Mine Economics

Do Any Junior Producers Model a Gold ETF?

Date: March 1, 2016 Author: Ken Kuchling Comments: 4 Replies
junior mining company
I have often wondered if any of the smaller gold producers have ever considered modelling their business plan similar to a gold Exchange Traded Fund (“ETF”).
This hybrid business model may be a way for companies to provide shareholders a way to leverage themselves to physical gold rather than leveraging to the performance of a mine.

Let me explain further

Consider two identical small mining companies each starting up a new mine. Their projects are identical; 2 million gold ounces in reserves with annual production rate of 200,000 ounces with a 10 year mine life. On an annual basis, let’s assume their annual operating costs and debt repayments could be paid by the revenue from selling 180,000 ounces of gold. This would leave 20,000 gold ounces as “profit”. The question is what to do with those 20,000 ounces?

Gold Dore

Company A

Company A sells their entire gold production each year. At $1200/oz, the 20,000 oz gold “profit” would yield $24 million. Income taxes would be paid on this and the remaining cash can be spent or saved.
Company A may decide to spend more on head offices costs by adding more people, or they may spend money on exploration, or they could look at an acquisition to grow the company. There are plenty of ways to use this extra money, but returning it to shareholders as a dividend isn’t typically one of them.
Now let’s jump forward several years; 8 years for example. Company A may have been successful on grassroots exploration and added new reserves but historically exploration odds are working against them. If they actually saved a portion of the annual profit, say $10M of the $24M, after 8 years they may have $80M in cash reserves.

Company B

Company B only sells 180,000 ounces of gold each year to cover costs.  It puts the remaining 20,000 ounces into inventory. Their annual profit-loss statement shows breakeven status since their gold sales only cover their financial commitments. In this scenario, after 8 years Company B would have 160,000 gold ounces in inventory, valued at $192 million at a $1200 gold price.
If you’re an investor looking at both these companies in the latter stages of their mine life, which one would you rather invest in?
Company A has 400,000 ounces (2 years) remaining in mineral reserves and $80M cash in the bank. Company B also has 400,000 ounces of mineral reserves and $192 million worth of gold in the vault. If I’m a bullish gold investor and foresee a $1600/oz gold price, then to me Company B might theoretically have $256M in the vault (160k oz x $1600). If I’m a super bullish, their gold inventory could be worth a lot more..theoretically.

Which company is worth more?

I assume that the enterprise value (and stock price) of Company A would be based on its remaining reserves at some $/oz factor plus its cash in the bank. Company B could be valued the same way plus its gold inventory. So for me Company B may be a much better investment than Company A in the latter stages of its mine life. In fact Company B could still persist as an entity after the mine has shutdown simply as a “fund” that holds physical gold. If I am a gold investor, then Company B as an investment asset might be of more interest to me.
If Company A had good exploration results and spend money wisely, then it may have more value but not all companies are successful down this path.

Conclusion

It appears that most of the time companies sell their entire annual gold production to try to show profit on the annual income statement. This puts cash in the bank and shows “earning per share”.
My question is why not stockpile the extra gold and wait for gold prices to rise?  This might be an option if the company doesn’t really need the money now or doesn’t plan to gamble on exploration or acquisitions.
This concept wouldn’t be a model for all small miners but might be suitable for a select few companies to target certain types of gold investors.
They could provide an alternative mining investment that might be especially interesting in the last years of a mine life. Who really wants to buy shares in a company who’s mine is nearly depleted?  I might buy shares, if they still hold a lot of gold.
Note: You can sign up for the KJK mailing list to get notified when new blogs are posted.
Share

Higher Metal Prices – Should Miners Lower the Cut-Off Grade?

Date: February 23, 2016 Author: Ken Kuchling Comments: 7 Replies
When metals prices are high, we are generally told that we should lower the cutoff grade. Our cutoff grade versus metal price formula tells us this is the correct thing do. Our grade-tonnage curve reaffirms this since we will now have more metal in the mineral reserve.

But is lowering the cutoff grade the right thing?

