Articles tagged with: Cashflow Model

Project Economics – Simple 1D Model

Date: May 29, 2015 Author: Ken Kuchling Comments: 2 Replies
mining desktop study
In a previous article I outlined my thoughts on the usefulness of early stage financial modelling (“Early Stage “What-if” Economic Analysis – How Useful Is It?”).     My observation was that it is useful to take a few days to build a simple cashflow model yourself to help you understand your project.

By “simple” I mean really simple.

This blog describes one of the techniques that I use to take a quick look at any project; whether it is for a client wishing to understand his project at a high level; or whether it is a project that I have read about.  There is no study nor production schedule available yet.
It takes about 10 minutes to plug the numbers into my template to get quick results.  The image below is an example of the simple model that I use, but anyone can build one for themselves.

Screenshot of Simple Economic Model

I term this a one dimensional (“1D”) model since it doesn’t require the typical X-Y matrix with years across the top and production data down the page.
The 1D model simply relies on life of mine (“LOM”) totals to estimate the total revenue, total operating cost, and total profit.  This determines how much capital expenditure the project can tolerate.
The only caveat is that you need to have some sense for operating and capital costs for similar projects. The analysis can be on both a pre-tax and simple after-tax basis.
Using estimated metal prices and recoveries, the first step is to calculate the incremental revenue generated by each tonne of ore (see a previous article “11. Rock Value Calculator – What’s My Rock Worth?”).
Next that revenue per tonne is multiplied by the total ore tonnage to arrive at the total revenue over the life of mine.
The second step is to determine the life of mine operating cost, and again this simple calculation is based on estimated unit operating costs multiplied by the total tonnages being handled.
The third step is to calculate the life of mine profit based on total revenue minus total operating cost.
The potential net cashflow would be calculated by deducting an assumed capital cost from the life-of-mine profit.  The average annual cashflow is estimated based on the net cashflow divided by the mine life.  An approximate NPV can be calculated by determining the Present Value of a series of annual payments at a certain discount rate.
The reasonableness of the 1D model will be examined via benchmarking and this will be summarized once completed.  I will include a link to that future blog here.

You need to understand your project

One can easily evaluate the potential impact of changing metal prices, changing recoveries, ore tonnages, operating costs, etc. to show what the economic or operational drivers are for this project.  This can help you understand what you might need in order to make the project viable.
Update:  Interestingly there is a Mining Intelligence website that provides an online calculator for evaluating mining project economics.   It is a black box approach, in that you simply input your parameters and it outputs the results.   I have not used it nor do I know what the cost is.  Unfortunately the website does not provide information on the qualifications or backgrounds of the people who have built the model but it seems to be affiliated with InfoMine.  If anyone has experience using the economic modelling service, please share your thoughts.

Conclusion

The bottom line is that a 1D economic calculation is very simplistic but still provides a vision for the project.  The next step in the economic modelling process would be a 2D model based on an annual production schedule.  The 1D approach is just a quick first step in looking at a potential project.  You can do it even when you just know the head grades and some generalized orebody information.
The two ways you can apply the simple 1-D model are:
  1. evaluate the potential of early stage projects using cost inputs from other studies,
  2. examine a project’s sensitives (units costs, recoveries, prices) by calibrating your simple model to the published study (i.e. use the same parameters and make changes as needed.
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/.
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Rock Value Calculator – What’s My Rock Worth?

Date: May 8, 2015 Author: Ken Kuchling Comments: 3 Replies
rock economic value
In my view, one of the most important things you need to understand about your orebody is the insitu rock value.  Its a key driver in shaping the project for you.
The two main nature-driven factors in the economics of a mining project are the ore grade and the ore tonnage.  In simplistic terms, the ore grade will determine how much incremental profit can be generated by each tonne processed.
The ore tonnage will determine whether the cumulative profit generated all the ore will be sufficient to pay back the project’s capital investment plus provide some reasonable financial return to the investor.

Does the Ore Grade Generate a Profit ?

In order to understand the incremental profit generated by each ore tonne one must first convert the ore grade into a revenue dollar value.   This calculation will obviously depend on metal prices and the amount of metal recovered.  For some deposits with multiple metals, the total revenue per tonne will be based on the summation of value from each metal, some of which may have different process recoveries and different net smelter payable factors.
To help calculate the value of the insitu rock, I have created a simple cloud-based spreadsheet at this link (Rock Value Calculator).  An example screenshot is shown below.  Simply enter your own data in the yellow shaded cells and the rock values are calculated on a “$ per tonne” basis. One must zero out the values for metals of no interest.

