Articles tagged with: Study Management

NPV a Disappointment? A Few Ways to Fix It

So, you just completed your initial PEA cashflow model and the resulting NPV and IRR are a little disappointing. They are not what everyone was expecting. They don’t meet the ideal targets of an IRR greater than 30% and an NPV that is more than 2x the initial capital cost. The project could now be on life support in the eyes of some.
Now what to do? Its time to jump into NPV repair mode.
Hopefully this blog post isn’t too controversial but will lead to some discussion about how studies are done.  Its based on observations I have made over the years as to what different studies will do to try to improve their economics.
The first thought typically is to lower (i.e. low ball) the capital and operating costs. We know that will certainly improve the economics. A risk with that is it might discredit the entire study if the costs are not in line with similar projects. Perhaps someone does a deep dive into the costing details or does some benchmarking against other projects. Also, advanced studies will develop more accurate costs, ultimately highlighting that the initial study was inaccurate and misleading. So overly optimistic, under-estimated costing is not a good approach.
What other things can help bump up the NPV? Let’s look at some of the ones I have seen, some of which I have applied in my work. I would expect (and hope) that some of these ideas will already have been adopted in the initial engineering and cashflow model.

Using the Time Value of Money

The discounting of cashflows in a cashflow model means that up-front revenues and costs have a bigger impact on the final economics than those far off in the future. This effect is amplified at higher discount rates.
Hence looking at ways to bring revenue forward or push costs backwards  are typically the first options considered. Here are a few of the ways this will be done.
High Grading and Stockpiling: One can bring revenue forward by using a Low Grade Ore stockpiling strategy. Select an elevated cutoff grade to define High Grade Ore and send only that ore to the plant. The Low Grade Ore can be placed into a stockpile and processed gradually or all at once at the end of the mine life. One must mine more tonnes to undertake stockpiling and will eventually incur an ore rehandling cost. However, in my experience, the early revenue benefit from high grade normally outweighs the associated cost impacts.
Stockpiling Tramming: If using the stockpiling approach described above, many assume that all stockpile rehandling to the crusher will simply be done by tramming with a wheel loader. Having to re-load the ore into trucks will cost more than double the cost of tramming. So place the ore stockpiles close to the crusher to lower rehandling costs.
Milling Soft Ore: If the deposit has both an upper soft ore (oxide, saprolite) and a deeper hard ore, one can take advantage of the soft material and push more ore tonnage through the plant at start-up. This will increase the up-front revenue. It may also allow the cost deferral of some plant components that are only needed for processing the harder ore.
Defer Stripping Tonnages: Delaying some waste stripping costs from pre-production (Y-1) to Year 1 or Year 2 will help improve the NPV. However, care must be taken that increasing mining tonnages in Year 1 or 2 doesn’t trigger the purchase of additional loaders and trucks. The deferred tonnes need to be small enough not to trigger a fleet size increase or could negate the impact of the cost deferral.
Capitalize Waste Stripping: It may be possible to capitalize waste stripping for satellite pits and pit wall pushbacks to better align stripping costs with the timing of ore mining. Capitalizing waste stripping may result in lower short term taxable income since the entire expense is not immediately deducted. This can reduce tax liabilities and improve cash flow. Each situation may be unique.
Accelerate Depreciation: In some jurisdictions, tax laws permit accelerated depreciation rates. This will help to lower or eliminate taxable income in the early years. This boosts the after-tax cashflow in those years, bumping up the NPV. If accelerated depreciation is the case, enhancing revenue (by high grading) at the same time, gives an even bigger nudge to the NPV. Maximize the revenue during tax free periods.
Apply Tax Losses: On some projects there are historical corporate tax loss carry-overs. These losses allow one to offset future taxes payable in the early years. This help bump up the initial after-tax cashflows.
Leasing of Equipment: One can look at equipment leasing to defer some of the initial capital costs. Leasing will distribute the purchase cost over several years (typically 60 months). Although the lease interest will increase the total cost of the machine, the capital cost deferral likely results in an NPV benefit.
Use Contract Mining: To avoid the entire cost of purchasing major mining equipment, many will look to contract mining. In studies, sometimes contract mining costs are estimated or they can be derived from budgetary contractor quotes. At an early stage these contractor quotes might be quite “favorable” as the contractor tries to stay in the good books of the mining company. Contract mining will greatly reduce the mining equipment capital cost and can help the NPV, even if the unit mining costs may be slightly higher with a contractor.

Using Other Cashflow Tweaks

There are other tweaks that one can make to the cashflow model. Sometimes several of the small ones, when compounded together, will result in a significant impact. Here are some of the other cashflow model adjustments that I have seen.
Increase Metal Prices: Normally when selecting metal prices for the cashflow model one looks at; trailing averages; analyst consensus forecasts; marketing study forecasts; and prices being used in other current studies. It is usually simple to defend whatever price you wish to use. In a rising price environment, one can see what other recent studies have used and escalate those prices by 5%-10%. That likely won’t be viewed as unreasonable. After all, someone has to be the trailblazer in raising modelling metal prices.
Improve metal recoveries: At an early study stage, one may have limited number of metallurgical tests upon which to base the process recoveries. I have seen some bump up the recoveries slightly and add the statement “Further metallurgical testing, grind size optimization, and reagent optimization should improve the recovery above those shown by the current test work”. This can gain a bit of revenue at no extra cost.
Optimistic Dilution: It can be very difficult to predict ore mining dilution at an early stage. Two different engineers looking at he same mining method, may come up with different dilution assumptions. Hence one may have the opportunity to select an optimistic dilution. Lower dilution will increase the head grade to the mill and hence increase the revenue at no extra cost. Even a modest reduction in dilution will play its role in nudging up the NPV.
Reduction in Working Capital: Some cashflow models do not include the cost for working capital, while others will include it. Working capital is the money needed on hand to pay the monthly operating cost in Year 1 before payable revenue is generated. If difficulties arise in achieving commercial production, one wishes to have more working capital on hand. Working capital typical is 2-4 months of operating cost. To bump up NPV, some will use the lower range of 2 months working capital. Some will just omit working capital entirely. Take a look at the working capital needs and decide what is reasonable.
Buy the Royalty: Some projects may have the option for a company to buy out the royalty from the royalty holder. Although doing this may result in an upfront cost, the payable royalty saving may offset that up-front buy-out cost. At high metal prices, the royalty saving could be significant.
Reclamation Cost Equals Salvage Value: At the end of the mine life, the final closure and reclamation cost will be in the tens of millions of dollars. Although this cost is heavily discounted back to the start of the cashflow model, I have seen cases where it is assumed that salvage value of the mine and plant equipment is sufficient to pay the entire closure cost. I don’t know how realistic this is, but I have seen that assumption used.
Lower The Discount Rate:  A few years ago, it seems the benchmark discount rate was 5% used in most studies.   In 2024, the cost of capital has gone up.  Hence many studies seem to be using 8%-10% as their base case.   A project at the PEA stage today isn’t going to be built for a few years.  Some can argue that interest rates will likely be lower in a few years, and so using 5% discount rate today is still reasonable.  Conversely some will maintain that is is best to use what others are using so that current projects are all comparable.