Books have been written on the subject of cutoff grades where readers can get all kinds of detailed logic and calculations using Greek symbols (F = δV* − dV*/dT). Here is one well known book by Ken Lane, available on Amazon HERE.
Recently we have seen a trend of higher cash costs at operating mines when commodity prices are high. Why is this?
It may be due to higher cost operating inputs due to increasing labour rates or supplies. It may also be partly due to the lowering of cutoff grades.  This lowers the head grade, which then requires more tonnes to be milled to produce the same quantity of metal.
A mining construction manager once said to me that he never understood us mining guys who lower the cutoff grade when gold prices increase. His concern was that since the plant throughput rate is fixed, when gold prices are high we suddenly decide to lower the head grade and produce fewer and higher cost ounces of gold.

Do the opposite

His point was that we should do the opposite.  When prices are high, we should produce more ounces of gold, not fewer. In essence, periods when supply is low (or demand is high) may not be the right time to further cut  supply by lowering head grades.
Now this is the point where the grade-tonnage curve comes into play.
Certainly one can lower the cutoff grade, lower the head grade and produce fewer ounces of gold.  The upside being an extension in the mine life.  A company can report more ounces in reserves and perhaps the overall image of the company looks better (if it is being valued on reserves).   To read more about the value of grade-tonnage curves, you check out this blog post “Grade-Tonnage Curves – Worthy of a Good Look“.

What if metal prices drop back?

The problem is that there is no guarantee that metal prices will remain where they are and the new lower cutoff grade will remain where it is. If the metal prices drop back down, the cutoff grade will be increased and the mineral reserve will revert back to where it was. All that was really done was accept a year of lower metal production for no real long term benefit.
This trade-off  contrasts a short term vision (i.e. maximizing annual production) against a long term vision (i.e. extending mineral reserves).

Conclusion

The bottom line is that there is no simple answer on what to do with the cutoff grades.  Hence there is a need to write books about it.
Different companies have different corporate objectives and each mining project will be unique with regards to the impacts of cutoff grade changes on the orebody.
I would like to caution that one should be mindful when plugging in new metal prices, and then running off to the mine operations department with the new cutoff grade. One should fully understand both the long term and short term impacts of that decision.
In another blog post on the cutoff grade issue, I discuss whether in poly-metallic deposits the cutoff should be based on metal equivalent or block NSR value.  Neither approach is perfect, but I prefer the NSR option.  You can read that post at “Metal Equivalent Grade versus NSR for Poly-Metallics“.

 

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/.
Share

Global Tax Regimes – How Do They Compare?

Date: February 9, 2016 Author: Ken Kuchling Comments: 3 Replies
mining economics
Update: This blog was originally written in Feb 2016, but has been updated in Aug 2019.
As a reminder for all QP’s doing economic analysis for PEA’s, don’t forget that one needs to present the economic results on an after-tax basis.
Every once in a while I still see PEA technical reports issued with only pre-tax financials.  That report is likely to get red- flagged by the securities regulators.  The company will need to amend their press release and technical report  to provide the after tax results.    No harm done other than some red faces.

Taxes can be complicated

When doing a tax calculation in your model, where can you find international tax information?  PWC has a very useful tax-related website.  The weblink below was sent to me by one of my industry colleagues and I thought it would be good to share it.
The PWC micro-site provides a host of tax and royalty information for selected countries.  The page is located at https://www.ey.com/gl/en/services/tax/global-tax-guide-archive
On the site they have a searchable database for tax information for specific countries.
The PWC tax and financial information includes topics such as:
  • Corporate tax rates
  • Excess profits taxes
  • Mineral taxes for different commodities
  • Mineral royalties
  • Rates of permissible amortization
  • VAT and other regulated payments
  • Export taxes
  • Withholding taxes
  • Fiscal stability agreements
  • Social contribution requirements
PWC has a great web site and hopefully they will keep the information up to date since tax changes happen constantly.  The website also has a guide related to the rules for the treatment of capital expenditures.   Check it out.  https://www.ey.com/gl/en/services/tax/global-tax-guide-archive
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/.
Share

Resource Estimates – Are Independent Audits A Good Idea?

Date: February 2, 2016 Author: Ken Kuchling Comments: 2 Replies
mining reserves
(Orig-2016 Updated-2026)
Question: How important is the integrity of the tailings dam to the success of a mine?
Answer: Very important.
Tailings dam safety is so important that in some jurisdictions regulators are requiring that mining companies have independent review boards or third-party audits done on their tailings designs. The logic is that, although a reputable consultant may be doing the dam design, there is still a need for outside oversight. Differences in interpretation and experience, or errors and omission are always a possibility regardless of who does the design. A second set of eyes is beneficial.
Question: How important is the resource estimate to the success of a mine?
Answer: Critically important. The mine life, project economics, and shareholder value all rely on it. The resource estimate IS the project. So why aren’t third-party audits of the estimate that common?