 

Rock Value Calculator Pic

Price: represents the metal prices, in US dollars for the metals of interest.
Ore Grade: represents that head grades for the metals of interest in the units as shown (g/t and %).
Process Recovery: represents the average percent recovery for each of the metals of interest.
Payable Factor: represents the net payable percentage after various treatment, smelting, refining, penalty charges.  This is simply an estimate depending on the specific products produced at site.  For example, concentrates would have an overall lower payable factor than say gold-silver dore production.
Insitu Rock Value: this output is the dollar value of the insitu rock (in US dollars), without any recovery or payable factors being applied.
NSR Rock Value: this output represents the net smelter return dollar value after applying the recovery and payable factors.  This represents the actual revenue that could be generated and used to pay back operating costs.

Profit = Revenue – Cost

The final profit margin will be determined by subtracting the operating cost from the NSR Rock Value.  These costs would include mining, processing, G&A, and offsite costs.  Typically large capacity open pit operations may have total costs in the range of $10-15/tonne while conventional underground operations would be much higher.

Conclusion

The bottom line is that very early on you should understand the net revenue that your project’s head grades may deliver.
This will give sense for whether you are a high margin project from an operating cost perspective or whether the ore grades are marginal and higher metal prices or low operating costs will be required by a project.
The earlier one understands the potential economics of your different ore types, the better you will be able to visualize, design, and advance your project.
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/.

 

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Four Study Stages (Concept to Feasibility) – Which Should We Do?

Date: April 29, 2015 Author: Ken Kuchling Comments: 2 Replies
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.
Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website. Follow us on Twitter at @KJKLtd for updates and insights.
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Early Stage “What-if” Economic Analysis – How Useful Is It?

Date: April 27, 2015 Author: Ken Kuchling Comments: Leave a reply
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” .
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/.
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#1 Financial Spreadsheet Modelling – Please Think of Others

Author: Ken Kuchling Comments: Leave a reply
Mining Cashflow modeling
In my current role as a mining consultant I am often required to review spreadsheet cost models or cashflow models built by others.  Some of these spreadsheets can be monsters, using numerous worksheets, cross-linking between worksheet cells, and having hard wired numbers inside cell formulas.
Some of the models I have reviewed will build the entire operating cost (mining, processing, G&A) in one file.  They will build in the capital cost too and finally provide the economic model… all in one!
This makes the model very complex and difficult to follow the logic.  Sometimes your gut feel says there must be formula or linkage errors in there somewhere but you just can’t find them.  In these types of models more focus is spent trying to figure out the formula logic than actually looking at the validity of the inputs and output.
It seems that only the model developer can really work with these spreadsheets and the rest of us can just hope they have  done everything correctly.

Cleverness is not a virtue

Over the years, I have learned that there is an art to creating a clear, concise, and auditable cashflow model (or cost model). Once in awhile you come across one that is well crafted and is not an example of someone saying “look how clever I am”.
In building the spreadsheet models I have learned to not try to do too much in the same model, especially if several different technical people are involved in its foundation.   Other suggestions are:
  • Color coded input cells differently than formula cells.
  • Carry over values rather than linking to other worksheets.
  • Highlight cells that are carried over from other worksheets.
  • Never hardwire numbers into a formula.
  • Use conditional formatting when possible to help identify errors.
I won’t go into detail on good spreadsheet practices, but you can check out the instructional presentations prepared by Peter Card at Economic Evaluations (http://economicevaluation.com.au).
He has some excellent practical recommendations that all financial modellers should consider.  It doesn’t take long to review his online courses and it’s worth your time to do it.  His recommendations can generally apply to any Excel modelling exercise, whether its costing, scheduling, or economic analysis.

Try to help by building in clarity.

The bottom line is that you must build your spreadsheet models compatible with the way you think.  However not everyone thinks the same way so try to keep all aspects easily identifiable and traceable.  Be consistent in the model format from worksheet to worksheet. Be consistent in methodologies on all worksheets and with all your models.   Your client, colleagues, and reviewers will thank you.
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/.
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