Conclusion

Don’t let a disappointing NPV get you down. There may be a few ways to boost the NPV by applying some common practices. However, if after applying all of these adjustments, the NPV still isn’t great, something bigger may be required. That could be an entire project scope re-think.
Or go drill for more ore higher grade ore.
Or low-ball the cost estimates (just kidding).
I have heard that if the project requires fancy tax manipulation to make it work, then it isn’t a good project to begin with. If taxes are critical, the economics may be too marginal.
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The Anatomy of 43-101 Chapter 16 – Mining (Part 2)

Part 2 of this blog post will focus on the remaining engineering work to finish Chapter 16 of the Technical Report. We only wrote about half of it in Part 1. The mining engineer can generally handle the rest of these tasks without requiring a lot of external input. You can read Part 1 at this link “The Anatomy of 43-101 Chapter 16 – Mining (Part 1)”.
The pit design and phases were completed at the end of Part 1, and we can move on to scheduling.

4. Production Scheduling

Once the pit design is complete, everyone will be calling for the production schedule as soon as possible. Others on the team are waiting for it. The tailings engineers need the production schedule for the tailings stage design. The process engineers need the scheduled head grades to finalize sizing the plant components. The client wants the schedule to plug into their internal cashflow model for a quick peek at the economics.
However, before the mine engineer can start scheduling, the dilution approach needs to be selected. Dilution is waste that is mixed in with ore during mining. A high amount of dilution can dramatically lower the processed head grades. There may be a desire to “low ball” the dilution to make the grades look better, but the engineer should base the dilution on what they would expect to see.
Two dilution approaches are common. One can either construct a diluted block model; or one can apply dilution afterwards in the production schedule. I have used both approaches at different times.
The production schedule must be on a diluted basis, since that represents what the processing plant will actually see.
Generally, two different production schedules must be created: (i) a Mining schedule, and (ii) a Processing schedule. In some instances, they may be one and the same schedule. However, if any ore stockpiling is done, then the Mining schedule will be separate from the Processing schedule.
The Mining schedule shows ore going directly to the plant and ore going into the stockpiles. The Processing schedule will show ore delivered directly from the mine and ore reclaimed from stockpiles. Building stockpiles and pulling ore from stockpiles are two independent activities.
ore stockpileSometimes lower grade stockpiles are built up by the mine each year but only processed at the end of the mine life. Periodically the ore mining rate may exceed the processing rate and other times it may be less.  This is where the stockpile provides its service, smoothing the ore delivery to the plant.
Scheduling can be done with variable time periods. Perhaps the schedule is generated using monthly time periods, or quarters, or years.
The 43-101 report will normally show the annual production schedule, but that does not mean it was generated that way. I prefer to use short time periods (monthly or quarterly) for the entire mine life, to ensure ore is always available to feed the plant. A 10 year mine life would result in 120 monthly time periods, so output spreadsheets can get large.
Scheduling can be done manually (in Excel) or by using commercial software, like Datamine’s NPVS. The commercial software is better in that it allows one to run different scenarios more quickly, and it does a lot of the thinking for the engineer. It also does a good job of stockpile tracking. It also decides when it is necessary to transition to mining in satellite pits.
Once the schedules are finalized, they are normally reviewed by the client for approval. The strip ratio and ore grade profile by date are of interest. One may then be asked to look to at different stockpiling approaches to see if an NPV (i.e. head grade) improvement is possible.
One can stockpile lower grade ore and feed the plant with better grade by mining at a higher rate with more equipment. One might need to examine iterative schedules of that type.
Sometimes one must take two steps backwards and re-design some of the initial pit phases to reduce waste stripping or improve grades. Then one would run the schedules again until getting one that satisfies everyone.
Now that the schedule is complete, we can write up the Chapter 16 text up to page 15. We’re getting closer to the end.

5. Site Layout Design

Diavik mines

With the pit tonnages and mining sequence from the schedule, the mine engineers can start to look at the site layout (waste dumps and haul roads). Normally the tailings engineers will be responsible for the tailings layout. However, if there is no tailings engineer on the PEA team, the mining engineer may look after this too.
First there is a need for a waste balance. This defines how much mined overburden or waste rock will be needed to build haulroads, laydown pads, and tailings dams. Then the remaining waste volume must be placed into waste dumps.
Hopefully the tailings engineers have finished their tailings dam construction sequence by this time to provide their rockfill needs (although unlikely if you only gave them the production schedule two days ago).
The geotechnical engineers will provide the waste dump design criteria; for example, 3:1 overall side slope using 15m high dump lifts. Ideally it is nice to have soil and foundation information beneath the waste dump sites, but at PEA stage most often this isn’t available. The dump locations are only being defined now.
The mining engineers will size the various waste dumps to their required capacity. Then they can lay out the mine haulroads from the pit ramps exits to the ore crusher, the ore stockpiles, and to each waste dump.
That’s it for the site layout input. Add another 2 pages to Chapter 16. Now the mining engineers can look at the mining equipment fleet.

6. Fleet Sizing and Mining Manpower

The last task for the mine engineer in Chapter 16 is estimating the open pit equipment fleet and manpower needs. The capital and operating costs for the mining operation will also be calculated as part of this work, but the costs are only presented in Chapter 21.
The primary pieces of equipment are the haul trucks. They can range in size from 30 tonnes to 350 tonnes and anywhere in between.
Typically, the larger the equipment is, the lower the unit cost ($/t), especially in jurisdictions where labor costs are high. One doesn’t want a mine fleet with only 5 trucks nor one with 50 trucks. So where is the happy medium?
Once the schedule and site layout are complete, the mine engineers can run the truck haul cycles, in minutes. They need to estimate the time to drive from the pit face, up the ramp, to the waste dump, to the ore crusher, and return back into the mine. Cycle times determine the truck productivity, in tonnes per hour per truck and include the time to load the truck. Some destinations may have long cycle times (to a far off crusher) while others may be quick (to an adjacent waste dump).

Open Pit Slope

The cycle time must be calculated for each material type going to each destination. As the pit deepens, the cycle times increase.
Very simplistically, if a 100 tonne truck has a 20 minute cycle time, it can do three cycles in an hour (300 tph). If one has to mine 10 million tonnes of ore per year, then that would require 33,300 truck hours. If a single truck provides 6500 operating hours per year, that activity would require a fleet of 5 trucks. The same calculation goes for waste.
The total trucking hours will vary year to year as waste stripping tonnages change or haul cycle times increase in deeper pits. The required truck fleet may vary year to year.  Keeping haul distance short and haul cycles quick is the key to a lower cost mine.
The mine engineers undertake the productivity calculations for loading equipment to estimate annual operating hours, and the required shovel / loader fleet size.
The support equipment needs (dozers, graders, pickups, mechanics trucks, etc.) are typically fixed. For example, 2 graders per year regardless if the annual tonnages mined fluctuate.
The support equipment needs are normally based on the mining engineer’s experience. Hence the benefit of actually working at a mine at some point in your career.
Blasting includes both the blasthole drilling activity and hole charging. The mining engineer estimates drill productivity and specifications based on the bench height, the expected rock mass quality, and the power factor (kg/t) need to properly demolish the rock.
Finally, the mine operation manpower is estimated based on all the equipment operating hours as well as the fixed number of personnel to support and supervise the mine.
This essentially concludes the mining information presented in Chapter 16 of a typical 43-101 open pit report.

