Pre-Concentration – Maybe Good, Maybe Not

Date: June 2, 2020 Author: Ken Kuchling Comments: Leave a reply

A while back I wrote a blog titled “Pre-Concentration – Savior or Not?”. That blog was touting the benefits of pre-concentration. More recently I attended a webinar where the presenter stated that the economics of pre-concentration may not necessarily be as good as we think they are.

My first thought was “this is blasphemy”. However upon further reflection I wondered if it’s true. To answer that question, I modified one of my old cashflow models from a Zn, Pb project using pre-concentration. I adjusted the model to enable running a trade-off, with and without pre-con by varying cost and recovery parameters.

Main input parameters

The trade-off model and some of the parameters are shown in the graphic below. The numbers used in the example are illustrative only, since I am mainly interested in seeing what factors have the greatest influence on the outcome.

The term “mass pull” is used to define the quantity of material that the pre-con plant pulls and sends to the grinding circuit. Unfortunately some metal may be lost with the pre-con rejects. The main benefit of a pre-con plant is to allow the use of a smaller grinding/flotation circuit by scalping away waste. This will lower the grinding circuit capital cost, albeit slightly increase its unit operating cost.

Concentrate handling systems may not differ much between model options since roughly the same amount of final concentrate is (hopefully) generated.

Another one of the cost differences is tailings handling. The pre-con rejects likely must be trucked to a final disposal location while flotation tails can be pumped. I assumed a low pumping cost, i.e to a nearby pit.

The pre-con plant doesn’t eliminate a tailings pond, but may make it smaller based on the mass pull factor. The most efficient pre-concentration plant from a tailings handling perspective is shown on the right.

The outcome

The findings of the trade-off surprised me a little bit. There is an obvious link between pre-con mass pull and overall metal recovery. A high mass pull will increase metal recovery but also results in more tonnage sent to grinding. At some point a high mass pull will cause one to ask what’s the point of pre-con if you are still sending a high percentage of material to the grinding circuit.

The table below presents the NPV for different mass pull and recovery combinations. The column on the far right represents the NPV for the base case without any pre-con plant. The lower left corner of the table shows the recovery and mass pull combinations where the NPV exceeds the base case. The upper right are the combinations with a reduction in NPV value.

The width of this range surprised me showing that the value generated by pre-con isn’t automatic. The NPV table shown is unique to the input assumptions I used and will be different for every project.

The economic analysis of pre-concentration does not include the possible benefits related to reduced water and energy consumption. These may be important factors for social license and permitting purposes, even if unsupported by the economics. Here’s an article from ThermoFisher on this “How Bulk Ore Sorting Can Reduce Water and Energy Consumption in Mining Operations“.

Conclusion

The objective of this analysis isn’t to demonstrate the NPV of pre-concentration. The objective is to show that pre-concentration might or might not make sense depending on a project’s unique parameters. The following are some suggestions:

1. Every project should at least take a cursory look at pre-concentration to see if it is viable. This should be done on all projects, even if it’s only a cursory mineralogical assessment level.

2. Make certain to verify that all ore types in the deposit are amenable to the same pre-concentration circuit. This means one needs to have a good understanding of the ore types that will be encountered.

3. Anytime one is doing a study using pre-concentration, one should also examine the economics without it. This helps to understand the economic drivers and the risks. You can then decide whether it is worth adding another operating circuit in the process flowsheet that has its own cost and performance risk. The more processing components added to a flow sheet, the more overall plant availability may be effected.

4. The head grade of the deposit also determines how economically risky pre-concentration might be. In higher grade ore bodies, the negative impact of any metal loss in pre-concentration may be offset by accepting higher cost for grinding (see chart on the right).

5. In my opinion, the best time to decide on pre-con would be at the PEA stage. Although the amount of testing data available may be limited, it may be sufficient to assess whether pre-con warrants further study.

6. Don’t fall in love with or over promote pre-concentration until you have run the economics. It can make it harder to retract the concept if the economics aren’t there.

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Climbing the Hill of Value With 1D Modelling

Date: May 12, 2020 Author: Ken Kuchling Comments: Leave a reply

Recently I read some articles about the Hill of Value. I’m not going into detail about it but the Hill of Value is a mine optimization approach that’s been around for a while. Here is a link to an AusIMM article that describes it “The role of mine planning in high performance”. For those interested, here is a another post about this subject “About the Hill of Value. Learning from Mistakes (II)“.

