Their top 10 risks are listed below, many are different than those from the World Economic Forum ranks. You must read the EY article to fully understand the details around their risk items.
  1. License to operate (difficulty to acquire)
  2. Digital effectiveness (lack thereof)
  3. Maximizing portfolio returns (can this be done)
  4. Cyber security (increasing risk of attack)
  5. Rising costs (can costs be controlled)
  6. Energy mix (acceptable power sources)
  7. Future of workforce (lack of interest in the sector)
  8. Disruption (falling behind competitors)
  9. Fraud (increasing sophistication)
  10. New world commodities (versus reduced demand for some commodities)

Conclusion

My bottom line is that the Global Risk Report is something that we should all read. Download it and then compare with what your company sees as its greatest risks. The only way to mitigate your risks is to know what they are.  The only way to work with others is to know what their issues are.
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Google Earth – Share Your Project in 3D

Google Earth is a great tool and it’s free for everyone to use. No doubt that many of us in the mining industry already use it regularly.
Previously I had written an article about how Google Earth can be used to give your entire engineering team a virtual site visit. It’s cheaper than flying everyone to site. That blog is available at this link “Google Earth – Keep it On Hand”.

What else can Google Earth do for me?

The Investor Relations (IR) department in a mining company can also take advantage of Google Earth’s capabilities. Typically the IR team are responsible for creating a myriad of PowerPoint investor presentations. Their slideshows will include graphics highlighting the project location, showing exploration drilling and planned site facilities for advanced projects. This is where Google Earth can be used to create a more interactive experience for investors.

Google Earth with 3D Buildings

Rather than relying only on PowerPoint, the technical team can create drillhole maps, 3D infrastructure layouts, open pit plans, 3D tailings dams, and import them into Google Earth.
By creating a KMZ file, one can share this information with investors, analysts, and stakeholders. This will provide an interactive opportunity to view the information themselves.
Viewers could fly around the site, zoom in and out as needed, examine things in 3D, and even measure distances. Viewers can even save the project in Google Earth and return back whenever curiosity dictates.
I have been a part of engineering teams where Google Earth has been used to share layout information. However I have not yet seen such information offered as a downloadable KMZ file to external parties. If you know of any companies that are currently doing this, please let me know (kjkltd@rogers.com) and I will share their link here.

There also is VRIFY

VRIFY is a new cloud based platform that provides 3D viewing capability. It provides a map based graphic tool to IR departments for sharing project information. VRIFY can also enhance collaboration among engineering teams by enabling a group to view a virtual project and sketch on the image in real time.

VRIFY desktop screenshot

VRIFY also allows more detailed information to be displayed in the form of hotspots within a project. Click on them to get more information on that topic (see image to the right).
Although I have only been given a demo of VRIFY, it appears to be a nice package that provides more functionality than Google Earth. Unfortunately VRIFY is not free for a company to use. The minimum subscription cost is about $10,000 (plus extras).
In June 2019 VRIFY made a deal with Kirkland Lake Gold whereby interested property vendors can submit their project to Kirkland Lake management for their review.
Here is the link (https://vrify.com/dealroom). In the proposed approach, the project information is submitted using the VRIFY platform. Essentially some of the same information presented in a PowerPoint is now provided in a more interactive fashion. Participating companies must first enter into a client service agreement with VRIFY. We will see how this idea works, since it does add a cost and new complexity for the property vendor.
There is another cloud based service called Reality Check, which offers virtual reality site visits.

Conclusion

The bottom line is that the trend in the mining industry is towards more open data sharing whether you’re connecting with the public or within your own engineering team. New and old cloud based platform tools can be used to do this. It just depends on your budget.
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Flawed Projects – No Such Thing as Perfection

Recently I read a post on LinkedIn where somebody was asking what key metrics companies are looking for in order to develop (or provide financing to) a new mining project. It’s more than just a project having a good NPV or IRR.  They are also looking at how difficult it is to achieve the targeted NPV.
Mining companies are always on the hunt for new projects to grow their cashflows. They would all like to find the “perfect” project; one with ideal conditions and great attributes. However those perfect projects likely don’t exist anymore, if they ever even did.
Consequently companies must be willing to accept some potential flaws (or risks) in their go-forward projects. The question is what flaws are they willing to accept and how far away from the ideal situation are they willing to go.