Conclusion

These two blog posts hopefully give an overview of some of the things that mining engineers do as part of their jobs. Hopefully the posts also shed light on the amount of work that goes into Chapter 16 of a 43-101 report. While that chapter may not seem that long compared to some of the others, a lot of the effort is behind the scenes.
Some will say PEA’s are not very accurate documents that should be taken with a grain of salt. One should understand that engineers are working with a limited amount of information at this early stage while forming the concept for the proposed operation.
The subsequent study stages are where more accurate costs are expected and can be demanded.
I don’t know if this overview makes one want to sign up to be a mining engineer or learn to code instead. None of this is rocket science; it just requires practical thinking.
If young people want to get into mining, but not sure into which aspect, I suggest go read through a 43-101 report. There are sections describing exploration, resource modelling, mine engineering, metallurgy, geotechnical engineering, environmental, and financial modelling. Its all in one document. See if any of these areas are of interest to you. Universities should use 43-101 reports as part of their mining engineering curriculum.
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The Anatomy of 43-101 Chapter 16 – Mining (Part 1)

When people learn that I’m a mining engineer, I’ll normally get perplexed looks and asked what that job is about.    Most never even knew the job existed.
So I thought what better way to explain the mining engineer role than by describing the anatomy of a typical Chapter 16 (MINING) in a 43-101 Technical Report.  That chapter is a good example of the range of tasks typically undertaken by mining engineers.
Secondarily it also provides an opportunity to describe in detail all the steps that go into writing a Chapter 16, focusing on the PEA.
PEA’s tend to have a poor reputation for lack of accuracy, and this blog post may shed some light on why that is.  To avoid running on too long, I have subdivided this into Part 1 and Part 2.
Generally, one will see a single QP sign off on Chapter 16.  However, the chapter requires input from several people.   Section 16 is generally prepared in the same way for a PEA or a feasibility study (FS).   The main difference is related to the amount of hard supporting data in a FS versus a PEA.
The PEA will rely on many “reasonable assumptions” and it can be done in at least half the time of a FS.  A FS will also build on previous study decisions, something a PEA doesn’t have access to since it is a first time snapshot of a project.
Normally preparing Chapter 16 is done under time pressure to deliver results as quickly as possible.  Other study team members are waiting for its output to finalize their own engineering work.

1. Define the Mine

In a PEA, the first thing that must be conceptualized is whether this will be an open pit (OP) mine, underground (UG), or a combination of both.
Geological pit sectionThere is always a mineral resource estimate available before doing a PEA.   The way the resource is reported will indicate what type of mine this likely is.  The geologists have already done some of the mining engineer’s work.
The mineral resource will suggest if this will be an OP or UG, a large or small operation, a long life or short life, and the likely processing method. The framework for the project is already set at the mineral resource estimate stage.
We can now write page 1 of Chapter 16.

2. Optimize the Pit Size and Shape

The first step for the mining engineer is a pit optimization analysis to define the approximate size and shape of the pit.  The pit optimization step creates a series of nested economic pit shells for different metal prices.  For example, the base case gold price may be $1800/oz, but we still want to see what size of pit would be economic at $1000/oz, $1200, $1300, etc.   Normally one may run 50 different price scenario increments.   The smaller shells may eventually be good starter pits to help improve NPV and payback time.
Before starting pit optimization, we require economic inputs from several people.   The base case metal prices must be selected (normally with input from the client).  The mining operating cost per tonne must be estimated (by the mining engineer).  The processing engineers will provide the processing cost and recovery for each ore type.
The geotechnical engineers will provide approximate pit wall angles.  All  of these inputs have to be forecasted at a very early stage.  We don’t yet know the size of the pit, the ore tonnage available, nor the actual plant throughput rate but one must still predict some costs.  Hence these initial inputs might just be ballpark data.
In the final cashflow model you may eventually see slightly different metal prices, costs, or recoveries than used in pit optimization.  That’s because that cashflow model inputs are generated by the study, while the optimization inputs are pre-study estimates.
The pit optimization step may also need to apply constraint boundaries.  For example, if there is a nearby property limit or river, one may want to constrain the pit optimization to get no closer than 50 metres to the river or boundary.   The pit shell optimizer may be free to expand the pit outwards in multiple directions, except that one direction.
Once the optimization is run, a series of nested pit shells are created, each with its own tonnes and grade.   These shells are compared for incremental strip ratio, incremental head grade, total tonnes, and contained metal.
A decision must now be made on which shell to use for the mine design.    Larger economic shells may have more tonnes, lower grade, and higher strip ratio.  Smaller shells may have lower strip ratio and better grade.
For example, a smaller shell may have 10 year life containing 800,000 oz at a strip ratio of 2:1 while a larger shell may have 14 years, 1 million oz at a strip ratio of 3:1.  Both are roughly the same economically.  However, developing the larger shell may require more mining equipment capital yet have a lower average cost per tonne. Which shell do you choose?
There can be dozens of such shell to shell trade-offs and typically one doesn’t run schedules and cost models on all of them. The client will have input on whether they wish to move forward with 10 years 800,000 oz or the 14 years with 1 million oz.  Sometimes selection is driven by investors having size expectations that need to be met.
Some people may say ‘Well… just run cashflow models for each case to see which is best”. The problem with doing too much analysis at this stage is that if you re-do the pit optimization with different recovery, operating costs, pit wall angles, you will get a different optimization result.  It becomes a question of how much detail work to do on something that is based on very preliminary input parameters.
Assuming the mining engineers have now selected the preferred shell for mine design, they can move on to mine design.  We can now write more of Chapter 16 to page 5.

3. Open Pit Design.

The mining engineer is now ready to undertake the pit design. The pit design step introduces a benched slope profile, smooths out the pit shape, and adds haulroads.   Hence a couple of key input parameters are required at this time.  The mining engineer will need to know the geotechnical pit slope criteria and the truck size & haul road widths.  Let’s look at both of these.
Pit Slopes: Geotechnical engineers are responsible for providing the slope angle criteria to the mining engineers.   The geotech engineers may have a lot or little information to work with.   Perhaps they have geotechnical oriented core holes and they have undertaken some rock strength testing.
Perhaps the only information for the geotechnical engineers is rock quality data from exploration drilling.   I have seen both situations at the PEA stage; the latter is more typical.  In the feasibility study they would have geotechnical core hole data available.  At the PEA stage, that is less likely, since no one yet knows the size and depth of the pit.  We are only getting to that now.
Pit wall schematic