(From AusIMM)

The basic premise is that an optimal mining project is based on a relationship between cut-off grade and production rate. The standard breakeven or incremental cutoff grade we normally use may not be optimal for a project.

The image to the right (from the aforementioned AusIMM article) illustrates the peak in the NPV (i.e. the hill of value) on a vertical axis.

A project requires a considerable technical effort to properly evaluate the hill of value. Each iteration of a cutoff grade results in a new mine plan, new production schedule, and a new mining capex and opex estimate.

Each iteration of the plant throughput requires a different mine plan and plant size and the associated project capex and opex. All of these iterations will generate a new cashflow model.

The effort to do that level of study thoroughly is quite significant. Perhaps one day artificial intelligence will be able to generate these iterations quickly, but we are not at that stage yet.

Can we simplify it?

In previous blogs (here and here) I described a 1D cashflow model that I use to quickly evaluate projects. The 1D approach does not rely on a production schedule, instead uses life-of-mine quantities and costs. Given its simplicity, I was curious if the 1D model could be used to evaluate the hill of value.

I compiled some data to run several iterations for a hypothetical project, loosely based on a mining study I had on hand. The critical inputs for such an analysis are the operating and capital cost ranges for different plant throughputs.

I had a grade tonnage curve, including the tonnes of ore and waste, for a designed pit. This data is shown graphically on the right. Essentially the mineable reserve is 62 Mt @ 0.94 g/t Pd with a strip ratio of 0.6 at a breakeven cutoff grade of 0.35 g/t. It’s a large tonnage, low strip ratio, and low grade deposit. The total pit tonnage is 100 Mt of combined ore and waste.

I estimated capital costs and operating costs for different production rates using escalation factors such as the rule of 0.6 and the 20% fixed – 80% variable basis. It would be best to complete proper cost estimations but that is beyond the scope of this analysis. Factoring is the main option when there are no other options.

The charts below show the cost inputs used in the model. Obviously each project would have its own set of unique cost curves.

The 1D cashflow model was used to evaluate economics for a range of cutoff grades (from 0.20 g/t to 1.70 g/t) and production rates (12,000 tpd to 19,000 tpd). The NPV sensitivity analysis was done using the Excel data table function. This is one of my favorite and most useful Excel features.

A total of 225 cases were run (15 COG versus x 15 throughputs) for this example.

What are the results?

The results are shown below. Interestingly the optimal plant size and cutoff grade varies depending on the economic objective selected.

The discounted NPV 5% analysis indicates an optimal plant with a high throughput (19,000 tpd ) using a low cutoff grade (0.40 g/t). This would be expected due to the low grade nature of the orebody. Economies of scale, low operating costs, high revenues, are desired. Discounted models like revenue as quickly as possible; hence the high throughput rate.

The undiscounted NPV 0% analysis gave a different result. Since the timing of revenue is less important, a smaller plant was optimal (12,000 tpd) albeit using a similar low cutoff grade near the breakeven cutoff.

If one targets a low cash cost as an economic objective, one gets a different optimal project. This time a large plant with an elevated cutoff of 0.80 g/t was deemed optimal.

The Excel data table matrices for the three economic objectives are shown below. The “hot spots” in each case are evident.

Conclusion

The Hill of Value is an interesting optimization concept to apply to a project. In the example I have provided, the optimal project varies depending on what the financial objective is. I don’t know if this would be the case with all projects, however I suspect so.

In this example, if one wants to be a low cash cost producer, one may have to sacrifice some NPV to do this.

If one wants to maximize discounted NPV, then a large plant with low opex would be the best alternative.

If one prefers a long mine life, say to take advantage of forecasted upticks in metal prices, then an undiscounted scenario might win out.

I would recommend that every project undergoes some sort of hill of value test, preferably with more engineering rigor. It helps you to understand a projects strengths and weaknesses. The simple 1D analysis can be used as a guide to help select what cases to look at more closely. Nobody wants to assess 225 alternatives in engineering detail.

In reality I don’t ever recall seeing a 43-101 report describing a project with the hill of value test. Let me know if you are aware of any, I’d be interested in sharing them. Alternatively, if you have a project and would like me to test it on my simple hill of value let me know.