What makes a perfect project?

If one could envision a perfect mining project, what might it look like?   Here are some attributes that one would want to see (in random order). If a project had 100% of these, it would be a fantastic project.
    • A high grade ore orebody
    • A large reserve and long mine life to ride out commodity price cycles
    • Low operating cost
    • Low cash cost, in the bottom quartile of costs
    • Well defined ore zones, allowing simple mining with low dilution
    • A geotechnically competent rock mass
    • Clean and straightforward metallurgy
    • Consistent and straightforward permitting regulations
    • A stable government and stable fiscal regime
    • Safe security conditions for site personnel
    • High NPV and high IRR
    • No acid runoff issues from waste products
    • Stable tailings disposal conditions
    • Readily available local workforce / local power supply / good water supply
    • Favorable local community and stakeholder support
Other readers may have more attributes that they would like to see if asked to theorize “What constitutes a perfect mining project?”

Take off the promoter hat

backhoe on soft claysNow take an honest look at some recent (or past) projects that you have been involved with. How many of the perfect attributes listed above would be represented? It would be surprising to see them all checked off. Unfortunately that means certain flaws (risks) must be accepted when developing a project.
Each company (or financier) will have their vision as to which attributes are “must have” and which ones are “nice to have”.

But we have risk tools

There are many risk tools available to help in evaluating the potential flaws in a project. Unfortunately these tools don’t make the decisions for management.
Risk based Monte Carlo analysis requires management to pre-define the magnitude of the risks and then decide upon what probability of success is acceptable. Real option analysis or decision trees or Kepner-Tregoe are examples of other tools that can help in the decision making process.
Ultimately risk is risky.  Management must make the go/no-go decision regardless of how many probabilistic histograms and tables they have generated. A 90% chance of success still means there is a 10% chance of failure. The probability of failure may be low, but it is not zero.
It would be interesting to examine recent failed projects to define the cause(s) of failure. One could then see if the cause was something that was pre-determined as a risk, either as a small risk or a large risk. Perhaps the cause was something that management felt could be mitigated or perhaps it was something viewed as highly unlikely. No doubt that successful projects also had risks, which were either mitigated or which (luckily) never occurred.

Conclusion

The bottom line is that management understandably have a difficult task in making go/no-go decisions. Financial institutions have similar dilemmas when deciding on whether or not to finance a project.
In my career I have sat in on such management discussions and it’s never been a simple process, mainly because no project is perfect. Management know all the flaws (at least they think they do) and thus have to decide whether to push forward knowing the flaws exist.
I fully expect that future mining project risk will increase due to the complexity of project designs and broadening of stakeholder dynamics. Hence decision making in the mining industry isn’t going to get any easier regardless of the decision tools being used.  Look at your own situation, are your projects getting easier or harder?
Perhaps this is one reason we are seeing the flight of investment capital from mining into software/cannabis businesses. The risk/reward profile may be viewed more favorably in these investments.
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AI versus the Geologists

We likely have all seen recent articles about how Artificial Intelligence (AI) is going to change the mining industry.   I have been wondering if AI is a real solution or just a great buzzword.   My original skepticism has diminished somewhat and let me explain why.
At a booth at the 2019 PDAC I had a chance to speak with a publicly traded company called Albert Mining (referencing Albert Einstein’s intelligence).  They are providing exploration consulting services by applying a form of AI and have been doing so for many years.  The company has been around since 2005 but were not using the term AI to describe their methods.
These days the term “AI” has become very trendy.  Currently IBM Canada and Goldcorp are using Watson and AI to further their exploration efforts on the Red Lake property. GoldSpot Discoveries is another recent player in the mining AI field.  It appears Goldspot offers something similar to Albert Mining but they extend their platform to include picking projects, picking teams, and picking investments. That’s a lot of analysis to undertake.  Albert Mining is focused solely on mineral exploration.

