Articles tagged with: Mining

Mining Takeovers – Should Governments Be (Heavily) Involved?

Date: July 13, 2015 Author: Ken Kuchling Comments: 5 Replies

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.

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New Mining Software and 43-101 Legal Issues

Date: July 6, 2015 Author: Ken Kuchling Comments: 2 Replies

NI 43-101 puts a fair amount of legal liability on the Qualified Person preparing a resource or reserve estimate or sign off on an advanced study. The QP is to be responsible for the accuracy of their work and take legal responsibility.

Every so often some new mining software comes along and I often wonder what are the risks in using it? Some examples of new mining software that I have heard about (but not personally used) nor have seen mentioned in any 43-101 studies are SimSched, the ThreeDify’s software packages, NPV One, and Bentley.

Is the software doing everything correctly?

Given that as a QP I am legally responsible for my work, I am bit apprehensive about how I can be assured the new software will provide reliable and accurate results for which I accept legal liability. The last thing I would want to do is issue a public technical report which is found to be in error due to a software bug.

Irrespective of 43-101, if you are working at a mining operation the last thing you want to do is present management with an incorrect reserve, pit design, or production plan.

If you are a consultant, how agreeable will your client be when you tell him that his study was done using a novel software package and not one of the industry standard packages, and there was an error in it?

I recall working with a major mining company and there was a reluctance to adopt any new software that was unproven and not an industry standard. Money was not the issue; the company’s concern was with the risk in using unproven software.

What if you have a limited budget?

How do you view new software if you have a limited budget? The new software may be cheaper, may appear to be be great, and may be a technological improvement and all at a lower cost. However the software risk still remains. There is no guarantee that all software output is correct simply because it comes from a computer.

As a QP, I suggest the onus is on the software developers to demonstrate that they can produce reliable and comparable results under all conditions. They need to be able to convince the future users that their software is accurate.

Perhaps over time the new software will gain wider adoption and be generally accepted. We may see more 43-101 reports that use it and hence it will get more overall acceptance.

Another question when developing a market for new software is whether it is better to focus on more consultant adoption or more mining company adoption?

Will mining companies use the software if their consultants are using it, or will consultants use it if more companies adopt it? It’s an interesting discussion that new software vendors must deal with in trying to grow their market share.

Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website. The entire blog post library can be found at this LINK with topics ranging from geotechnical, financial modelling, and junior mining investing.

Mine Approvals May Be Hinging on the Corporate Bank Account

Date: June 30, 2015 Author: Ken Kuchling Comments: 1 Reply

A few months ago there were some discussions on a now defunct blog site “I THINK MINING” and on a website (https://lindsaynewlandbowker.wordpress.com) regarding whether mine environmental approvals should be linked to the overall financial health of the parent company.

This point was raised in regards to the Mount Polley tailing dam incident as well as other notable tailings failures. The logic behind the idea was that the potentially high cleanup cost for tailings failures could exceed the financial capacity of a small mining company and then the failure 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 is being newly proposed is the requirement to have sufficient corporate funds in the bank account to pay remediation costs for some hypothetical failure. This has not been part of the current environmental approval process as far as I know. Depending on the type of failure scenario one envisioned, the hypothetical cleanup cost could range from low to enormous.

A failure cleanup fund

One of the options being proposed is that the various mining companies in a jurisdiction each contribute money to a failure cleanup fund that could be used for mitigation purposes.

The ultimate goal of this idea may be better environmental practice or simply as a means to curtail mine development by handcuffing smaller companies.

Many deposits are too small for the major miners so the intermediate companies are the only ones interested in them. However if they don’t have the financial reserves in the corporate bank account, then their projects would not get approved.

Small companies would only be explorers

It would impact on the ability for the smaller or intermediate miners to develop new mines if the corporate bank account of the parent company becomes a large part of the mine permitting process. Not only would they need to finance the construction capital cost, which is not easy these days, but they would also need to finance a tailings failure cleanup fund.

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 the junior industry. Perhaps everyone could really only be exploration companies.

One impact from this might be that new operators will be pushed towards dry stack tailings. Possibly the added costs for dry stacking could be offset against the need for the tailings failure fund.

Regardless of how it would be done, this would become an added cost to the mining industry at a time when it doesn’t need more cost pressures.