Pit wall schematic

The geotechnical engineers will provide the inter-ramp slope angles, specified by catch bench widths and bench face angles.   The engineers may subdivide slopes by rock type.
For example: the overburden wall is to be at 30 degrees, the underlying oxide rock at 40 degrees and the deeper fresh rock wall at 55 degrees.  Additionally, the pit may be subdivided into pie shaped sectors, with differing slope criteria.
For example, the fresh rock on the west wall might have a 55 degree angle, but the east wall fresh rock may only allow 50 degrees and the south wall is 45 deg.
The more sectors and differing slope criteria, the more complex it is to do the pit design.   Normally you don’t see geotechnical engineers signing off as QP’s for Chapter 16, although they had key input into the pit design.
Ramps: Next the mining engineer needs to select the truck size, even though the production schedule has not yet been created.
Trucks sizes can vary between 30t up to 350t.  A double lane ramp width is approximately 4.5 times the truck width, including space for a ditch and an outer safety berm.   A 90 tonne truck is 6.7 metres wide (haulroad of 30m) while a 350 tonne truck is 9.8 m wide (haulroad of 44 m wide).    That’s a 14m width difference.
The haul road gradient is normally 10%, which means a 200 metre deep pit requires a ramp length of 2000 metres to get to the bottom.  It can be difficult to fit a 2 kilometre ramp in a small pit without pushing the walls out to provide enough circumference to get to depth.
Ramps can spiral around the pit, or they can zigzag back and forth on one side of the pit (switchbacks).  The mine engineer will decide this once they see the topography, pit size, and ore body orientation.   Adding ramps in a pit design pushes the crest outwards and adds waste to be stripped.
Pit Phases: After the pit design is complete, the mine engineer will design multiple interior phases to distribute the waste and ore tonnages in the mining schedule.  These phases are sometimes referred to as pushbacks, laybacks, or stages. At mine start-up, one doesn’t want to strip the entire top off of a large pit.   A smaller pit within the large pit will allow faster access to ore.
This completes the open pit design and now allows one to write to page 10 of Chapter 16.  However, the mining engineer is not done yet.

Conclusion

This ends Part 1.  In Part 2 we will discuss the mining engineer’s next tasks; production scheduling; waste dump design; and equipment selection.   The mining engineer QP will sign off and take responsibility for all the mine design work done so far.    You can read Part 2 at this link “The Anatomy of 43-101 Chapter 16 – Mining (Part 2)“.
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Mine Builders vs Mine Vendors

Normally when Major or Intermediate miners advance their projects through the study stages, they usually have the intent to build the mine at some time.  Sometimes they may decide to sell the project if it no longer fits in their corporate vision or if they desperately need some cash.   However, selling the project was likely not their initial intent.
On the other hand, Junior miners tend to follow one of two paths.  They are either on (a) the Mine Builder path, or (b) the Mine Vendor path (i.e. sell the project).  In this article, I will present some examples of companies on each path.   There will also be some discussion on whether the engineers undertaking the early stage studies (e.g., PEA’s) should be considering the path being followed.

The Mine Builder Path

The Mine Builder generally follows a systematic approach, as sketched out in the image below.  The project advances from drilling to Mineral Resource Estimate (MRE), scoping study (PEA), then through the Pre-Feasibility Study (PFS) and/or Feasibility Study (FS) stages.  Environmental permitting is normally proceeding in conjunction with the engineering. Once the FS is complete, the next hurdles for the Mine Builder are financing and construction.   The path is fairly orderly.
Mining Project Builder Path
The amount of the exploration drilling is only needed to define an economic resource to the Measured and Indicated classifications.   There is no requirement to delineate the mineral resource on the entire property since there will be time to do that during production.   Demonstrating an economic resource, with some upside potential, is often sufficient for the Mine Builder.
Three examples of companies on the Builder path are shown below; Orla Camino Rojo gold project (in operation), SilverCrest Las Chispas gold project (in operation), and Nexgen Rook uranium project (financing stage).   Although the duration of each timeline is different due to different project complexities, the development paths are consistent.  Most junior miners would not consider themselves on the Builder path.

The Mine Vendor Path

Mine Vendor type organizations have the primary goal of selling their project.  These companies may consist of management teams that don’t have the desire, comfort, or capability to put a mine into production. For example, this is often the case with companies founded by exploration geologists, whereby their plan is to explore, grow, and sell all (or part) of the project.   In other cases the Junior miner realizes their project is large with a high capital cost.  That capital cost is beyond the financial capability of the company.  Hence a deep-pocket partner is required or an outright sale is preferred.
Mining Project Vendor Path
The Mine Vendors tend to follow a different development path than the Mine Builders. They don’t have the same long term objectives.  Vendors want out at some point.
The Vendor path can be more irregular, with multiple studies undertaken at different levels of detail, sometimes stepping back to lower level of studies as more information is acquired.  Their object is to make the project look good to potential buyers, and look better than their junior miner competitors also for sale.  Often this ongoing project improvement process is termed “de-risking”.
Not only must the Vendors demonstrate an economic resource, they must demonstrate a highly valuable resource to maximize the acquisition price for the shareholders.  They will try to do this through multiple drill campaigns followed by multiple studies, each one looking better than the prior one.
Sometimes you will see a management team indicate that, if the project isn’t sold, they are going to put it into production themselves.  This may be true in some cases, or simply part of the negotiating game to try to maximize the acquisition price.
Two quick examples of companies on the Vendor path are shown below: Western Copper Casino project and Seabridge KSM project.  The durations of these development timelines are extensive and expensive, while waiting for an interested buyer.   During these periods, the companies may continue to spend money de-risk the project further.  The hope is that the company can eventually make the project attractive or that changing market conditions will make it attractive for them.   Unfortunately, there is always the possibility that no buyer will ever come along.

Engineer’s Perspective

One question is whether the independent geologists and engineers working on the advanced studies should be aware of the path the company is following. Is the company a Builder or a Vendor?
Some may feel that the technical work should be independent of the path being followed.  Based on my experience as both an owner’s representative and independent study QP, I have a somewhat different opinion.  The technical work should be tailored to the intended path.

The Engineer on the Mine Builder Path: 

If an engineer understands that a Mine Builder’s project will move from PEA to PFS to FS in rapid succession, then there is more incentive to ensure each study is somewhat integrated.
For example, a PEA will use Inferred resources in the economics.  However, if the project will advance to the PFS stage, where Inferred cannot be used, then it is important for the PEA to understand the role that Inferred plays in the economics.    How much drilling will be needed to upgrade Inferred resource to Indicated for the PFS, if needed at all?
Typically, capital costs tend to increase as advancing studies get more accurate due to greater levels of engineering.   A Builder wants to avoid large cost increases when moving from PEA to PFS to FS.  Therefore, when costing at the PEA stage, one may wish to increase contingency or use conservative design assumptions.  After all, one is not trying to sell or promote the project internally, but rather move it towards production.
There is no value to the Mine Builder by fooling themselves with low-balled cost estimates.  (Although some may argue there is still a desire to low ball costs to get management to approve the project).    Conversely Mine Vendors do have some incentive to low ball the costs.
Perhaps some of the recent project capital cost over-runs we have seen is that the Vendor mentality was used at the PEA stage to optimistically set the capital cost baseline.  Subsequent studies were then forced to conform to that initial baseline. Ultimately construction will be the arbiter on the true project cost.  Hence there is no real value in underestimating costs, ultimately making management appear incompetent if costs do over-run.
The Mine Builder will also be advancing environmental permitting simultaneously with their advanced studies.  Hence at the early stage (PEA) it is important to properly define the site layout, processing method, production rate, facility locations, etc. since they all feed into the permitting documents.
Changing significant design details in the future will set back the permitting and construction timelines.  Hence, for the Mine Builder, the engineers should focus on getting the design criteria mostly correct at the PEA stage.  For the Mine Vendor, this is not as important since multiple studies are being planned for in the future anyway.