NI43-101 Was The First Step

In the years prior to the NI 43-101 regulations, junior mining companies could develop their own resource estimates and disclose those results publicly. With the advent of NI 43-101, a second set of eyes was introduced, whereby an independent QP would need to review the company’s internal resource or prepare their own independent estimate. The QP ultimately takes legal responsibility for the estimate.
The QP is the sole and final arbiter, or are they?
Many resource estimates are prepared solely by the contracted independent QP. In most cases this estimate gets published without any other oversight. In other words, no second set of eyes has taken a deep dive into it. We recognize the QP is a qualified expert, but is their judgement without question and error free?
The past Parker Challenges have shown that different experts can arrive at different resource estimates using the exact same geological data. In my experience with due diligence, it is not uncommon for our resource expert to find disagreements with the target’s resource model. There likely is no one perfect resource model.

Audits – Good Idea or Not?

Like the tailings design, would it be a good idea for companies to have a second set of eyes take a look at the resource estimates developed by their independent QP’s? Probably yes, with a few caveats. First I would like to clarify that an independent review can consist of three levels of review.
  1. Internal peer review: the idea is to catch errors before public release, working in collaboration with the responsible QP.
  2. Independent technical review: purpose to independently validate methodology, interpretations, and conclusions used by the responsible QP.
  3. Independent resource estimate: whereby the third party actually prepares an entirely new resource estimate. This is sometimes done by due diligence teams.
For a junior miner, I generally think the second option is the preferred approach. The company can have their responsible QP prepare the resource estimate, then have another genuinely independent QP review the database, geological model, estimation methodology, classification and reasonable-prospects assumptions.

What are the Pro’s and Con’s

There are both pro’s and con’s to undertaking such a cold eyes audit. It can create issues that will need to be dealt with, and these can be avoided by not doing the review at all.

Pros

  1. Adds credibility to the resource: an independent review can give investors, analysts, lenders, and potential partners greater confidence in the estimate. This can be important for a company whose technical team or project has limited history.
  2. Catches technical errors: An independent audit may identify problems involving geological interpretation, density assumptions, or grade estimation, classification, etc.
  3. Improves the company’s internal controls: if they only have a few technical employees assisting or checking the work of the responsible QP.
  4. Reduces financing and transaction risk: by having a resource that has been independently audited it may be easier to market to potential investors and financiers.
  5. Provides an early warning before commencing a PEA or feasibility study. If the resource contains weaknesses, it is much cheaper to discover them during an audit than after spending money on the studies and then discovering the flaws.
  6. Maybe identify upside: an experienced reviewer may identify opportunities to improve the model, expand the resource, improve classification, or reduce overly conservative assumptions.
  7. Protects the board and management from a governance perspective: having an independent technical audit can show that management took reasonable steps to verify their most key material technical disclosure.

Cons

  1. It costs money: for a small junior, an independent resource audit can be a significant expense. The cost can be difficult to justify if the deposit is still at an early exploration stage and the resource is going to eventually change substantially with further drilling.
  2. It can delay disclosure: a proper audit requires access to drill data, geological models, databases, QA/QC information, estimation parameters and supporting documentation. This will delay the disclosure of the resource update or technical report.
  3. The auditor may disagree with the company’s QP. Although this can be a positive, it can also be painful. It may create difficult situations where the reviewer suggests shrinking the resource or modifying the geological interpretation.
  4. “Independent” doesn’t necessarily mean completely independent since the reviewer is still being paid by the company, directed by the company, and could try to gain favor for future work. The audit may be closer to a peer review rather than a truly independent audit.
  5. It can create false confidence. An independent audit doesn’t guarantee that the resource is correct. Two competent QPs can still legitimately produce somewhat different estimates. Which one is correct?
  6. Potential liability and disclosure issues: if the audit identifies a material problem, the company may be forced to address it. Once management is aware of a material technical deficiency, simply ignoring it can create a much bigger governance and disclosure problem.
Repeated audits can become expensive and inefficient. Hence one would not want to do them every time a minor change is made to the resource model. But at least one audit may provide learnings that improve subsequent resource updates.

