Articles tagged with: 43-101

PEA’s – Is it Worth Agonizing Over Details

Mining PEA
As stated in a previous article (“PEA’s – Not All PEA’s Are Created Equal“) different PEA’s will consist of different levels of detail.  This is driven by the amount of technical data available and used in the study.    The same issue applies to a single PEA whereby different chapters of the same study can be based on different degrees of data quality.
I have seen PEA’s where some of the chapters were fairly high level based on limited data, while other parts of the same study went into great depth and detail. This may not be necessary nor wise.

Think about the level of detail justifiable

If the resource is largely inferred ore, then the mine production plan will have an inherent degree of uncertainty in  it.  So there is not a lot of justification for other engineers (for example) to prepare detailed tailings designs  associated with that mine plan.
Similarly there is little value in developing a very detailed operating cost model or cashflow model for a study that has many underlying key uncertainties.  Such technical exercises may be a waste of time and money, adding to the study duration, increasing engineering costs, and giving the unintended impression that the study is more accurate than it really is.
Different levels of detail in the same study can crop up when diverse teams are each working independently on their own aspect of the study.   Some teams may feel they are working with highly accurate data (e.g. production tonnage) when in reality the data they were provided is somewhat speculative.
The bottom line is that it is important for the Study Manager and project Owner to ensure the entire technical team is on the same page and understands the type of information they are working with.   The technical detail in the final study should be consistent throughout.
Experienced reviewers will recognize the key data gaps in the study and hence view the entire study in that light regardless of how detailed the other sections of the report appear to be.
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Metal Equivalent Grade versus NSR for Poly-Metallics. Preference?

NSR for poly-metallics
Some of the mining studies that I have worked on were for deposits containing multiple recoverable metals.  For example Ag-Pb-Zn mineralization or Cu-Pb-Zn-Au-Ag mineralization.    Discussions were held regarding whether to use a “metal-equivalent grade” to simplify the deposit grade or to use a Net Smelter Return (“NSR”) dollar value.

The NSR represents a $/tonne recovered value rather than a head grade.

I have found that the geologists tend to prefer using a metal-equivalent grade approach.  This is likely due to the simpler logic and calculation required for an equivalent grade formula.  At an early stage it’s simpler to select the cutoff grade based on similar projects.
Generally I have no concerns on the metal-equivalent approach at the resource estimate stage.   However from an engineer’s view, an equivalent-grade does not provide a meaningful representation of the ore quality.   It is more difficult to relate the head grade to an operating scenario which may rely on different mining or processing methods generating different final products (e.g. dore versus concentrates).   The NSR makes it easier to understand the actual ore quality.
On the downside, the NSR calculation will require more input data.  Information such as metallurgical recoveries, concentrate characteristics and costs, and smelter payable parameters will be needed.  However the end result is an NSR block value that can be related directly to the operating costs.
For example if a certain ore type has an on-site processing cost of $20/tonne and G&A cost of $5/tonne, then in order to breakeven the ore NSR block value must exceed $25/tonne.   If one decides to include mining costs and sustaining capital costs, then the NSR cutoff value would be higher.   In all cases one can directly relate the ore block value to the operating cost and use that to determine if it is ore or waste.  This is more difficult to do with equivalent grades.

Using the NSR approach, the operating margin per block is evident.

If using pit phases to start mining in high grade areas, one can immediately get a sense for the incremental benefit by looking at the profit margin per pit phase.
One drawback to the NSR block value approach is that the calculation will be based on specific metal prices.  If one changes the metal prices, then one must recalculate the NSR block values.
In some studies, I have seen higher metal prices used for resource reporting and then lower metal prices for mine planning or reserves.  In such cases, one can generate two different NSR values for each block.  One can use the same NSR cutoff value for reporting tonnages.   This two NSR approach is reasonable in my view.

Pit Optimization

Pit optimizations can also be undertaken using the block NSR values rather than ore grade values, so the application of NSR’s should not create any additional problems.
For projects that involve metal concentrates, the cashflow model usually incorporates detailed net smelter return calculations, which include penalties, deductions, different transport costs, etc.  The formula used for the calculation of NSR block values can be simpler than the cashflow NSR calculation.   For example, one could try to build in penalties for arsenic content thereby lowering the NSR block value; however in actuality such ore blocks may be blended and the overall arsenic content in the concentrate may be low enough not to trigger the penalty.
Since the NSR block value is mainly being used for the ore/waste cutoff, I don’t feel it is necessary to get too detailed in its calculation.
The bottom line is that from an engineering standpoint and to improve project clarity, I recommend the use of NSR values rather than equivalent grades.   Geologists may feel differently.
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PEA’s – Not All PEA’s Are Created Equal

