Mining study economics
Over the years I have worked with both large and small mining companies and watched how they studied potential acquisitions.
Large mining companies have their in-house evaluation teams that will jump on a potential opportunity that comes in the door and start examining it quickly.  These evaluation teams are experienced at what they do and can provide management with solid advice even if working with only limited data.  This help management decide very early on whether to pursue the opportunity or walk away.
Early stage economics are not right all of the time but more than often they save their company from wasting money on projects unlikely to fly.
If you are a small mining company, what are your options?
You don’t have an in-house technical team sitting around ready to hit the ground running.  Management needs to know if this project has a chance.  If the project is early stage, sometimes management thinks it is better to put money into the ground rather than on early studies.

It is possible to do both

I feel that you won’t know if you have arrived at your destination if you don’t know your destination.  Early stage financially modelling can help define that destination.
The exploration team and management usually have a vision of the potential project, even those projects with only an early resource estimate.   Each person may have a different opinion on the potential size and scope of what may eventually exist.  However the question is whether any of those vision have sufficient potential to warrant spending more shareholder money on the project.
Some of the junior mining management teams that I have worked with have found it beneficial early on to have a simple internal cashflow model that is simply to tweak to examine “what-if’s” scenarios for the project.  Input the potential deposit size and mine life, potential head grades, expected metallurgy, and typical costs to see what the economic outcome is.  Does this project have a chance and, if not, what tonnage, head grade, recovery, or metal price is required?

Early stage modelling adds value

The tangible benefits to early financial modelling are:
  • It helps management to think about and better understand their project.  If done honestly, it will reveal both the good and the bad aspects.
  • It helps management to understand what parameters will be most important to resolve and what technical factors can be viewed as secondary. This helps guide the on-going exploration and data collection efforts.
  • Periodically updating the economic model with new information will show the if economic trends are getting better or worse.

Its not 43-101 compliant

I must caution that this type of early stage economic analysis is not be 43-101 compliant and hence can not be shared externally, no matter how much one might wish to.
Another caution is that in some cases these early stage un-engineered projections become “cast in stone”, treating them as if they are accurate estimates.  All subsequent advanced studies somehow need to agree with the original cost guesses, thereby placing unreasonable expectations on the project.
The early stage economic models can consist of simple one-dimensional tables using life-of-mine tonnages or two-dimensional tables showing assumed annual production by year.  Building simple cashflow models may take only 2-3 days of effort.  That is not an onerous exercise compared to the overall guidance they can provide.
The bottom line is that it is useful to take a few days to develop a simple cashflow model.  “Simple” also means that management themselves can tweak the models and don’t need a modeling expert on hand at all times.  “Simple” means the model should be well written and understandable (see the article Financial Spreadsheet Modelling – Think of Others).
Most companies have a CFO that can easily undertake this modelling, with the help of some technical input.
To learn more about simple 1D financial models, read my blog “Project Economics – Simple 1D Model” .
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