The Bottom Line

For a junior mining company preparing a material resource estimate, I’d strongly recommend an independent audit at some point, albeit under certain conditions. For example:
  • when the resource is going to be a major valuation driver for the company;
  • if the company is starting a PEA or feasibility study;
  • if the company is raising significant capital and needs credibility;
  • if there has been a major change in the geological interpretation;
  • if the company is selling the project and independent audits will likely be done by acquirers;
  • if management has concerns about the robustness of the estimate due to complex geology or metallurgy.
An independent audit is likely not required every time the resource is updated. However resource estimates have been shown to be wrong from time to time by the economic failures of some new mines.
Would an independent audit have prevented these failures – I don’t know. However, one doesn’t want their own company to become one of these case studies, so take all possible steps to avoid it.

 

Note: You can sign up for the KJK mailing list to get notified when new blogs are posted. Follow me on Twitter at @KJKLtd for updates and other mining posts.   The entire blog post library can be found at https://kuchling.com/library/
For some free mining calculator apps, including project timelines and a simplified cashflow modeller, check out this website https://sites.google.com/view/drillingdown
Share

Measured vs. Indicated Resources – Do We Treat Them the Same?

Date: January 19, 2016 Author: Ken Kuchling Comments: 6 Replies
measured and indicated
(Orig 2016  Updated 2026) One of the first things we normally look at when examining a mineral resource estimate is how much of the resource is classified as Measured and Indicated (“M+I”) and then compare that to the Inferred tonnage.  It seems to be important to understand the uncertainty in the resource estimate and how much the Inferred contributes to the overall tonnage.  Sometimes we even break the rules and add together the M+I tonnage with the Inferred tonnage.
The mining engineer needs to juggle all three classifications.  Having said that, how much emphasis do we put on the split between the Measured and Indicated tonnages?   How much emphasis should be put on the Inferred resource by itself?

Inferred Resources Play a Role

We are all aware of the NI 43-101 restrictions imposed on the Inferred resources in mining studies.  They are deemed highly speculative, and hence cannot be used in the economic models for pre-feasibility and feasibility studies. However Inferred resource are used for pit design and production planing in a Preliminary Economic Assessment (“PEA”).
Inferred resources are so speculative that a company is not permitted to add them to the Measure and Indicated tonnages in a resource statement (although that is what every investor automatically does).   I don’t really understand that concern in a Mineral Resource statement if it clearly includes a line that adds M+I tonnage with Inferred tonnes – as long as everything is transparent.  It provides an easy way to see what portion of the total resource is Inferred.
Its a bit contradictory that when a PEA mining schedule is developed, the three resource classifications can be combined into a single tonnage value.  However in the Mineral Resource statement itself, the M+I+I cannot be totaled.
I understand that a company must provide information as to how much of the PEA production schedule is based on Inferred Resources, although often they do not provide this breakdown.  Next time you are reviewing a 43-101 report for a PEA, take a look if it is provided.

Are Measured Resources Important?

It appears to me that investors are often more interested in what resource tonnage meets the M+I threshold but are less focussed on the tonnage split between Measured and Indicated.
It seems that M+I are largely viewed as being somewhat the same.  Since both Measured and Indicated resources can be used in a pre-feasibility economic analysis, does it matter if the tonnage is 100% Measured (Proven) or 100% Indicated (Probable)?
The NI 43-101 and CIM guidelines provide definitions for Measured and Indicated Mineral Resources, but do not specify any different treatment like they do for the Inferred resources.   If Measured has more certainty than Indicated, should we be able to apply their tonnages interchangeably?
CIM Resources to Mineral Reserves

Relationship between Mineral Reserves and Mineral Resources (CIM Definition Standards).