The Engineer on the Mine Vendor Path: 

The objective of the Mine Vendor is to make the project attractive to potential buyers.  There is less urgency in fast tracking detailed engineering and permitting.
It is not uncommon to see multiple drilling programs, followed my multiple studies of scenarios with different size, production rate, and layout.   The degree of engineering conservativeness in design and costing is less critical since future studies may be on substantially different sized projects.
The role that the Inferred resource plays in the economics is also less important at this time, since a lot more drilling may be coming. The Vendor’s objective tends to be on maximizing resource size not necessarily optimizing resource classification.
While the Mine Vendor may also be advancing environmental permitting as another way to de-risk the project, the project design may still be in flux as the resource size changes.  Major modifications to the plan may cause permitting to stop and re-start, leading to an extended project timeline and wasted money.
There is also risk in starting the permitting with a project definition that isn’t of economic interest to future buyers.  Sometimes the Vendor may be making regulatory commitments that constrain the operating flexibility of future mine operators. Its easy to commit to things when you aren’t the one having to live up to them.
The Mine Vendor will also de-risk the project by moving from PEA to PFS and even to FS.   The caution with completing a FS is that it is a costly study and essentially brings one to the end of the study line.  What does the company do next if there is still no buyer?
Feasibility studies also have a shelf life, with the cost estimates and economics becoming inaccurate after a few years.  Some companies may re-examine the project, re-frame it, and jump back to the PEA or PFS stages.  There can be an on-going study loop, requiring continued funding with no guarantee of a sale in sight.  Often feasibility studies have the dual role of trying to boost the share price and market cap, as well as frame the project for potential buyers.

Conclusion

As an engineer, it is helpful to understand the objectives of the project owner and then tailor the technical studies to meet those objectives.  This does not mean low balling costs to make the study a promotional tool.  It means focusing on what is important.  It means recognizing the path, and what doesn’t need to be engineered in detail at this time.  This may save the client time, money, and improve credibility in the long run.
In many cases, the precise size of the deposit is less important than understanding the site, access, water supply, local community issues, the environmentally acceptable location for dumps and tailings, etc..   It can be more important to focus on these issues rather than having a detailed mine plan with multiple pit phases that immediately becomes obsolete in a few months after the next drilling campaign.
Potential buyers will have their own technical team that will develop their own opinions on what the project should be and what it should cost.   Just because a Mine Vendor has a feasibility study in hand, doesn’t mean a potential buyer will believe it.
This post is just a brief discussion of mining project timelines.   For those interested, there a few additional project timelines for curiosity purposes.   Each path is unique because no two mining projects are the same.  You can find these examples at this link “Mining Project Timelines”.
Let me know about other interesting projects that have interesting paths to learn from.  I can add them to the list.
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/

 

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NPV One – Cashflow Modelling Without Excel

NPV One mining software
From time to time, I encounter interesting software applications related to the mining industry.  I recently became aware of NPV One, an Australian based, cloud hosted application used to calculate mineral project economics. Their website is https://npvone.com/npvone/
NPV One is targeting to replace the typical Excel based cashflow model with an online cloud model. It reminds me of personal income tax software, where one simply inputs the income and expense information, and then the software takes over doing all the calculations and outputting the result.
NPV One may be well suited for those not comfortable with Excel modelling, or not comfortable building Excel logic for depreciation, income tax, or financing calculations. These calculations are already built in the NPV One application.
I had a quick review of NPV One, being given free access to test it out. I spent a bit of time looking at the input menus and outputs, but by no means am I proficient in the software after this short review.
Like everything, I saw some very good aspects and some possible limitations. However, my observations may be a bit skewed since I do a lot of Excel modelling and have a strong comfort level with it. Nevertheless, Excel cashflow modelling has its own pro’s and con’s, some of which have been irritants for years.

NPV One – Pros and Cons

NPV One mining softwarePros

  1. NPV One develops financial models that are in a standardized format. Models will be very similar to one another regardless of who creates it. We are familiar with Excel “artists” that have their own modelling style that can make sharing working models difficult. NPV One might be a good standard solution for large collaborative teams looking at multiple projects while working in multiple offices.
  2. NPV One, I have been assured, is error free. A drawback with Excel modelling is the possibility of formula errors in a model, either during the initial model build or by a collaborator overwriting a cell on purpose (or inadvertently).
  3. With NPV One, a user doesn’t need to be an Excel or tax modelling expert to run an economic analysis since it handles all the calculations internally.
  4. NPV One allows the uploading of large input data sets; for example life-of-mine production schedules with multiple ore grades per year. This means technical teams can still generate their output (production schedules, annual cost summaries, etc.) in Excel. They can then simply import the relevant rows of data into NPV One using user-created templates in CSV format.
  5. As NPV One evolves over time with more client input, functionality and usability may improve as new features are added or modified.

Cons

Like anything, nothing is perfect and NPV may have a few issues for me.
  1. Since I live and breathe with Excel, working with an input-based model can be uncomfortable and take time to get accustomed to. Unlike Excel, in NPV One, one cannot see the entire model at once and scroll down a specific year to see production, processing, revenue, costs, and cashflow. With NPV jump to. If you’re not an avid Excel user, this issue may not be a big deal.
  2. In Excel one can see the individual formulas as to how a value is being calculated.  Excel allows one to follow a mathematical trail if one is uncertain which parameters are being used. With NPV One the calculations are built in. I have been assured there are no errors in NPV One, so accuracy is not the issue for me. It’s more the lack of ability to dissect a calculation to learn how it is done.
  3. With NPV One, a team of people may be involved in using it. That’s the benefit of collaborative cloud software. However that means there will be a learning curve or training sessions that would be required before giving anyone access to the NPV One model.  Although much of NPV One is intuitive, one still needs to be shown how to input and adjust certain parameters.
  4. Currently NPV One does not have the functionality to run Monte Carlo simulations, like Excel does with @Risk. I understand NPV One can introduce this functionality if there is user demand for it. There will likely be ongoing conflict to try to keep the software simple to use versus accommodating the requests of customers to tailor the software to their specific needs.

Conclusion

The NPV One software is an option for those wishing to standardize or simplify their financial modelling.
Whether using Excel or NPV One, I would recommend that a single person is still responsible for the initial development and maintenance of a financial model. The evaluation of alternate scenarios must be managed to avoid it becoming a modelling team free for all.
Regarding the cost for NPV One, I understand they are moving away from a fixed purchase price arrangement to a subscription based model. I don’t have the details for their new pricing strategy as of May 2023. Contact Christian Kunze (ck@npvone.com) who can explain more, give you a demo, and maybe even provide a trial access period to test drive the software.
To clarify I received no compensation for writing this blog post, it is solely my personal opinion.
Regarding Excel model complexity mentioned earlier, I have written a previous blog about the desire to keep cashflow models simple and not works of art. You can read that blog at Mine Financial Modelling – Please Think of Others”.
As with any new mining software, I had also posted some concerns with QP responsibilities as pertaining to new software and 43-101. You can read that post at the appropriately titled “New Mining Software and 43-101 Legal Issues”.