Independent Consultants Are Growing

Date: June 23, 2015 Author: Ken Kuchling Comments: 2 Replies

I have read quite a few articles indicating that the mining industry is seeing a shortage of experienced people, on both the technical and management side of the business. Apparently the baby boomer generation is now nearing their retirement or early-retirement stage and there is a gap in the number of experienced people following behind.

Many of these retirees enter the “independent consultant” stage of their careers.

I also hear from recruiters that there is a shortage of engineers willing to take remote or international assignments. This is particularly difficult when a senior level candidate has a growing family.

Can the independent engineers help out?

In a previous article (14. Miners – Why Have Your Own Independent Consultant?) I discussed why mining companies (or even consulting firms) should make use of the independent engineers as advisers or Board members.

I understand from colleagues in the mining industry that many of the people nearing retirement are willing to take on consulting assignments or board or directors roles or other management roles. They are often willing to work part time and independently. Or they may work as “associates” with engineering firms.

So there likely is a significant network of experienced people out there. It’s just a matter of being able to tap into that network when someone needs specific expertise.

So how can one do this?

LinkedIn currently seems to be the only global network for technical people. It is a great way to connect with engineers and geologists industry wide.

LinkedIn members work everywhere, at mine operations, consulting firms, financial houses, as independents, or even retired. Almost every technical person I know is registered on LinkedIn.

The question is how to find these people when you are looking for a specific independent expertise for a short term or over the longer term.

Networking

Networking with people you already know is the most common approach. However what if you need someone with particular knowledge?

LinkedIn is a great search mechanism for technical experts. With a keyword search one can identify a lot of experts with very specific skill sets. The problem is that many of the experts highlighted by the LinkedIn search may be fully employed at mining operations or with large consulting firms and may not be the person you are looking for.

To my knowledge, there is no searchable online registry solely intended for independent geologists and engineers. It would be in the interests of the mining industry to have some type of easily searchable independent consultant directory to be able to tap into the expertise that is out there. I understand that MineLife.org is attempting to build such an online service but it still appears to be early in the development stage.

Junior Mining – Are People Still Investing?

Date: June 8, 2015 Author: Ken Kuchling Comments: 3 Replies

Update: This blog was originally written in June 2015, however many of the observations made then still hold in late 2018.

The general consensus over the last couple of years is that the junior mining sector is still in a state of flux.

I briefly touched on this in a previous article “12. Financings – It Helps to Have a Credible Path Forward”.

It is still difficult for junior miners to get funding and the stock prices of have been on a downward trend. Some observers say this just a temporary phase and the stock prices will cycle, as they have in the past. I’m not convinced that this will be the case, although I am hoping.

Metal prices may recover, but will stock prices?

I am reasonably confident that metal prices will improve over time, but I am not sure that alone will result in the junior mining sector invigorating. I think there is a long term shift in how personal investments are being made and how the mining industry is being viewed. The following blog has some personal opinions on the present and the future.

Mining companies are constantly in the media with stories of cost over-runs, mine shutdowns, fatalities, strikes & protests, and environmental incidents.

In addition, the junior mining sector has had a few notable scams that nobody ever forgets about.

In some instances management were over promoting sub-optimal projects simply for the purpose of raising the stock price and cashing out. Not many companies fell into this category, but enough to create an unfavorable image of the industry.

I think it will take time to recover from the image being created by the events described above. Unfortunately new incidents only build on the perceived legacy.

The implementation of sustainable and green mining practices is an attempt to rehabilitate the image of mining, but is anyone out there listening?

Are investment practices changing?

Regarding today’s investment practices, I have three general observations:

Yield Investors: When many of us baby boomers were younger with a steady job, we were willing to speculate on mining stocks hoping for the big payoff. At the time there were some well publicized payoffs. Also there wasn’t much else to speculate on.

Now those same baby boomers are moving into retirement and financial planners are push them into fixed income and dividend paying investments. Be happy with a 2% to 5% yield. The risk tolerance for many of these investors has shifted from speculation / growth to income / capital retention.

I’m not sure how many of these people will ever re-enter the mining stock market. The majority of miners don’t pay any significant yield. Looking at the yield for Barrick (2%), Goldcorp (0.8%), and Yamana (0.85%), their yields are lower than those for the more conservative bank stocks (4%-6%).