In my experience with some feasibility studies, a few people did apply a  rule-of-thumb that the majority of the tonnage mined during the payback period must consist of higher confidence Measure resource (i.e. Proven reserve).
The idea was to reduce project risk by ensuring the production tonnage during the capital recovery period is mining the resource with the highest certainty in tonnes and grade.
Generally I do not see this requirement used that often anymore, although I am not aware of what everyone is doing in every study.  It would be good to see more  transparency on this in the studies.  Perhaps this may explain why some recent projects put into production had difficulty meeting grade targets and then ran into trouble.
I realize there is a cost, and possibly a significant cost, to infill drill to convert Indicated resource to Measured.  Hence there may be some hesitation in this approach. Likely it is simpler for everyone to just view the Measured and Indicated tonnages as one.  Note that some algorithyms are now available to help optimize infill drill programs to get the most bang for the buck (see this blog pot Let A.I. Help Target Your Infill Drilling).

Conclusion

NI 43-101 specifies how the Inferred resource can and cannot be used.  Given some of the project failures, is it a matter of time before the regulators start specifying how Measured and Indicated resources must be used?  There is  merit to this idea, however adding more regulation (and cost) to an already burdened industry would not be helpful. Ultimately it is up to the mining companies and financiers as to how far they want to see the re-risking step go.
In lieu of more regulations, perhaps in the interest of transparency, feasibility studies should add two new rows to the bottom of the production schedule. These rows would show how the annual mining and processing tonnages are split between Proven (Measured) and Probable (Indicated) categories. This would enable one to can get a sense of the resource risk in the early years of the project.
Given the capabilities of today’s mining software, it is not difficult to provide this additional detail.   Companies with a high proportion of Measured in their Feasibility Study can use this a way to promote their de-risking efforts.   Now we just need to ensure that the resource estimation consultants actually classify Measured as very high certainty resources.
I don’t want to give the impression that Inferred resources are unimportant.  They do play a role in mine design and permitting, as discussed in this post “The Double Life of Inferred Resources: Now You See It – Now You Don’t“.

************

Note: You can sign up for the KJK mailing list to get notified when new blogs are posted. Follow me on Twitter at @KJKLtd for updates and other mining posts.   The entire blog post library can be found at https://kuchling.com/library/
For some free mining calculator apps, including project timelines and a simplified cashflow modeller, check out this website https://sites.google.com/view/drillingdown
Share

Claim Fees Paid for a Royalty Interest – Good Deal or Not?

Date: January 12, 2016 Author: Ken Kuchling Comments: 2 Replies
mineral property acquisition
In 2016 I read several articles about how the junior mining industry must innovate to stay relevant.    Innovation and changing with the times are what is needed in this economic climate.
One company that was trying something new is Abitibi Royalties.  They were promoting a new way for them to acquire royalty interests in early stage properties.  They were offering to fund the claim fees on behalf of the property owner in return for a royalty.
Their corporate website states that they would pay, for a specified period of time, the claim fees/taxes related to existing mineral properties or related to the staking of new mineral properties.
In return, Abitibi Royalties would be granted a net smelter royalty (“NSR”) on the property.  It may be a gamble, but it’s not a high stakes gamble given the relatively low investment needed.

Not just anywhere

Abitibi were specifically targeting exploration properties near an operating mine in the Americas. They were keeping jurisdiction risk to a minimum.   Abitibi stated that their due diligence and decision-making process was fast, generally within 48 hours.  No waiting around here but likely this is possible due to the low investment required and often the lack of geological information to do actually do a due diligence on.
To give some recent examples, in a December 14, 2015 press release, Abitibi state that the intend to acquire a 2% NSR on two claims in Quebec and will pay approximately $11,700 and reimburse the claim owner approximately $13,750 in future exploration expenses. This cash will be used by the owner towards paying claim renewal fees and exploration work commitments due in 2016.   Upon completion of the transaction, these will be the ninth and tenth royalties acquired through the Abitibi Royalty Search.  For comparison, some of their other royalty acquisitions cost were in the range of $5,000 to $10,000 each (per year I assume).   I think that those NSR interests are being acquired quite cheaply.
The benefit to the property owner may be twofold; they may have no other funding options available and they are building a relationship with a group that will have an interest in helping the project move forward.  The downside is that they have now encumbered that property with a NSR royalty going forward.
The benefit to Abitibi Royalties is that they have acquired an early stage NSR royalty quite cheaply although there will be significant uncertainty about ever seeing any royalty payments from the project.   Abitibi may also have to continue to make ongoing payments to ensure the claims remain in good standing with the owner.
It’s good to see some degree of innovation at work here, although the method of promotion for the concept may be more innovative than the concept itself. Unfortunately these Abitibi cash injections investments are not enough to pay for much actual exploration on the property and this is where the further innovation is required, whether through crowd funding, private equity, or some other means.   I’m curious to see if other companies will follow the Abitibi royalty model but extend it to foreign and more risky properties.
Note: You can sign up for the KJK mailing list to get notified when new blogs are posted.
Share