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Simple Financial Models Can Really Help

Date: April 27, 2020 Author: Ken Kuchling Comments: 3 Replies

A few years ago I posted an article about how I use a simple (one-dimensional) financial model to help me take a very quick look at mining projects. The link to that blog is here. I use this simple 1D model with clients that are looking at potential acquisitions or joint venture opportunities at early stages. In many instances the problem is that there is only a resource estimate but no engineering study or production schedule available.

By referring to my model as a 1D model, I imply that I don’t use a mine production schedule across the page like a conventional cashflow model would.

The 1D model simply uses life-of-mine reserves, life-of-mine revenues, operating costs, and capital costs. It’s essentially all done in a single column. The 1D model also incorporates a very rudimentary tax calculation to ballpark an after-tax NPV.

The 1D model does not calculate payback period or IRR but focuses solely on NPV. NPV, for me, is the driver of the enterprise value of a project or a company. A project with a $100M NPV has that value regardless of whether the IRR is 15% or 30%.

How accurate is a 1D model?

One of the questions I have been asked is how valid is the 1D approach compared to the standard 2D cashflow model. In order to examine that, I have randomly selected several recent 43-101 studies and plugged their reserve and cost parameters into the 1D model.

It takes about 10 minutes to find the relevant data in the technical report and insert the numbers. Interestingly it is typically easy to find the data in reports authored by certain consultants. In other reports one must dig deeper to get the data and sometimes even can’t find it.

The results of the comparison are show in the scatter plots. The bottom x-axis is the 43-101 report NPV and the y-axis is the 1D model result. The 1:1 correlation line is shown on the plots.

There is surprisingly good agreement on both the discounted and undiscounted cases. Even the before and after tax cases look reasonably close.

Where the 1D model can run into difficulty is when a project has a production expansion after a few years. The 1D model logic assumes a uniform annual production rate for the life of mine reserve.

Another thing that hampers the 1D model is when a project uses low grade stockpiling to boost head grades early in the mine life. The 1D model assumes a uniform life-of-mine production reserve grade profile.

Nevertheless even with these limitations, the NPV results are reasonably representative. Staged plant expansions and high grading are usually modifications to an NPV and generally do not make or break a project.

Conclusion

My view is that the 1D cashflow model is an indicative tool only. It is quick and simple to use. It allows me to evaluate projects and test the NPV sensitivity to metal prices, head grades, process recovery, operating costs, etc. These are sensitivities that might not be described in the financial section of the 43-101 report.

This exercise involved comparing data from existing 43-101 reports. Obviously if your are taking a look at an early stage opportunity, you will need to define your own capital and operating cost inputs.

I prefer using a conventional cashflow model approach (i.e. 2D) when I can. However when working with limited technical data, it’s likely not worth the effort to create a complex cashflow model. For me, the 1D model can work just fine. Build one for yourself, if you need convincing.

In an upcoming blog I will examine the hill of value optimization approach with respect to the 1D model.

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Benchmarking – Let’s See More Of It

Date: February 18, 2020 Author: Ken Kuchling Comments: Leave a reply

Benchmarking is the process of measuring performance of a company’s attributes against those of another. Ideally the benchmarking comparison is made against what are considered to be the best in the industry. Sometimes however the comparison is simply made between industry peers.

We often see junior mining companies benchmarking themselves against others. Sometimes corporate presentations provide graphs of enterprise value per gold ounce to demonstrate that a company might be undervalued.

We also see cash cost charts (an example to the right) benchmarking where a company’s production cost will rank among its competitors.

I view benchmarking as a great thing. The information can be very insightful, but with the caveat that it takes effort to ensure the comparative data is accurate.

Can we see more benchmarking?

Given the benefits of benchmarking, another area that might warrant such effort is related to capital cost estimates.

When a project moves into the development stage, the first two observable metrics are the construction progress and the capital cost expenditures. The capital cost trend is generally given very close scrutiny since it is a key indicator describing where a project is heading.

Lenders may have observers at site monitoring both construction progress and cash expenditures. Shareholders and analysts are watching for news releases that update the capital spending. Their concern is well founded due to several significant cost over-run instances.

Some of these over-runs have been fatal whereby the company has been unable to secure additional financing for the extra costs. There are others instances where a financing white knight has come in and essentially wrestled company ownership away from current shareholders.

Some industry people also feel that capital cost performance can foreshadow a project’s performance once it goes into commercial production.

Capital cost over-runs may be caused by poor execution and/or unforeseen events, or due to inaccurate cost estimation to begin with. Many investors still have apprehension with capital cost estimates from advanced studies. This is where benchmarking may play a role. Mining company shareholders may want to see a comparison of their project capital cost with other similar projects.