Where to speculate now? Where might the 30 to 40 year old’s speculate today? Younger people today may still speculate with their free cash, but they are not hoping to be investors in the next Voisey’s Bay, Kidd Creek, or Hemlo. They have never even heard of them.

They are hoping to be investors in the next Apple, Google, or Facebook, or a cannabis company. The dot.com bubble of 1999–2000 was a case of junior mining speculators jumping into technology and it was a bust. However currently several of the new breed of dot.com companies that have IPO’d are getting huge share price increases. Is it still a tech bubble? Not so much anymore.

I don’t know whether the younger speculators will ever have interest in the mining sector since they never heard of it. There is so much other investing activity happening out there.
The perception of mining: The mining and energy news shown in the media is not helping the industry by focusing mainly on the negative aspects. The resource business appears to be somewhat analogous to the meat industry. Everyone likes their nicely packaged rows of chicken and beef at the grocery store but nobody wants to see how it actually gets to the store. Everyone also loves their metallic gadgets and the energy used to power them, but please don’t show how it actually gets from mine to store shelf. It can be quite upsetting.
Complexity: To invest in a mining stock or understand a mining IR presentation, one needs a basic understanding of mining and geology. To understand a tech stock or bank stock, one does not need to be an expert in that industry. People will intuitively have a better comfort level with them.

Can mining companies provide more yield?

An interesting group of companies are the mid tier producers that have operating mines and generate profits, but do not pay a dividend. I will be curious to see how these companies shares will perform since they don’t satisfy the yield investor nor may they satisfy the pure speculator looking for order of magnitude capital gains.

The larger mining companies will always have their investors like pension funds and mutual funds, however the junior miners may be a different story.

Possibly private equity and equity-based crowdfunding will be one of the long term solutions.

I have heard of one geological consulting firm that was trying to foster a plan to help crowdfunders with their 43-101 report even though they don’t yet have the money to pay for the report.

I also understand that Canada now has a few private equity stock exchanges that allow PE to change hands, which may facilitate more private equity involvement.

Conclusion

The bottom line is the mining industry needs to have a self-examination with respect to what the future holds. There is talk that mining needs to change its business model, but very little suggestion regarding what changes to make.

The growing population changing demographics, competition for equity funding, and society’s urbanization may result in fundamental, and permanent, changes to how the financial side of the junior mining industry can function. Just my opinion.

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/.

Open Pit Optimization – How I View It

Date: June 3, 2015 Author: Ken Kuchling Comments: 6 Replies

One of the first steps in an open pit design is the pit optimization analysis. Pit optimization is used to define the most profitable pit shell for a given set of economic parameters. The economic parameters include the metal prices, processing recoveries, and site operating costs. Normally when optimization is done, a range of metal prices or Revenue Factors (“RF”) is used to develop a series of nested shells to understand how the pit will expand or contract with increasing or decreasing metal prices.

Once the optimization step is complete, mining engineers will then design the pit inside that shell, introducing benches and ramps. The pit design should mimic the selected optimized shell as closely as possible.

The pit design may (or may not) closely replicate the optimization shell depending on the slope angles used in the optimization and where the haul ramps are located in the design.

Hence the actual ore and waste tonnages mined may be different that the tonnages defined by the optimizer.

Various experts in pit optimization will use approaches of differing complexity. Some may apply variable mining costs with pit depth; apply variable process recoveries linked to head grade; apply variable pit slopes by sector or depth, apply dilution and ore losses; etc. One can make the pit optimization step as simple or detailed as one wants it.

The question is whether detailed pit optimization is warranted. My view is that overly detailed pit optimization is not required, other than if one wants to test parameter sensitivity on the resulting pit size and shape. There are just too many uncertainties in the parameters being used in optimization.