Constraints: Use Them to Your Advantage

Date: August 22, 2015 Author: Ken Kuchling Comments: Leave a reply
mining study management
I recently read a business book called “A Beautiful Constraint: How to Transform Your Limitations into Advantages, and Why It’s Everyone’s Business” by Adam Morgan and Mark Barden. It describes how to use constraints, like lack of time, or money, or resources and use them to help transform your company for the better.
Here’s an Amazon link to the book.  Beautiful Constraint Book Cover
The book discusses how to shift away from the typical “victim” role by understanding how our routines control things, ask the right questions, and focus on “how” and not “if”.

Focus on HOW and not IF

A good example: one of the recommendations in the book is in your team meetings no one on your team is allowed to utter the words “we can’t because…”.  They must replace those words with “we can if…”.   This forces the generation of ideas and promotes a positive attitude rather than a victim attitude.
The book describes how many innovative ideas are due to constraints and those innovations would never have come about without those constraints.
To force innovation in your organization you can create artificial constraints for your team.  This will foster innovative thinking and push for “outside the box” ideas.  The tougher the constraint, the greater the challenge for your team.  Possibly the greater the final outcome too.
The term Theory of Constraints may be common to some.  However that concept is different than what is being discussed in the book.  The TOC essentially relies on managing a constraint or eliminating it, and then addressing the next constraint in sequence.
The book authors instead propose to exploit the constraint or leverage it to create a new possibility.  Hence the title “beautiful constraint”.

Mining has no shortage of constraints

We all know the mining industry has more than enough constraints placed upon it today. It may be lack of funding, lack of skilled talent, environmental pressures, supply-demand issues, social issues, or security issues.  Each mining project may have additional constraints, so one probably doesn’t need to create artificial constraints for the team.
The mining industry has no option but to try to use these constraints in a constructive manner.  Miners must not let them pull the industry down nor simply wait until they go away.  When people say “Mining is cyclical and it will all turn around soon.”, that’s an example of waiting for the constraint to go away.

How long do you wait before taking your own action?

The bottom line is that the book is an eye opener and enlightening.  It may be telling some of us what we already know deep inside but don’t acknowledge openly.  Don’t wait any longer, start innovating, and don’t be afraid of grand innovations.
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/.
Share

Mining Takeovers – Should Governments Be (Heavily) Involved?

Date: July 13, 2015 Author: Ken Kuchling Comments: 5 Replies
Mine acquisition
I have seen some on-line discussions about whether governments should be regulating corporate takeovers, some of which may be outside their own borders. The fear from some groups is that mine assets may be acquired by less than desirable acquirers.
One specific example that I have seen is related to the 2015 disposition of foreign resource assets by both Barrick and Ivanhoe to Zijin, a Chinese company.  I don’t know much about Zijin, other than having heard Norway’s government directed its $790 billion oil fund to sell holdings in some companies because of their environmental performance. Zijin was one of these companies.
In light of the Norway decision, some groups are questioning whether Zijin should be allowed to buy mining assets currently owned by Canadian or American companies.

Its a balancing act

It appears that some groups would like their governments to step in and prevent a company from selling their mining assets to another company that may have a poor reputation or limited financial capacity. The fear is the new company would operate in a non-sustainable manner and ignore local environmental rules.
Government sanctioning of deals gets tricky in that how do they define which companies have poor reputations and which don’t.  Also how can they dictate to the shareholders of a company, possibly nearing bankruptcy, that they cannot sell their assets to a certain interested party?
Governments have stepped in and blocked acquisitions in the past but these were mainly related to deals involving antitrust issues or technology of national interest.
It will be interesting to see whether the idea of governments sanctioning the acceptability of acquirers in the mining industry will gain traction.
It may be an overstep for the government of one country to block the acquisition of a foreign property when the owner may not have the capability to develop the project while the acquirer does.
The foreign government may want to see their own resources  developed but another government may be hindering that by blocking transfer of ownership.
The last thing we want are more country-to-country disputes. I presume the only option in this case is to revoke the mineral concessions and assign them to someone willing to develop them.  One company will lose an asset, which creates new issues related to compensation.  It also harms the reputation of that country as a place to invest in.  Unfortunately it had no choice if a foreign government was getting in the way.