Project databases

It would be a good thing if the mining industry (or other concerned parties) work together to create open source project databases. These would incorporate summary information and cost information for global mining projects. The information is already out there, it just needs to be compiled.

One nice thing is that younger workers coming into the mining industry exhibit an interest in collaboration and information sharing. Hence maintaining the databases could be done by interested parties, industry experts, and/or crowd sourcing.

The databases would be public domain accessible to everyone and could be used to benchmark a project against other similar projects. The Global Tailings Portal (tailing.grida.no/about) is working to build a freely accessible database for the thousands of tailings dam globally. Its the same idea.

I realize that many mining projects are unique with site specific features and conditions. However many projects are also very similar to one another. For example West African gold projects in many cases can be replicates of one another with similar capital costs.

Published technical reports could include a chapter on benchmarking, whereby a project is compared with other similar projects. A company could provide rationale why their project will be costlier (or less expensive) than the others.

Conclusion

Benchmarking can be a great tool when done correctly. Benchmarking capital costs might bring more transparency to the project development process. It may help convince nervous investors that the proposed costs are reasonable.

We already see corporate presentations using benchmarking, so why stop at production costs and share price valuation.

One could expand the reach to include operating costs but internal confidentiality may be an issue. Furthermore operating costs are longer in duration and subject to change with global influences.

Capital cost accuracy is one of the primary concerns in the development of new projects. Possibly more benchmarking is part of the solution.

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Consulting and Stock Compensation

Date: January 23, 2020 Author: Ken Kuchling Comments: 5 Replies

The other day a press release came across my desk with the following title “First Mining Issues First Tranche Of Shares To Ausenco; Pre-Feasibility Study For Springpole Gold Project Underway”.

Reading it further, it was apparent that their study consultant, Ausenco, was being paid in company stock in lieu of cash. The arrangement included an initial financing of $750k with a further $375k to follow once the pre-feasibility study was 75% complete. Upon completion of the study another share payment was due.

That press release was interesting. I personally had never seen one like this before.

Some may see independence as an issue with their fiscal arrangement. Maybe… but this blog isn’t about the need for independent QP’s. In fact I don’t recall feasibility studies having that requirement. Some 43-101 resources estimates do require independence.

An industry discussion about where independence is required would be an interesting exercise. However I will leave that conversation for a future post.

Would you work for company shares only?

I have never been in a situation where I was consulting with company shares as my compensation. Neither have I ever managed a study where outside consultants were being paid in shares. However I can see the possibility of interesting dynamics at play.

In the past I have worked as an owner’s study manager and been awarded stock options along with salary. In that role, my job was to look after the owner’s interests, pushing for cost efficiencies and optimizations.

Regarding share compensation, there are significant risks on the consultant’s side when they agree to be paid in shares. I can see both positive and negative aspects with that type of a relationship.

I am not passing judgement here on what is right or wrong. My objective is to comment on some basic issues that may arise.

Pro’s and Con’s

The positive aspects one might experience include;

It’s easier for the company to pay for the study since there are no cash outlays from the treasury.
The consultants might have the company’s best interests at heart since they will now be part owners of the company.
Possibly there will be greater technical effort to produce optimal designs and cost estimating efficiencies in the drive for great economics.

The potential pitfalls of this approach might include;

A public perception that the study is not impartial.
There is an overhang of shares that may be dumped onto the market in the near future.
Possibly the consultant will charge a premium for their services due to the financial risks they are taking.
The company may be more tolerable of study cost overruns since there is no hard cash outlay.

Regarding the first item “impartiality”, in the past there have been questions raised about the impartiality of engineering firms. I first recall reading this claim many years ago in a public response to a mining EIA application. Unfortunately I cannot find the exact source now.

The concern was whether the consultant’s work would be overly optimistic, seeing that they would eventually gain as a project moved from PEA through to the PFS and FS stages. They didn’t want to kill the golden goose. The project’s opponents were making the argument to the regulators “don’t believe what the engineering company is telling you”.

I’m curious how many times this argument has been used, seeing that it’s been around for some time.

Conclusion

It would be interesting to know how many consulting firms would be willing to accept compensation solely in shares. Stock prices move up and down and the outcome of the study itself can have an impact on share performance.