 

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Life as an Engineer – Read All About It

One of the interesting aspects of being an engineer in the mining industry is travelling around the globe (or even) around your own country. I have been to over a dozen countries as part of my career and this only makes me a small-time traveller compared to other engineers I know. Travelling and experiencing the world is often part of the job, whether working for a junior miner, a major, a financial house, a consulting firm, or an equipment vendor. It is actually quite difficult to avoid travel if you work in mining.

Diavik Project

Recently a former colleague of mine on the Diavik Diamond Diavik project has published book that describes his life as an engineer. The book is titled Roseway: a Life of Adventure and is available on Amazon.
Its the story of John Wonnacott, a Canadian professional engineer who was involved in the construction of several projects, including the Diavik Diamond mine in Canada, a nickel smelter in China, a gold mine in Brazil, and a titanium mine in Madagascar to list a few.
John has a broad background, having conducted engineering studies in the jungles of Indonesia, the cold of Greenland, the sands of the desert, the heat of Australia, the altitude of the Andes. He has documented his engineering career in his new book.
Disclaimer: I have not yet read the book since it has only recently been published. However John has kindly sent me some excerpts that I have reprinted below to provide everyone with a sense for the content and style.

Some Excerpts

Introduction

At one time or another, I have been a professional paper-boy, forest worker, tree planter, market gardener, food processing equipment operator, lobster fisherman’s helper, commercial dragger deckhand, short-order cook, military engineering officer, computer system installer, greenhouse worker, permafrost researcher, marine oil spill cleanup specialist, pyrometallurgy researcher, garbage landfill operator, project manager, construction company general manager, regional director, open pit diamond miner, underground gold miner, corporate vice-president, design consultant, company owner, private corporation president and for 50 years, a damn good engineer. I have also been happily married to my wonderful wife Carole Anne for more than 52 years and we have 2 outstanding children. So I can add “husband”, “father” and “grandfather” to the list – but making lists like this is boring. Let me tell you my story.

Newfoundland

I remember in the late fall of that year, the company had a chance to bid on a larger project in Gros Morne National Park, Newfoundland. So our President, Frank Nolan (he was a brother to Fred Nolan, the infamous land-owner at Oak Island, by the way), decided he wanted to see the site and he chartered a Bell 106 helicopter to fly us there from Deer Lake. It was December (they say “December month” in that province) and when we got close to the Park, we ran into a sudden snow squall.
From bright sunny weather we were suddenly flying in heavy wet snow. I was sitting in the back of the chopper, with Frank sitting in the left front passenger seat. We were chatting with the pilot, via the radio headsets, when suddenly there was a loud “BEEP BEEP BEEP” sound coming from the front of the aircraft, and a number of the instrument lights started flashing. The engine had cut out – we learned later that wet snow had blocked the air intake and the engine had stalled – and we started descending pretty fast. Most people don’t realize that a helicopter will glide (quite steeply, at a glide angle of about 10 to 1) provided the pilot gets the torque off the rotor and he makes the correct feathering adjustments.
Our pilot did that instinctively and when we passed through the squall he calmly explained to us what was happening as he looked around for an open, flat spot to land. We didn’t have many options as we were flying over a densely wooded forest, with the mountains of Gros Morne and a deep fiord up ahead. But the pilot spotted a snow-covered frozen bog that was not a lot bigger than the helicopter and he put us down there as smoothly as if the engine hadn’t stopped. Maybe the deep snow cushioned our impact, because I felt nothing. But the instant we landed, Frank Nolan wrenched his door open, and he bolted out of the machine, straight ahead, in front of us.
The rotor was still spinning rapidly, and just as Frank ran ahead, the chopper settled further into the snow, tilting the machine forward in the process. With the chopper blades almost skimming the top of the snow, both the pilot and I expected Frank to be cut into pieces by the rotor, but he was just past their reach and he ran on, unaware of his narrow escape. When the spinning parts stopped, the pilot and I climbed out of the chopper to catch up with Frank. Examination of the machine showed us how the snow had plugged the air intake. The pilot cleared away the snow, and walked around the chopper once and then we took off again. We continued our aerial inspection of the National Park project and later that afternoon we flew back to Deer Lake.

Madagascar

The QMM field office In Port Dauphin, Madagascar was located near the edge of town, and I typically walked from my lodging to the office each morning when I was there, about the time when school started for the children. Typically I passed dozens and dozens of tiny bamboo huts with corrugated metal roofs, and dirt floors each about 2 meters square.
I was constantly amazed by the flocks of young boys and girls walking to school – each child aged from 6 to 15 years old, I suppose – dressed in immaculate white shirt or blouse and blue shorts or skirts. I never saw a dirty child, and how they could have kept clean clothes while living in those small crude huts was something I never could figure out. Even more amazing, were the genuine, wide smiles and frequent greeting as we passed the children: “bonjour monsieur, bonjour monsieur”.
It brings tears to my eyes even now, thinking about those children. If they were girls, they could look forward to a life expectancy of 48 years, according to the town officials we talked to. If they were boys, they could expect to live to an age of only 40 years. The perils of fishing in the ocean in dugout canoes made life even harder for the men.
The next morning, we arrived at the Astana international airport, to find that the check-in arrangements were quite different from what we were used to. Instead of checking our luggage at a desk and then walking through Security to get to our departure gate, everyone was expected to wheel their luggage and handbags through security, as the airline check-in desks were located inside.
The mechanics of rustling our luggage weren’t difficult, but as I passed through the check-point, suddenly a strange-sounding alarm went off. As the alarm rang and rang, my mind raced – what did I have in my bag that would trigger the alarm, I wondered? It didn’t help that the Security guards only spoke Russian, and they were dressed in military uniforms with ridiculously large military caps, which made them look imposing (and silly). But what began to worry me more, was that the look on the Security guards’ faces was not the usual one that happens when a piece of metal sets off an alarm. The guards looked frightened and angry, at the same time.
Fortunately for us, the commotion caught the attention of the clerks at the Turkish Airlines desk inside the terminal building, and one English-speaking fellow approached, speaking to the security guards in Russian first, then saying to us: “I speak English, may I help”? Well, he helped, but it took a while, because it turned out that a rarely used hidden nuclear radiation detector had been triggered when I came through the gate, and the guards were concerned that I had some kind of radioactive material in my suitcase.
For a moment my mind went blank, and then I remembered a card that I was carrying in my wallet. I had had a bout of prostate cancer the previous fall, and my brachytherapy treatment had involved inserting over a hundred tiny radioactive pellets in and around my prostate – designed to kill the cancer. The pellets decay naturally in a fairly short time, and by now, 9 or 10 months after my operation, I would have bet that the radioactive material had all decayed to an undetectable level. But my doctor had given me a card to carry, which explained the medical procedure, just for circumstances like this. When I pulled out the card, it was like a “Get out of Jail Free Card” from the Monopoly game. Instantly the guards’ attitudes changed from fear and suspicion, to sympathy and smiles. One of the big fellows wheeled my luggage over to the Turkish Airlines desk where the Good Samaritan clerk reverted back to his normal job of checking us in.