Here is what I learned

Albert Mining’s system, called CARDS (Computer Aided Resource Detection System) uses pattern recognition and multi-variate analysis to examine a mineral property to look for targets.     The system requires that the property has some known mineralization hits and assay samples.  These are used to “teach” the software.   Both positive hits and negative hits are valuable in this teaching step.
The exploration property is sub-divided into cells and data are assigned to each cell.  These data attributes could be derived from geophysics, geochemistry, topography, soil samples, indicator minerals, assayed samples, geological maps, etc.  I was told that a cell could contain over 700 different data attributes.
The algorithm then examines the cell data to teach itself which attributes correlate to known mineralization and which attributes correlate with barren areas. It essentially determines a geological “signature” for each mineralization type.    There could be millions of data points and combinations of attributes.  Correlation patterns may be invisible to the naked eye, but not to the computer algorithm.
Once the geological signatures are determined, the remainder of the property is examined to look for similar signature hits.  Geological biases are eliminated since it is all data driven.   The newly defined exploration targets are given a ranking score based on the extent of correlation.
Some things to note are that the system works best for shallow deposits, unless one has some deep penetrating geophysical surveys.  The system works best if there is fairly uniform data coverage across the entire property.  The property should also have generally similar geological conditions and as mentioned before, the property needs to have some mineralized assay information.
This exploration approach reminds me somewhat of the book Moneyball.  This book is about the Oakland A’s baseball team where unconventional statistics were used to rank players in order to find hidden gems.

Are geologists becoming obsolete?

I was told that many in the geological community tend to discount the AI approach.  Either they don’t think it will work or they are fearing for their jobs.  Personally I don’t understand these fears nor can I really see how geologists can ever be eliminated.  Someone still has to collect and prepare the data as well as ultimately make the final decision on the proposed targets.   I don’t see the downside in using AI as another tool in the geologist’s toolbox.
Albert Mining’s stock price has recently gained some traction (note: I am not promoting them)  because junior mining news releases are starting to mention their name more often (Spruce Ridge Resources and Falco Resources are some examples).
Probably years ago if a mining company said their drill targets were generated by an algorithm, they might have gotten strange looks.   Today if a mining company says their drill targets were generated by AI, it gives them a cutting edge persona.  Times have changed.

In conclusion

I suggest we all take a closer looks at the AI technology to better understand what it does.
P.S. I  might also suggest that Albert Mining consider revising their company name to incorporate the term “AI” to stay on trend. (Update: In October 2019, Albert Mining changed their name to Windfall Geotek; I’m not sure it better explains what they do).
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Mining Due Diligence Checklist

It doesn’t matter how long you have worked in the mining industry, at some point you will probably have taken part in a due diligence review. You might have been asked to help create a data room. Perhaps your company is looking at a potential acquisition. Maybe you’re a consultant with a particular expertise needed by a due diligence team. It’s likely that due diligence has impacted on many of us at some point in our careers.
The scope of a due diligence can be exceptionally wide. There are legal, marketing, and environmental aspects as well as all the technical details associated with a mining project. The amount of information provided can be overwhelming sometimes.

I’m a big fan of checklists

Checklists are great and they can be very helpful in a due diligence review. A scope checklist is a great way to make sure things don’t fall through the cracks. A checklist helps keep a team on the same page and clarifies individual roles and tasks. Checklists bring focus and minimize sidetracking down unnecessary paths.
Recognizing this, I have created a personal due diligence checklist for such times. A screen shot of it is shown below. The list is mainly tailored for an undeveloped project but it still has over 230 items that might need to be considered.