Unlike being paid in bitcoin, which also fluctuates in value, shares will generally have a hold period before they can be sold off. This further increases the consultant’s risk.

I am curious to see whether the First Mining + Ausenco financial arrangement will create a precedent. Possibly it happens more than I am aware of. Realistically I don’t see anything wrong with the approach, although one needs to understand the perceptions that it can create. See where you sit if you were on the owner’s or consultant’s side and this idea was being discussed. What would you do?

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NPV and Sustainable Mining – Friends or Foes

Date: January 6, 2020 Author: Ken Kuchling Comments: 2 Replies

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

There 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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Green Energy Storage Using Abandoned Mines

Date: November 11, 2019 Author: Ken Kuchling Comments: 3 Replies

The mining industry is always looking for ways to rehabilitate their abandoned operations so that there may be a public use for them. This could entail leaving behind recreational lakes, building golf courses, creating nature parks or using empty pits as public landfills. Another rehabilitation idea being studied is using old underground mines as a means of green energy storage. If successful, we do have a lot of abandoned mines in all regions of the country.

Compressed air can store energy

I was at the 2019 Progressive Mine Forum in Toronto and a presentation was given on underground compressed air storage. The company was Hydrostor (https://www.hydrostor.ca/). They were promoting their Advanced Compressed Air Energy Storage (A-CAES) system.

It is a technology that addresses the power grid need for power transmission deferral services. The A-CAES system can theoretically provide low-cost, long duration bulk energy storage (i.e. hundreds of MWs, 4-24+ hour duration).

The idea is to store off-peak or excess power from solar, wind, or other generating source. Then the system can release this power back into the system during peaks or low generation capacity. Solar and wind power normally don’t work as well at night.

Flood the mine

The system uses excess electricity to run a compressor, producing heated compressed air. Initially heat is extracted from the air and retained inside a thermal store. This preserves the heat energy for later use. Next the compressed air is stored in the underground mine, keeping a constant pressure.

While charging, the compressed air displaces water out of the mine, up a water column to a surface reservoir.

On discharge, water flows back down forcing air to the surface where it is re-heated using the stored heat and expanded to generate electricity.

Imagine an underground mine beneath an open pit, and seeing the open pit water level rise and fall daily as the compressed air is recharged underground and then released.

Hydrostor is currently building a $33 million 5-MW project in Australia at the Angas Zinc Mine site. I asked Hydrostor if they had any white papers describing the economics for a typical abandoned mine we might see here in Canada. Unfortunately they don’t have such a case study available.

Update: A Canadian example recnetly came to light; “How an old Goderich salt mine could one day save you money on your hydro bill“.

No doubt there would be capex and opex costs to build and operate the plant, but these would hopefully be offset by the power generation. It just not clear over what time horizon this payback would occur. Many abandoned underground mines are already in place; they are just waiting to be exploited.

Permitting is still an issue

Converting an abandoned mine into a power storage facility will still have its challenges. Cost and economic uncertainty are part of that. In addition, permitting such a facility will still require some environmental study.

At Hydrostor’s proposed Australian operation, a fairly extensive environmental impacts assessment still had to be completed (see the link here).

Noise, vibration, air quality, ecology, traffic, surface water, groundwater impacts, visual impacts, employment, and indigenous consultations are aspects that would need to be addressed. However, given that this would be a green energy application, one might be able to get all stakeholders on board quickly.

Conclusion

We hear about sustainable mining and the desire to extend the positive social and economic impacts of a mining project. Energy storage is one way to extend the mine life into perpetuity by creating a localized power grid. Simply use wind or solar to recharge the system and then generate power over night.

If anyone is aware of a situation where something similar has been done, let me know and I will share it. Perhaps one day Hydrostor will provide a detailed economic study for a typical Canadian mine so that mining companies can see the economic potential.

Update: In 2021 Hydrostor announced that it is developing two 500MW/5GWh energy storage projects in California, each of which would be the world’s largest non-hydro energy storage system ever built. Read more at this link “Gigawatt-scale compressed air“

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43-101 and the Shrinking Feasibility Study

Date: September 9, 2019 Author: Ken Kuchling Comments: Leave a reply

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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Power Generation & Desalinization – An Idea that Floats

Date: August 20, 2019 Author: Ken Kuchling Comments: 2 Replies

Access to a fresh water supply and a power supply are issues that must be addressed by many mining projects. Mining operations may be in competition with local water users for the available clean water resources. In addition, the greenhouse gas emissions from mine site power plants are also an industry concern. If your project has both water and power supply issues and it is close to tidewater, then there might be a new solution available.