**** end of excerpt ****

Conclusion

It is one thing to briefly visit a remote project as part of a review team. It is another thing to be there as part of a design team trying to solve a problem and engineer a solution. I know of many engineers and geologists that would have similar work life experiences as part of their careers. However John has taken the initiative to write it all down.
The author is available to be contacted on LinkedIn if you have any questions or just want to say hello (at https://www.linkedin.com/in/john-wonnacott-84aa461a/).
The book can be found on Amazon at this link: Roseway: a Life of Adventure.
This is a story from the life of an experienced engineer working in the mining industry.  If you want to read the perspective from a new mining engineer graduate, check out this post “A Junior EIT Mining Story“.   There is no book deal yet here.
If you find stories about working as an engineer of interest, I have written a 2 part blog post on my adventures in the potash industry in Saskatchewan.  You can read that post at this link “Potash Stories from 3000 Feet Down – Part 1
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O/P to U/G Cross-Over – Two Projects into One

Over the years I have been involved in numerous mining tradeoff studies. These could involve throughput rate selection, site selection, processing options, tailings disposal methods, and equipment sizing. These are all relatively straightforward analyses. However, in my view, one of the more technically interesting tradeoffs is the optimization of the open pit to underground crossover point.
The majority of mining projects tend to consist of either open pit only or underground only operations. However there are instances where the orebody is such that eventually the mine must transition from open pit to underground. Open pit stripping ratios can reach uneconomic levels hence the need for the change in direction.
The evaluation of the cross-over point is interesting because one is essentially trying to fit two different mining projects together.

Transitioning isn’t easy

There are several reasons why open pit and underground can be considered as two different projects within the same project.
There is a tug of war between conflicting factors that can pull the cross-over point in one direction or the other. The following discussion will describe some of these factors.
The operating cut-off grade in an open pit mine (e.g. ~0.5 g/t Au) will be lower than that for the underground mine (~2-3 g/t Au). Hence the mineable ore zone configuration and continuity can be different for each. The mined head grades will be different, as well as the dilution and ore loss assumptions. The ore that the process plant will see can differ significantly between the two.
When ore tonnes are reallocated from open pit to underground, one will normally see an increased head grade, increased mining cost, and possibly a reduction in total metal recovered. How much these factors change for the reallocated ore will impact on the economics of the overall project and the decision being made.
A process plant designed for an open pit project may be too large for the subsequent underground project. For example a “small” 5,000 tpd open pit mill may have difficulty being kept at capacity by an underground mine. Ideally one would like to have some satellite open pits to help keep the plant at capacity. If these satellite deposits don’t exist, then a restricted plant throughput can occur. Perhaps there is a large ore stockpile created during the open pit phase that can be used to supplement underground ore feed. When in a restricted ore situation, it is possible to reduce plant operating hours or campaign the underground ore but that normally doesn’t help the overall economics.
Some investors (and companies) will view underground mines as having riskier tonnes from the perspective of defining mineable zones, dilution control, operating cost, and potential ore abandonment due to ground control issues. These risks must be considered when deciding whether to shift ore tonnes from the open pit to underground.
An underground mine that uses a backfilling method will be able to dispose of some tailings underground. Conversely moving towards a larger open pit will require a larger tailings pond, larger waste dumps and overall larger footprint. This helps make the case for underground mining, particularly where surface area is restricted or local communities are anti-open pit.
Another issue is whether the open pit and underground mines should operate sequentially or concurrently. There will need to be some degree of production overlap during the underground ramp up period. However the duration of this overlap is a subject of discussion. There are some safety issues in trying to mine beneath an operating open pit. Underground mine access could either be part way down the open pit or require an entirely separate access away from the pit.
Concurrent open pit and underground operations may impact upon the ability to backfill the open pit with either waste rock or tailings. Underground mining operations beneath a backfilled open pit may be a concern with respect to safety of the workers and ore lost in crown pillars used to separate the workings.
Open pit and underground operations will require different skill sets from the perspective of supervision, technical, and operations. Underground mining can be a highly specialized skill while open pit mining is similar to earthworks construction where skilled labour is more readily available globally. Do local people want to learn underground mining skills? Do management teams have the capability and desire to manage both these mining approaches at the same time?
In some instances if the open pit is pushed deep, the amount of underground resource remaining beneath the pit is limited. This could make the economics of the capital investment for underground development look unfavorable, resulting in the possible loss of that ore. Perhaps had the open pit been kept shallower, the investment in underground infrastructure may have been justifiable, leading to more total life-of-mine ore recovery.
The timing of the cross-over will also create another significant capital investment period. By selecting a smaller this underground investment is seen earlier in the project life. This would recreate some of the financing and execution risks the project just went through. Conversely increasing the open pit size would delay the underground mine and defer this investment and its mining risk.

Conclusion

As you can see from the foregoing discussion, there are a multitude of factors playing off one another when examining the open pit to underground cross-over point. It can be like trying to mesh two different projects together.
The general consensus seems to be to push the underground mine as far off into the future as possible.  Maximize initial production based on the low risk open open pit before transitioning.
One way some groups will simplify the transition is to declare that the underground operation will be a block cave. That way they can maintain an open pit style low cutoff grade and high production rate. Unfortunately not many deposits are amenable to block caving.  Extensive geotechnical investigations are required to determine if block caving is even applicable.
Optimization studies in general are often not well documented in 43-101 Technical Reports. In most mining studies some tradeoffs will have been done (or should have been done).  There might be only brief mention of them in the 43-101 report. I don’t see a real problem with this since a Technical Report is to describe a project study, not provide all the technical data that went into it. The downside of not presenting these tradeoffs is that they cannot be scrutinized (without having data room access).
One of the features of any optimization study is that one never really knows if you got it wrong. Once the decision is made and the project moves forward, rarely will someone ever remember or question basic design decisions made years earlier. The project is now what it is.

 

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Are Engineers Too Pessimistic

Geological colleagues have often joked that engineers are a pessimistic lot; they are never technically satisfied. The engineers will fire back that geologists are an overly optimistic lot; every speck of mineralization makes them ecstatic. Together they make a great team since each cancels the other out.
In my opinion engineers are often pessimistic. This is mainly because they have been trained to be that way. Throughout my own engineering career I have been called upon many times to focus on the downsides, i.e. what can happen that we don’t want to happen.