Open Pit Optimization Uncertainties

Some of the uncertainties involved in the optimization approach are listed below:

Pit optimization can generate large pits that would have a long mine life. However one doesn’t really know the metal prices far into the future. So will that final pit ever get mined, or might it even be larger than shown.
Pit optimization is typically done at the start of a study, so one doesn’t have the detailed operating costs yet. The size of the project may be unknown and one has to use rough estimates for future costs and possibly even assume preliminary process recoveries.
Operating costs will also change in the future, and the optimization step is just a snapshot using current information.
Sometimes the optimization includes the use of Inferred resources, which are uncertainty. Sometimes optimization is done only using Measured and Indicated resource, yet there may be areas if Inferred resource that ultimately convert to M &I and these will have been ignored. So, either way you do it, you are not sure what ore the pit can captured and will to shape the pit.
The smaller pits, if developed, would consist of smaller operations and may have different operating costs than assumed in the optimization. Similarly larger pits may have different throughput rates and operating costs than assumed in the optimization.
The ore and waste split reported within the pit will be based on a specific life-of-mine cutoff grade. This is based on the fixed metal price and operating cost assumptions applied.
Overall pit wall slopes may differ for shallow pits versus deep pits. Slopes may vary above the groundwater table and below it. In many instances during pit optimization the wall angles are maintained at the same angle irrespective of the pit depths. Sometimes geotechnical programs have not yet been completed, so optimization slope angles are simply educated guesses.
Dilution may be applied globally during pit optimization (unless one is working with a diluted block model). In reality, dilution may differ in different parts of the ore body, and that may not be considered in the optimization stage. For more discussion on dilution in general, read the blog “Ore Dilution Prediction – Its Always an Issue“.

Conclusion

The bottom line is that pit optimization should be viewed as a guide to the pit design, but not as a highly precise calculation. There are too many uncertainties in the parameters used.

There is always opportunity for future miner operators to examine pushback to grow the pit larger than initially envisioned. Having said all that, one should still understand how future changes in metal prices can impact on the pit size, and then assess whether practical pushbacks are possible. Thin sliver pushbacks are operationally difficult so this should be understood at the start.

While open pit optimization is not a precise science, there is still merit in examining how the pit size and shape reacts to changes in different parameters. There are many ways to examine this and help select which shell should be advanced into the design stage. It can be more than just looking at the NPV versus Revenue Factor chart. You can read this post at this link “Pit Optimization – More Than Just a “NPV vs RF” .

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Mining Project Economics – Simple 1D Model

Date: May 29, 2015 Author: Ken Kuchling Comments: 4 Replies

In a previous article I outlined my thoughts on the usefulness of early stage financial modelling (“Early Stage “What-if” Mine Economic Analysis – Its Valuable”). My observation was that it is useful to take a few days to build a simple cashflow model to help your team better understand your project.

By “simple” I mean really simple.

This blog describes one of the techniques that I use to take a super-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 isn’t any actual study or production schedule available yet. Maybe there is only a mineral resource estimate available.

It takes about 10 minutes to plug the numbers into my template to get fast 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 use the term one dimensional (“1D”) model since it doesn’t use the typical X-Y matrix with years across the top and production data down the page.

The 1D model simply relies simple 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. This 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 “Ore Value Calculator – What’s My Ore 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 see 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.

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 the potential. You can do it even when you only know the head grades and some generalized orebody information.

The two ways you can apply the simple 1-D model are:

evaluate the potential of early stage projects using cost inputs from other studies,
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.

The entire blog post library can be found at this LINK with topics ranging from geotechnical, financial modelling, and junior mining investing.

Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website.

Oil Sands vs Tar Sands – Something I’ve Been Wondering About

Date: May 26, 2015 Author: Ken Kuchling Comments: 1 Reply

Watching the television news in Canada these days, one sees the environmental opponents of the oil sands parading around with signs that say “Stop the Tar Sands”. One way to distinguish whether someone is for or against the oil sands is to see what terminology they use. Do they call them “oil sands” (i.e. pro groups) or “tar sands” (i.e.anti groups)? Personally raw bitumen seems more tar-like than oil-like so the enviro’s seem to have it right.

Is it Oil Sands or Tar Sands

Going back many decades the oil sands were originally called the tar sands. I’m not sure when the terminology shifted, but in the mid-1960’s the first large scale mining operation was called Great Canadian Oil Sands (GCOS). I’m not sure why the terminology shift from tar to oil, but maybe it was related to the fact that “tar” was considered something of low perceived value while “oil” was considered something of high economic value.