I recently attended a presentation for an oil & gas related technology that is now being introduced to the mining industry. It is an innovative approach that addresses both water and power issues at the same time.

The technology consists of a floating LNG (liquefied natural gas) turbine power plant combined with high capacity seawater desalinization capabilities. MODEC is offering the FSRWP® (Floating Storage Regasification Water-Desalination & Power-Generation) system.

MODEC also has associated systems for power only (FSR-Power®) and water only (FSR-Water®)

FSRWP capabilities

The technology is geared towards large capacity operations that have access to tidewater. It provides many tangible and intangible operational and environmental benefits. It can:

Generate fresh water supply (10,000 – 600,000 m3 /day)
Generate electrical power (80 to 1000 MW) using LNG
Can provide power inland (>100 km) from a tidewater based floating power plant
Can provide natural gas distribution on land via on-board re-gasification systems
Has LNG storage capacity of 135,000 cu.m
Has a refueling autonomy of 20 to 150 days
Allows low cost marine delivery of bulk LNG supply

Procurement & Application

The equipment can be procured in several ways. For instance it can be contracted as an IPP (Independent Power Producer), purchased as an EPCI (Engineering, Procurement, Construction and Installation), BOO (Build, Own and Operate) or BOOT (Build, Own, Operate and Transfer).

Typically it takes 18-24 months of contract award to deliver to the project site, although temporary power solutions can be provided within 60-90 days.

From a green mining perspective, the FSRWP produces clean power with the highest thermal efficiency and lowest carbon foot-print.

See the table for a comparison of different power generation efficiencies and carbon emissions per kW.

Gas turbines are not new technology to MODEC. They currently own & operate 42 such generators, which can produce roughly 43 MW (each) in combined-cycle mode.

Mooring options

Currently there are three mooring options for the floating system that should fit most any tidewater situation.

Jetty or Dolphin mooring is suitable for protected areas or near-shore applications where the water depth is in the range of 7 to 20 meters.

Tower Yoke mooring is ideal for relatively calm waters where the water depth is between 20 to 50 meters.

External Turret mooring is similar to a Tower-Yoke and is ideal for water depths exceeding 50 meters or where the seabed drops off steeply into the ocean.

Power transmission

Twenty years ago it was impractical to transmit AC power long-distances and subsea power cable technology was not as advanced as it is today. Hence an offshore power plant like a FSRWP was not technically viable. Due to R&D efforts over the last 15 years it is now possible to economically transmit AC. For example it is possible to transmit up to 100 MW over 100 miles through a single subsea cable. In addition, it is also viable to transit 200 MW at 145 kV from a vessel to shore.

Water treatment

Modern FSRWP’s use reverse osmosis membrane technology to produce industrial or potable water. This is similar to most conventional onshore desalination plants.

The main benefits of floating offshore desalination are increased overall thermal efficiency if both power and water production are combined on a single vessel. In addition, seawater sourced offshore and rejected brine discharged offshore minimizes risk to coastal marine life.

Conclusion

The bottom line is that if your mining project is near shore, and has both water supply and power issues, take a look at the FSRWP technology. One might say it is greener technology by using LNG (rather than coal, heavy fuel oil, or diesel) to generate power. At the same time it avoids competition with locals for access to fresh water.

This technology won’t be suitable for all mining situations, but perhaps your mine site fits the model. Reportedly rough costs for power are in the range of $0.10-$0.14/kwh with a capital cost of $1M-$1.5M per MW.

There will be minimal closure costs associated with dismantling the power plant. One just floats it away at the end of the mine life.

Check out the MODEC website if you wish to learn more: https://www.modec.com/fps/fsrwp/index.html

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Global Risks – Our Fears Are Evolving

Date: July 30, 2019 Author: Ken Kuchling Comments: Leave a reply

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.

License to operate (difficulty to acquire)
Digital effectiveness (lack thereof)
Maximizing portfolio returns (can this be done)
Cyber security (increasing risk of attack)
Rising costs (can costs be controlled)
Energy mix (acceptable power sources)
Future of workforce (lack of interest in the sector)
Disruption (falling behind competitors)
Fraud (increasing sophistication)
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.

Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website. Otherwise I post notices on LinkedIn, so follow me at: https://www.linkedin.com/in/kenkuchling/.