Conclusion

The bottom line is whether the government of one country have the veto rights to prevent development in another country?  Does the government of one country have the right to decide the environmental standards in another via prevention of an asset sale?
This will be an interesting issue to continue to watch in the future.
Note: You can sign up for the KJK mailing list to get notified when new blogs are posted.
Share

Mine Approvals May Be Hinging on the Corporate Bank Account

Date: June 30, 2015 Author: Ken Kuchling Comments: 1 Reply
EIA EIS EISA
In the past I have seen some industry observers argue that mine environmental approvals should be linked to the overall financial health of the parent company.
Their point was raised in regard to the Mount Polley tailing dam incident as well as other notable tailings failures. Today one could also add the Victoria Gold Eagle Mine heap leach failure into the conversation.
The logic behind their idea was that the potentially high cleanup cost for tailings failures could exceed the financial capacity of a small mining company and thus the cleanup cost would need to be borne by the taxpayer.

Are reclamation bonds of sufficient size?

Closure bonds for final reclamation are standard practice in current permitting approvals and part of the normal course of business. However what was being proposed is the requirement to have sufficient corporate funds in the bank account to pay unexpected remediation costs for some hypothetical failure. Orderly closure is one thing, but cleanup & closure is entirely different. The costing for this situation has not been part of the current environmental approval process as far as I know. Depending on the type of failure scenario envisioned, a hypothetical cleanup cost could be low or enormous.
Along with the fiscal capacity requirement, another proposed idea was that all the mining companies in a jurisdiction each contribute into a regional failure cleanup fund. The ultimate goal of that idea could be twofold, either for better environmental practices, or simply to curtail mine development by handcuffing smaller companies.

Pro’s and Con’s of a Fiscal Capacity Limit

Linking environmental approval of a mining project to the proponent company’s fiscal capacity is a current policy idea used in various forms (e.g., financial assurance/bonding requirements, closure guarantees, insurance mandates). Here are the main arguments on each side for applying a corporate fiscal limit:

Arguments in favor (Pro) of Fiscal Capacity

  1. Ensures funds exist for all environmental remediation: Mining causes long-term environmental liabilities (tailings, acid mine drainage, land rehabilitation). If a company lacks fiscal capacity, it may be unable to pay for cleanup, especially after project closure or in case of failure, leaving the taxpayers to cover costs (as has happened with abandoned mines worldwide).
  2. Reduces moral hazard: Undercapitalized companies have less “skin in the game.” Linking approval to fiscal strength discourages speculative or shell companies from taking on projects they can’t responsibly manage, reducing the incentive to cut corners on environmental compliance to save money.
  3. Protects against bankruptcy-driven abandonment: A financially fragile company facing a downturn in commodity prices might declare bankruptcy and walk away from environmental obligations. This is not uncommon in reality. Fiscal capacity requirements act similarly to insurance, guaranteeing a fallback source of funds.
  4. Improves accountability and long-term compliance: Companies with strong finances are generally better able to invest in ongoing monitoring, new technology, and adaptive management of environmental risks over a project’s life cycle, which can span decades.Aligns incentives with the “polluter pays” principle: It cements the idea that the party responsible for potential damage should have the resources to address it, rather than shifting the burden to governments or future generations.
Arguments against (Con) of Fiscal Capacity
  1. Creates a barrier to entry, favoring large incumbents: Requiring high fiscal capacity could exclude smaller, junior mining companies, which are often responsible for exploration in the sector, from obtaining approvals, even if their specific project poses low environmental risk.
  2. Conflates financial strength with environmental performance: A company can be wealthy and still have poor environmental practices, or be smaller/newer but employ excellent environmental management and technology. Fiscal capacity is an imperfect measure of actual environmental risk or the quality of a mitigation plan. However larger companies have the incentive to do the right thing since they may have multiple operations under scrutiny.
  3. Risk of double regulation or redundancy: Many jurisdictions already require financial assurance instruments (bonds, insurance, trust funds) specifically earmarked for closure and remediation. Tying general approval to fiscal capacity could duplicate or conflict with these more targeted mechanisms. However do these assurances consider catastrophic failure cleanup?
  4. Could be gamed or is hard to assess accurately: Fiscal capacity can fluctuate over time, be hidden through corporate structuring (e.g., shell subsidiaries, transfer pricing), or be inflated through parent company guarantees that may not hold up in practice. Regulators may lack the tools to meaningfully audit ongoing financial health.
  5. May discourage joint ventures and innovative financing: Some legitimate, well-managed projects rely on external financing, partnerships, or staged capital. A blanket fiscal capacity threshold at the initial approval stage might penalize projects that have viable, if less conventional, financial structures.
  6. Doesn’t address the root issue: Even fiscally strong companies can choose not to prioritize environmental protection absent proper enforcement. The real solution to compliance may be more robust monitoring, penalties, and independent audits (not upfront financial capacity).