Each due diligence is unique

Not all of the items in the checklist are required for each review. Maybe you’re only doing a high level study to gauge management’s interest in a project. Maybe you’re undertaking a detailed review for an actual acquisition or financing event. It’s up to you to create your own checklist and highlight which items need to be covered off. The more items added the less risk in the end; however that requires a longer review period and greater cost.
You a create your own checklist but if you would like a copy of mine just email me at KJKLTD@rogers.com. Specify if you would prefer the Excel or PDF versions.
Please let me know if you see any items missing or if you have any comments.
Now that we have an idea of what information we need to examine in a due diligence, the next question is where to find it.
Previously I had written a blog titled “Due Diligence Data Rooms – Help!” which discussed how we can be overwhelmed by a poorly set up data room. My request is that when setting up a data room, please consider the people who will be accessing it.

Due Diligence isn’t for everyone

Due diligence exercises can be interesting and great learning experiences, even for senior people that have seen it all. However they can also be mentally taxing due to the volumes of information that one must find, review, and understand all in a short period of time.
Some people are better at due diligence than others. It helps if one has the ability to quickly develop an understanding of a project. It also helps to know what key things to look for, since many risks are common among projects.
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The Mining Bank or eBay for Mining Properties

mining properties
I recently attended the Money Show here in Toronto to learn a bit more about personal finanace, investing strategies, and to check out  the latest stock analysis software.
There was also a trade show, but only one mining company booth was present.  This definitely wasn’t the PDAC.  Interestingly there were about five marijuana company booths, so that is where the promotion is today.
The lone mining company was Globex Mining, here is their website.  They referred to themselves as a “mining bank”, so that was something that peaked my interest.

Mining bank

Speaking with their president, Jack Stoch, he gave me an overview on their business model.  As I understood it, GLOBEX’s model is to acquire a portfolio of mineral properties.  They would try to enhance their value by undertaking some limited geological work.  Finally they would option, JV, or sell the property while retaining an NSR royalty.
Mr. Stoch told me that Globex currently has over 140 land packages in their inventory.  Their properties will be at different stages.  Some have resource estimates, others only mineralized drill intersections, mineral showings, untested geophysical targets, or combinations of these.
They are focusing their acquisitions on lower risk jurisdictions like Quebec, Ontario, Nova Scotia, New Brunswick, Tennessee, Nevada, Washington, and Germany.  They try to acquire historical mines that have old shafts, following the adage the best place to find a new mine is next to an old mine.   They also have some industrial mineral properties.

 

Globex’s only NSR revenue property right now is a zinc project in Tennessee that can generate a seven-figure royalty each year, when that operation is up and running.  Unfortunately for Globex the zinc operation has not been in consistent operation the last few years.

Its a good concept

I like the concept that Globex are promoting.  I like the idea of having a one-stop shop that acquires and options out exploration properties to mining companies looking for new projects.
I also like the idea of trying to consolidate land packages in an area,  minimizing the patchwork of multiple ownership claims that can hinder advanced development.
Globex hope that by putting time and effort into a bunch of properties a few of them will pay off.  If they can generate sufficient NSR revenues, the company may get to the self-sustaining stage.

Its not a new idea

The idea of companies involving themselves in a portfolio of early stage prospects isn’t new.  This has been being done by EMX Royalty Corp (formerly Eurasian Minerals) for properties around the globe.    Abitibi Royalties is also doing something vaguely similar, whereby they would help fund prospectors in exchange for a long term royalty on a property. There are likely others.
There is a high risk to being successful but the cost of entry is relatively low.
It will be interesting to watch Globex over the longer term to see how many properties they can acquire and how many of these will pay off. Spending a bit of money on mapping and exploration on a property may benefit them by increasing value in the eyes of potential partners.
Statistically, mineral exploration is a high risk game but by limiting expenditures and diversifying the portfolio, some of that risk can be mitigated.
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Does the Mining Industry Employ Interns?

employing interns
Over the couple of years I have been working on a side project in the tech industry.   One of the things that struck me was the hiring of interns, both paid and unpaid.
I’m now aware that interns are being hired in other industries such as legal, politics, journalism, and marketing.  However I have never come across the use of interns within the mining industry.
Intern

Why hire interns?