Mining Preliminary Assessments
A Preliminary Economic Assessment (“PEA”) is defined in NI 43-101 as “…a study, other than a pre-feasibility or feasibility study, that includes an economic analysis of the potential viability of mineral resources”.  This is a fairly broad definition that provides for plenty of flexibility.  While there are generally accepted industry norms for a pre-feasibility or feasibility study, the mining PEA can have a broad scope.
Some PEA’s might be based on a large database of test work and site information while others may rely on very preliminary data and require design projections based on that data.
Some PEA’s may have production schedules consisting largely on Inferred resources while other schedules may be based on higher proportion of Indicated resource.
Some PEA’s are able to incorporate information from advanced socio-environmental work while other PEA’s may not have access to advanced information.
Therefore one should not view all PEA’s are being created equal. Perhaps that is what investors are doing it seems, in many cases ignoring the results of newly issued PEA’s.
The PEA is normally developed at a fairly early stage in the project life.  The initial PEA may then be superseded with a series of updated PEA’s as more data is acquired.  Typically one would expect to see changes in project size or scope in these updates and hopefully improved economics.  Shareholders appreciate being updated on positive growth trends.

Sequential PEA’s

The sequential PEA approach is a convenient way to continue advancement of the project without making the step to a Pre-Feasibility study or bigger step to a Feasibility study.  Maybe the project is still growing in size and a feasibility study at this stage would not be presenting the true potential, hence the updated PEA.
On the downside of the sequential PEA approach is that investors may get tired of hearing about PEA after PEA.  They may want to see a bigger advance towards a production decision.  They ask “How long can they keep studying this project?”.

 

There is no right or wrong as to what constitutes a PEA.

The securities commissions consider that the cautionary language an important component of the PEA Technical Report and may red-flag it if it’s not in all the right places.   However this cautionary language is generally focused on the resource.
For example the typical “The reader is cautioned that Inferred Resources are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as Mineral Reserves, and there is no certainty that value from such Resources will be realized either in whole or in part.”   In that cautionary statement there is no mention of all the other speculative assumptions that may have been used in the study.
For example, the Inferred resource may not be that significant however the amount of metallurgical test work might be a more significant uncertainty.  The previous cautionary language doesn’t address this issue.  Therefore it is important to consider the chapters in the Report pertaining to risks and recommendations for a more complete picture of the entire report.

Conclusion

The bottom line is that when reviewing a PEA report, be aware of all the uncertainties and assumptions that have been incorporated into the study.   The report may be well founded or built on a shaky foundation.  No two PEA’s are the same and this must be clearly understood by the reviewer.
Currently it seems that share prices do not move much with the issuance of a PEA.  It seems there is a lack of confidence in them.  On the other hand, I have also heard that it is better for future financings if a project has at least reached the PEA stage.
Develop your own personal PEA “checklist” to identify the amount and quality of data used for the different parts of the study to help understand where data gaps may exist.
For more about preparing a mining PEA, read the blog “PEA’s – Is it Worth Agonizing Over Details“.
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Four Study Stages (Concept to Feasibility) – Which Should We Do?

Over my career I have been involved in various types of mine studies, ranging from desktop conceptual to definitive feasibility.    Each type of study has a different purpose and therefore requires a different level of input and effort, and can have hugely different costs.
I have sat in on a few junior mining management discussions regarding whether they should be doing a PEA or a Pre-Feasibility Study, or a Feasibility instead of a Pre-Feasibility Study.    Everyone had their opinion on how to proceed based on their own reasoning.   Ultimately there is no absolute correct answer but there likely is one path that is better than the others.  It depends on the short term and long term objectives of the company, the quality and quantity of data on hand, and the funding available.

Four basic types of studies

In my opinion there are four basic levels of study, which are listed below.  My objective to simply provide an overview of them.  Detailed comparison tables are readily available, and anyone can contact me at KJKLTD@rogers.com for an a full copy of the table  shown below).

Four Studies Table

1. Desktop or Conceptual Study
This would likely be an in-house study, non-43-101 compliant, and simply used to test the potential economics of the project.  It lets management know where the project may go (see a previous blog at the link “Early Stage “What-if” Economic Analysis – How Useful Is It?”.    I recommend doing a documented desktop study.  It doesn’t take much time and is not made public so the inputs can be high level or simply guesses.  This type of study helps to frame the project for management and lets one test different scenarios.
2. Preliminary Economic Assessment (“PEA”)
The PEA is 43-101 compliant and presents the first snapshot of the project scope, size, and potential economics to investors.  Generally the resource may still be uncertain (inferred classification), capital and operating costs are approximate (+/- 40%) since not all the operational or environmental issues are known at this time.   Please do not sell the PEA as a feasibility study.