Conclusion

In reality, regulators tend to separate these concerns. Environmental approval focuses on adequacy of the environmental management plan. Financial capacity requirements (bonds, insurance, escrow accounts) are imposed as a condition tied specifically to closure and remediation liabilities. Financial capacity is not used a criterion for approving the project itself.
It will be interesting to see if this suggested permitting approach gains any traction in the future because it could have a significant impact on the operating approach of junior mining.
It would raise the question as to whether any small junior miner should be given environmental approval to put their project into production.  I do know of cases where First Nations have a preference that a project on their lands is put into production by a well reputation major-intermediate company and not the current junior miner owners of the project.  The major has backstop money, the junior does not.

 

Note: You can sign up for the KJK mailing list to get notified when new blogs are posted. Follow me on Twitter at @KJKLtd for updates and other mining posts.   The entire blog post library can be found at https://kuchling.com/library/
For some free mining calculator apps, including project timelines and a simplified cashflow modeller, check out this website https://sites.google.com/view/drillingdown
Share

Mining Cashflow Sensitivity Analyses – Be Careful

Date: June 15, 2015 Author: Ken Kuchling Comments: 1 Reply
cashflow sensitivity
One of the requirements of NI 43-101 for Item 22 Economic Analysis is “sensitivity or other analysis using variants in commodity price, grade, capital and operating costs, or other significant parameters, as appropriate, and discuss the impact of the results.”
The typical result of this 43-101 requirement is the graph seen below (“a spider graph”, which is easily generated from a cashflow model.  Simply change a few numbers in the Excel file and then you get the new economics.  The standard conclusions derived from this chart are that metal price has the greatest impact on project economics followed by the operating cost.   Those are probably accurate conclusions, but is the chart is not telling the true story.
DCF Sensitivity GraphI have created this same spider graph in multiple economic studies so I understand the limitations with it.   The main assumption is that all of the sensitivity economics are based on the exact same mineral reserve and production schedule.
That assumption may be applicable when applying a variable capital cost but is not applicable when applying varying metal prices and operating costs.
Does anyone really think that, in the example shown, the NPV is $120M with a 20% decrease in metal price or 20% increase in operating cost?   This project is still economic with a positive NPV.
In my view, a project could potentially be uneconomic with such a significant decrease in metal price but that is not reflected by the sensitivity analysis.  Reducing the metal price would result in a change to the cutoff grade.  This changes the waste-to-ore ratio within the same pit.  So assuming the same size mineral reserve is not correct in this scenario.
Changes in economic parameters would impact the original pit optimization used to define the pit upon which everything is based.
A smaller pit size results in a smaller ore tonnage, which may justify a smaller fleet and smaller processing plant, which would have higher operating costs and lower capital costs.
A smaller mineral reserve would produce a different production schedule and shorter mine life.  It can  get quite complex to examine it properly.
Hence the shortcut is to simply change inputs to the cashflow model and generate outputs that are questionable but meet the 43-101 requirements.
The sensitivity information is not just nice to have.   Every mining project has some flaws, which can be major or minor. 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.   You can read that blog post at this link “Flawed Mining Projects – No Such Thing as Perfection“
So if the spider chart isnt he best way to tackle the risk issue, what way is better?  In another blog post I discuss an different approach using the probabilistic risk evaluation (Monte Carlo).  Its isn’t new but now well adopted yet by the mining industry.  You can learn more at “Mining Financial Modeling – Make it Better!“
Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website.   
Share