Look at what oil did for the economic situation of Jed Clampett on the Beverly Hillbillies. How about the show “Dallas”? There was also a lot of money and scotch drinking.

Back then we all wanted to discover an oil well in our backyard so perhaps the term “oil” implied some level of elegance and prosperity.

These days when one sees the term “oil” in the news, it tends to be associated with negatives. We see oil references to rail explosions, pipeline ruptures, tanker spills, job layoffs, fracing, carbon emissions, Middle East wars, and protests.

These days I don’t know if there is any intangible benefit in using the term “oil” to describe your product anymore. Maybe there is actually some intrinsic harm in doing so.

Tar (or bitumen) on the other hand, is a molasses-like substance generally viewed by the public as a material used to repair our streets and patch our roofs. A tar spill is not going to flow anywhere; it will barely flow out of the tank it is held in. What is there not to like about tar?

So next time there is a protest with signs being held up to “Stop the Tar Sands”, the oil companies should shrug their shoulders, jump on the band wagon, and say “Yeah, tar, that’s us. So what are you worried about?”.

They should try to commandeer the word “tar” back from the protest groups since there really is nothing wrong with tar. There seems to be a lot wrong with oil.

3D Printing – A Simple Idea

Date: May 25, 2015 Author: Ken Kuchling Comments: 4 Replies

We hear more and more about 3D printing and what it is able to do. 3D printers have come down in price and can be bought for under $500. Here is an example of using a 3D printer from a recent project that I consulted on.

The open pit was going to be located in hilly terrain, and issues related to haul road access, waste dump sites, and leach pad location were all important. The client used a 3D printer to create a small desktop model of the terrain, which was given to each of the consulting firms.

The photo below shows the scale of the model.

Members of the engineering team were each given their own 3D model to take back to their offices. Putting one of these on your desk helps with familiarity of the overall site and allows you to better understand the siting and drainage issues.

Topographic maps may give data on actual elevations and distances, but even a small 3D model gives you a feel for the site. The model shown above was for undisturbed topography but one could easily print off a similar model once the final pit and dump design is done.

With the current three-dimensional printing capabilities, creating simple 3D topographic models for the engineering team is feasible and I recommend doing so.

At the same time provide the Owner’s team with their own models, helping them understand the site issues that must be dealt with.

Potash Ore Grades – Check the Units

Date: May 20, 2015 Author: Ken Kuchling Comments: 3 Replies

Having worked with the potash industry for many years, I have reviewed numerous geological reports for projects in Canada, Asia, Russia, and Africa. One of the curious things that I have seen is the reporting of resource grades in two different units; either as potassium oxide (K2O) or potassium chloride (KCl).

Is it K2O or KCl ?

Standard practice in the Saskatchewan industry is reporting ore grades using K2O units, with typical head grades in the range of 25% K2O. Many of the international projects, but not all, have decided to use the KCl units. Therefore when comparing potash resource grades between deposits, one must be vigilant for the units used since there is a significant difference.

The conversion from K2O to KCl is based on the formula K2O = 0.6317 x KCl. So a grade of 25% K20 is equal to 25/0.6317 = 39.6% KCl. The KCl grade value is significantly higher. The unit issue is relevant with low grade deposits, were an actual grade of 15% K2O may be reported as 23.7% KCl. One might see the ore grade in KCl and assume it is comparable to Saskatchewan potash grades, when in reality they are quite different.

Concentration Ratio is the Key

When looking at different potash projects, particularly those involving underground mining, a key economic factor is the concentration ratio. This ratio represents the tonnes of potash ore needed to produce a tonne of final saleable product.

Typically the final potash product has a grade of 60% K2O. Therefore a potash ore with a grade of 25% K2O would have a concentration ratio of about 2.4:1 (60%/25%). This means that 2.4 tonnes of potash must be processed to produce 1 tonne of product (ignoring the process recovery factor). For a lower grade ore with a head grade of say 15% K2O, the concentration ratio is 4:1 (60%/15%).

This gives a rough sense for the comparable operation size required to meet the same final product production levels. This also gives a indication for the relative amounts of salt tailings requiring disposal. Low grade ore can generate significant quantities of tailings, the disposal of which is becoming a larger permitting issue.