Don’t Announce a PEA Until You Know the Outcome

I recommend not announcing or undertaking a PEA until you are confident in what the outcome of the PEA will be.   A reasonable desktop study done beforehand will let a company know if the economics for the PEA will be favorable.  I have seen situations where companies have announced the timing for a PEA and then during the study, have seen things not working out as well as envisioned.  The economics were poorer than hoped and so a lot of re-scoping of the project was required.  The PEA was delayed, and shareholders and financial analysts negative suspicions were raised in the meantime.
The PEA can be used to evaluate different development scenarios for the project (i.e. open pit, underground, small capacity, large capacity, heap leach, CIL, etc.).  However the accuracy of the PEA is limited and therefore I suggest that the PEA scenario analysis only be used to discard obvious sub-optimal cases.  Scenarios that are economically within a +/-30% range of each other many be too similar to discard at the PEA stage.
3. Pre-Feasibility Study (“PFS”)
The PFS will be developed using only measured and indicated resources (not inferred) so the available ore tonnage may decrease from the PEA study.  The PFS costing accuracy will be better than a PEA.  Therefore the PFS is the right time to evaluate the remaining development scenarios.  Make a decision on the single path forward going into the Feasibility study.

Use the PFS to determine the FS case

More data will be required for the PFS, possibly a comprehensive infill drilling program to upgrade the resource classification from inferred.  Many companies, especially those with smaller projects might skip the PFS stage  and move directly to Feasibility.  I don’t disagree with this approach if the project is fairly simple and had a well defined scope at the PEA stage.
4. Feasibility Study (“FS”)
The Feasibility Study is the final stage study prior to making a production decision.  The feasibility study should preferably be done on a single project scope.  Try to avoid more scenario analysis at this time.
Smaller companies should be careful entering the FS stage since, once the FS is complete, shareholders will be expecting a production decision.  If the company only intends to sell the project with no construction intention, they now hit a wall.  What to do next?

Sometimes management feel that a FS may help sell the  project.

I don’t think a FS is needed to attract buyers and sell a project.  Many potential buyers will do their own in-house due diligence, and possibly some design and economic studies.   Likely information from a PFS would be sufficient to give them what they need.  A well advanced Environmental-Socio Impact Assessment may give as much or more comfort than a completed Feasibility Study would.

Conclusion

executive meetingMy bottom line recommendation is that there is no right answer as to what study is required at any point in time.  Different paths can be followed but consideration must be given to future plans for the company after the study is completed.   Also consider what is the best use of shareholder money?
Company management may see pressure from retail shareholders, major shareholders, financial analysts, and the board of directors.  Management must decide which path is in the best longer term interests of the company.
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Site Visit – What Is the Purpose?

Mining due diligence
National Instrument 43-101(6.2) specifies that “before an issuer files a technical report, the issuer must have at least one qualified person (“QP”) who is responsible for preparing or supervising the preparation of all or part of the technical report complete a current inspection on the property that is the subject of the technical report.
In most technical reports one may see a long list of QP’s but often only one or two of the QP’s have actually made a site visit. I have worked on numerous mining studies myself and not been involved in a site inspection.
In many cases the limited number of people completing a site visit may be due to the high cost for travel to a remote site, the logistics of travelling around with a large team, and the associated fees for the personnel to attend.  In some cases the site visit personnel may be restricted simply because there isn’t much to see at the property and the company simply wants to meet the 43-101 requirement.

Get the best bang for your buck

Site inspections that I have taken part in ranged from simple tours of the property only taking photographs to more detailed data room reviews, meeting the owner’s team, meeting with vendors and contractors.
Exploration Program in AndesIn my opinion the more advanced the study the more important the site visit becomes.  This requires that one optimizes the scope of the trip.
At the feasibility stage it is important that several QP’s complete one or more site visits at the same time if possible.  They need to see and hear the same things.  Obviously the QP’s will need to focus on different areas of responsibility, but the over-riding message should be consistent to the entire team.
For an earlier study stage (e.g. PEA), it is less critical that a large team complete the site visit.   However I would recommend that the QP making the site visit be in prior contact with the team members to determine what information they will want to see.
The visiting QP is then responsible to collect their data.  Sorting through information files covering different disciplines may be difficult for one person, but inspecting and photographing key sites may be of value to everyone.
In addition it is useful to make first contact with local vendors and contractors on behalf of others.   Ultimately spending an extra day or two at site is relatively inexpensive compared to the fixed cost of the travel.
Once back at the office, the QP should distribute and explain his findings to the rest of the team, thereby benefiting the team with better information.   I have often seen that this post-site visit information sharing does not happen.

Conclusion

The bottom line is that rarely I have seen pre-site visit data gathering lists prepared for the QP .  In many cases the QP simply collects the information they personally need.  Generally the pre-trip planning is focused on travel and hotel logistics and less so on the team information needs.
Quick drive-by site visits meet the requirements of NI 43-101 but they don’t add much to the study quality.  One way to help enhance team awareness is by using Google Earth; read the blog “Google Earth – Keep it On Hand” to learn more on this.
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