I was recently talking to a marketing consultant about tips on tech marketing and one of the suggestions she made was to hire an unpaid intern.  They would do much of the legwork of finding sales contacts and establishing contact with them.
My first question was why would anyone work for free?  There are  three main reasons:
  1. For school credit; as part of a course credit in college or university where an internship is part of the program requirement.
  2. For experience; it is difficult to get a real job without experience and so the internship teaches, builds  experience, and establishes a portfolio of work.
  3. Networking; building up industry connections can possibly lead to permanent work down the road.

Its the right thing to do

At first I was taken aback at the thought of asking someone to work for my company for free.  Are we that cheap?
Thinking about it further, if you are paying someone a salary the expectation is that they should be somewhat skilled at their job.  I have come to realize that the internship may actually be a win-win for both parties.

Its a win-win

The company gets a chance to learn about potential employees and also gets productive service from them.
The intern gains employment experience and learns about the realities of the business world.  Students have already paid the schools to teach them.  Now businesses can help teach them more, but at no cost.   It’s a win-win for both.
So how did our unpaid intern search go?  We posted a free ad on indeed.ca.  Within 72 hours we received over ten replies, of which only 2-3 came close to meeting the actual qualifications.  Some of the applicants had no relevant experience at all.
Possibly in today’s job market people are willing to work for free on the hope that they can get some experience, which will hopefully lead to a permanent job in the future.

Conclusion

The question is whether the mining industry can make use of interns in the areas of geology, engineering, marketing, presentation graphics, websites, etc?
There may be many students or recent grads looking for an opportunity and are willing to do whatever it takes to  advance their careers.
Even if your operating budget can’t afford the cost of hiring another person, you may still have a chance to help out someone new in the industry.
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Underground Feasibility Forecasts vs Actuals

underground costing
I recently attended a CIM Management and Economics Society presentation here in Toronto discussing the differences between actual underground production versus the forecast used in the feasibility study. The presenter was Paul Tim Whillans from Vancouver Canada.
His topic is interesting and relevant to today’s mining industry.  Paul raised many thoughtful points supported by data. He gave me permission to share his information.
The abstract for his paper is inerted below.  The paper can be downloaded at this LINK and here are the presentation slides.

ABSTRACT

An underground mining study that is done in accordance with NI43-101, JORC or similar reporting code is generally assumed by the public to be representative, independent and impartial. However, it has been well documented by academics and professionals in our industry that there is a sharp difference between the forecasts presented in these underground studies and the actual costs when a mine is put into production.
For underground mines, the risks associated with obtaining representative information are much greater than for surface mining and the cost of accessing underground ore is also proportionally much greater. There is a pressing need to align expectations, by improving the accuracy of projections. This will result in reduced risk to mining companies and investors and provide more reliable information to government agencies, the public, and more importantly, the communities in which the proposed mine will operate.
The objective of this article and an article currently being written titled “Mining Dilution and Mineral Losses” is to:
– Discuss the dynamics of intention that lead to over-optimism;
– Provide simple tools to identify which studies are likely to be more closely aligned with reality;
– Identify some specific points where underground mining studies are generally weak;
– Discuss practices currently in use in our industry that lead to a composite or aggregate effect of over optimism;
– Describe the effects of overly optimistic studies;
– Outline specific changes that are necessary to overcome these challenges; and
– Stimulate discussion and awareness that will lead to better standards.”

Conclusion

I agree with many of the points raised by Paul in his study. The mining industry has some credibility issues based on recent performance and therefore understanding the causes and then repairing that credibility will be important for the future.
Credibility ultimately impacts on shareholder returns, government returns, local community benefits, and worker health and safety; so having a well designed mine will realize benefits for many parties.
If you need more information Paul’s website is at http://www.whillansminestudies.com/
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