In the past gold grades have been reported as “oz/ton” or currently as “g/t”, but most geological reports today are consistent with “g/t”. Sometimes US based gold projects may use “oz/ton” however the magnitude in reported grades are fairly obvious between grams and ounces. That isn’t the case with potash grades.

The bottom line is that potash is one commodity that will use different units when reporting ore grades. Investors and reviewers must be aware of which units are being used.

If you are into potash mining, I have written a couple of blog posts about my brief, but interesting, time working at a potash mine in Saskatchewan. This was early in my career and I had roles that included mine engineer, chief mine engineer and production foreman. Each of these roles gave me a different perspective about a mining operation. In this two part blog, I share some stories relating to the uniqueness of potash mining. If interested, here is the link “Stories from 3000 Feet Down – Part 1“.

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/.

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.

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

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.

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.

NI 43-101 puts a fair amount of legal liability on the Qualified Person preparing a resource or reserve estimate or sign off on an advanced study. The QP is to be responsible for the accuracy of their work and take legal responsibility.

Is the software doing everything correctly?

Irrespective of 43-101, if you are working at a mining operation the last thing you want to do is present management with an incorrect reserve, pit design, or production plan.

If you are a consultant, how agreeable will your client be when you tell him that his study was done using a novel software package and not one of the industry standard packages, and there was an error in it?

I recall working with a major mining company and there was a reluctance to adopt any new software that was unproven and not an industry standard. Money was not the issue; the company’s concern was with the risk in using unproven software.

What if you have a limited budget?

As a QP, I suggest the onus is on the software developers to demonstrate that they can produce reliable and comparable results under all conditions. They need to be able to convince the future users that their software is accurate.

Perhaps over time the new software will gain wider adoption and be generally accepted. We may see more 43-101 reports that use it and hence it will get more overall acceptance.

Another question when developing a market for new software is whether it is better to focus on more consultant adoption or more mining company adoption?

Will mining companies use the software if their consultants are using it, or will consultants use it if more companies adopt it? It’s an interesting discussion that new software vendors must deal with in trying to grow their market share.

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A few months ago there were some discussions on a now defunct blog site “I THINK MINING” and on a website (https://lindsaynewlandbowker.wordpress.com) regarding whether mine environmental approvals should be linked to the overall financial health of the parent company.

Are reclamation bonds of sufficient size?

A failure cleanup fund

One of the options being proposed is that the various mining companies in a jurisdiction each contribute money to a failure cleanup fund that could be used for mitigation purposes.

The ultimate goal of this idea may be better environmental practice or simply as a means to curtail mine development by handcuffing smaller companies.

Many deposits are too small for the major miners so the intermediate companies are the only ones interested in them. However if they don’t have the financial reserves in the corporate bank account, then their projects would not get approved.

Small companies would only be explorers

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 the junior industry. Perhaps everyone could really only be exploration companies.

One impact from this might be that new operators will be pushed towards dry stack tailings. Possibly the added costs for dry stacking could be offset against the need for the tailings failure fund.

Regardless of how it would be done, this would become an added cost to the mining industry at a time when it doesn’t need more cost pressures.

Many of these retirees enter the “independent consultant” stage of their careers.

I also hear from recruiters that there is a shortage of engineers willing to take remote or international assignments. This is particularly difficult when a senior level candidate has a growing family.

Can the independent engineers help out?

In a previous article (14. Miners – Why Have Your Own Independent Consultant?) I discussed why mining companies (or even consulting firms) should make use of the independent engineers as advisers or Board members.

So there likely is a significant network of experienced people out there. It’s just a matter of being able to tap into that network when someone needs specific expertise.

So how can one do this?

LinkedIn currently seems to be the only global network for technical people. It is a great way to connect with engineers and geologists industry wide.

LinkedIn members work everywhere, at mine operations, consulting firms, financial houses, as independents, or even retired. Almost every technical person I know is registered on LinkedIn.

The question is how to find these people when you are looking for a specific independent expertise for a short term or over the longer term.

Networking

Networking with people you already know is the most common approach. However what if you need someone with particular knowledge?

Update: This blog was originally written in June 2015, however many of the observations made then still hold in late 2018.

The general consensus over the last couple of years is that the junior mining sector is still in a state of flux.

I briefly touched on this in a previous article “12. Financings – It Helps to Have a Credible Path Forward”.

It is still difficult for junior miners to get funding and the stock prices of have been on a downward trend. Some observers say this just a temporary phase and the stock prices will cycle, as they have in the past. I’m not convinced that this will be the case, although I am hoping.

Metal prices may recover, but will stock prices?

Mining companies are constantly in the media with stories of cost over-runs, mine shutdowns, fatalities, strikes & protests, and environmental incidents.

In addition, the junior mining sector has had a few notable scams that nobody ever forgets about.

In some instances management were over promoting sub-optimal projects simply for the purpose of raising the stock price and cashing out. Not many companies fell into this category, but enough to create an unfavorable image of the industry.

I think it will take time to recover from the image being created by the events described above. Unfortunately new incidents only build on the perceived legacy.

The implementation of sustainable and green mining practices is an attempt to rehabilitate the image of mining, but is anyone out there listening?

Are investment practices changing?

Regarding today’s investment practices, I have three general observations:

Yield Investors: When many of us baby boomers were younger with a steady job, we were willing to speculate on mining stocks hoping for the big payoff. At the time there were some well publicized payoffs. Also there wasn’t much else to speculate on.

Now those same baby boomers are moving into retirement and financial planners are push them into fixed income and dividend paying investments. Be happy with a 2% to 5% yield. The risk tolerance for many of these investors has shifted from speculation / growth to income / capital retention.

I’m not sure how many of these people will ever re-enter the mining stock market. The majority of miners don’t pay any significant yield. Looking at the yield for Barrick (2%), Goldcorp (0.8%), and Yamana (0.85%), their yields are lower than those for the more conservative bank stocks (4%-6%).

Where to speculate now? Where might the 30 to 40 year old’s speculate today? Younger people today may still speculate with their free cash, but they are not hoping to be investors in the next Voisey’s Bay, Kidd Creek, or Hemlo. They have never even heard of them.

I don’t know whether the younger speculators will ever have interest in the mining sector since they never heard of it. There is so much other investing activity happening out there.

Complexity: To invest in a mining stock or understand a mining IR presentation, one needs a basic understanding of mining and geology. To understand a tech stock or bank stock, one does not need to be an expert in that industry. People will intuitively have a better comfort level with them.

Can mining companies provide more yield?

The larger mining companies will always have their investors like pension funds and mutual funds, however the junior miners may be a different story.

Possibly private equity and equity-based crowdfunding will be one of the long term solutions.

I have heard of one geological consulting firm that was trying to foster a plan to help crowdfunders with their 43-101 report even though they don’t yet have the money to pay for the report.

I also understand that Canada now has a few private equity stock exchanges that allow PE to change hands, which may facilitate more private equity involvement.

Conclusion

The bottom line is the mining industry needs to have a self-examination with respect to what the future holds. There is talk that mining needs to change its business model, but very little suggestion regarding what changes to make.

The growing population changing demographics, competition for equity funding, and society’s urbanization may result in fundamental, and permanent, changes to how the financial side of the junior mining industry can function. Just my opinion.

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Once the optimization step is complete, mining engineers will then design the pit inside that shell, introducing benches and ramps. The pit design should mimic the selected optimized shell as closely as possible.

The pit design may (or may not) closely replicate the optimization shell depending on the slope angles used in the optimization and where the haul ramps are located in the design.

Hence the actual ore and waste tonnages mined may be different that the tonnages defined by the optimizer.

Open Pit Optimization Uncertainties

Some of the uncertainties involved in the optimization approach are listed below:

Pit optimization can generate large pits that would have a long mine life. However one doesn’t really know the metal prices far into the future. So will that final pit ever get mined, or might it even be larger than shown.

Pit optimization is typically done at the start of a study, so one doesn’t have the detailed operating costs yet. The size of the project may be unknown and one has to use rough estimates for future costs and possibly even assume preliminary process recoveries.

Operating costs will also change in the future, and the optimization step is just a snapshot using current information.

The smaller pits, if developed, would consist of smaller operations and may have different operating costs than assumed in the optimization. Similarly larger pits may have different throughput rates and operating costs than assumed in the optimization.