It starts early and continues on

This pessimism training started early in my career while working as a geotechnical engineer. Geotechnical engineers were always looking at failure modes and the potential causes of failure when assessing factors of safety.
Slope failure could be due to the water table, excess pore pressures, seismic or blast vibrations, liquefaction, unknown weak layers, overly steepen slopes, or operating error. As part of our job we had to come up with our list of negatives and consider them all. The more pessimistic view you had, the better job you did.
This training continued through the other stages of a career. The focus on negatives continues in mine planning and costing.
For example, there are 8,760 hours in a year, but how many productive hours will each piece of equipment provide? There will delays due to weather conditions, planned maintenance, unplanned breakdowns, inter-equipment delays, operator efficiency, and other unforeseen events. The more pessimistic a view of equipment productivity, the larger the required fleet. Geotechnical engineers would call this the factor of safety.
In the more recent past, I have been involved in numerous due diligences. Some of these were done for major mining companies looking at acquisitions. Others were on behalf of JV partners, project financiers, and juniors looking at acquisitions.
When undertaking a due diligence, particularly for a major company or financier, we are not hired to tell them how great the project is. We are hired to look for fatal flaws, identify poorly based design assumptions or errors and omissions in the technical work. We are mainly looking for negatives or red flags.
Often we get asked to participate in a Risk Analysis or SWOT analysis (Strengths-Weaknesses-Opportunities-Threats) where we are tasked with identifying strengths and weaknesses in a project.
Typically at the end of these SWOT exercises, one will see many pages of project risks with few pages of opportunities.
The opportunities will usually consist of the following cliches (feel free to use them in your own risk session); metal prices may be higher than predicted; operating costs will be lower than estimated; dilution will be better than estimated; and grind size optimization will improve process recoveries.
The project’s risk list will be long and have a broad range. The longer the list of risks, the smarter the review team appears to be.

Investing isn’t easy

After decades of the training described above, it becomes a challenge for me to invest in junior miners. My skewed view of projects carries over into my investing approach, whereby I tend to see the negatives in a project fairly quickly. These may consist of overly optimistic design assumptions or key technical aspects not understood in sufficient depth.
Most 43-101 technical reports provide a lot of technical detail; however some of them will still leave me wanting more. Most times some red flags will appear when first reviewing these reports. Some of the red flags may be relatively inconsequential or can be mitigated. However the fact that they exist can create concern. I don’t know if management knows they exists or knows how they can mitigate them.
It has been my experience that digging in a data room or speaking with the engineering consultants can reveal issues not identifiable in a 43-101 report. Possibly some of these issues were mentioned or glossed over in the report, but you won’t understand the full extent of the issues until digging deeper.
43-101 reports generally tell you what was done, but not why it was done. The fact I cannot dig into the data room or speak with the technical experts is what has me on the fence. What facts might I be missing?
Statistics show that few deposits or advanced projects become real mines. However every advanced study will say that this will be an operating mine. Many projects have positive feasibility studies but these studies are still sitting on the shelf. Is the project owner a tough bargainer or do potential acquirers / financiers see something from their due diligence review that we are not aware of?   You don’t get to see these third party reviews unless you have access to the data room.
My hesitance in investing in some companies unfortunately can be penalizing. I may end up sitting on the sidelines while watching the rising stock price. Junior mining investors tend to be a positive bunch, when combined with good promotion can result in investors piling into a stock.
Possibly I would benefit by putting my negatives aside and instead ask whether anyone else sees these negatives. If they don’t, then it might be worth taking a chance, albeit making sure to bail out at the right time.
Often newsletter writers will recommend that you “Do your own due diligence”. Undertaking a deep dive in a company takes time. In addition I’m not sure one can even do a proper due diligence without accessing a data room or the consulting team. In my opinion speaking with the engineering consultants that did the study is the best way to figure things out. That’s one reason why “hostile” due diligences can be difficult, while “friendly” DD’s allow access to a lot more information.

Conclusion

Sometimes studies that I have been involved with have undergone third party due diligence. Most times one can predict ahead of time which issues will be raised in the review. One knows how their engineers are going to think and what they are going to highlight as concerns.
Most times the issue is something we couldn’t fully address given the level of study. We might have been forced to make best guess assumptions to move forward. The review engineers will have their opinions about what assumptions they would have used. Typically the common comment is that our assumption is too optimistic and their assumption would have been more conservative or realistic (in their view).
Ultimately if the roles were reversed and I were reviewing the project I may have had the same comments. After all, the third party reviewers aren’t being hired to say everything is perfect with a project.
The odd time one hears that our assumption was too pessimistic. You usually hear this comment when the reviewing consultant wants to do the next study for the client. They would be a much more optimistic and accommodating team.
To close off this rambling blog, the next time you feel that your engineers are too negative just remember that they are trained to be that way.  If you want more positivity, hang out with a geologist (or hire a new grad).

 

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Heap Leach or CIL or Maybe Both

Typically gold mines consist of either a heap leach (HL) operation or a CIL type plant. There are a few projects that operate (or are considering) concurrent heap leach and CIL operations. Ultimately the mineral resource distribution determines if it makes economic sense to have both.  This blog discusses this concept based on past experience.
A CIL operation has higher capital and operating costs than a heap leach. However that higher cost is offset by achieving improved gold recovery, perhaps 20-30% higher. At higher gold prices or head grades, the economic benefit from improved CIL recovery can exceed the additional cost incurred to achieve that recovery.

Some background

Several years ago I was VP Engineering for a Vancouver based junior miner (Oromin Expl) who had a gold project in Senegal. We were in the doldrums of Stage 3 of the Lassonde Curve (read this blog to learn what I mean) having completed our advanced studies. Our timeline was as follows.
Initially in August 2009 we completed a Pre-Feasibility Study for a standalone CIL operation. Subsequently in June 2010 we completed a Feasibility Study. The technical aspects of Stage 2 were done and we were entering Stage 3. Now what do we do? Build or wait for a sale?
The property’s next door neighbor was the Teranga Sabodala operation. It made sense for Teranga to acquire our project to increase their long term reserves. It also made sense for a third party to acquire both of us. The Feasibility Study also made the economic case to go it alone and build a mine.
While waiting for various third-party due diligences to be completed, the company continue to do exploration drilling. There were still a lot of untested showings on the property and geologists need to stay busy.
Two years later in 2013 we completed an update to the CIL Feasibility Study based on an updated resource model. Concurrently our geologists had identified seven lower grade deposits that were not considered in the Feasibility Study.
These deposits had gold grades in the range of 0.5 to 0.7 g/t compared to 2.0 g/t for the deposits in the CIL Feasibility Study. We therefore decided to also complete a Heap Leach PEA in 2013, looking solely on the lower grade deposits.
These HL deposits were 2-8 km from the proposed CIL plant so their ore could be shipped to the CIL plant if it made economic sense. Test work had indicated that heap leach recoveries could be in the range of 70% versus >90% with a CIL circuit. The gold price at that time was about $ 1,100/oz.
Ultimately our project was acquired by Teranga in the middle of 2013.

Where should the ore go?

With regards to the Heap Leach PEA, we did not wish to complicate the Feasibility Study by adding a new feed supply to that plant from mixed CIL/HL pits. The heap leach project was therefore considered as a separate satellite operation.
The assumption was that all of the low grade pit ore would go only to the heap leach facility. However, in the back of our minds we knew that perhaps higher grade portions of those deposits might warrant trucking to the CIL plant.
For internal purposes, we started to look at some destination trade-off analyses. We considered both hard (fresh rock) and soft ore (saprolite) separately. CIL operating costs associated with soft ore would be lower than for hard ore. Blasting wasn’t required and less grinding energy is needed. The CIL plant throughput rate could be 30-50% higher with soft ore than with hard ore, depending on the blend.
I have updated and simplified the trade-off analysis for this blog. Table 1 provides the costs and recoveries used herein, including increasing the gold price to $1500/oz.
The graph shows the profit per tonne for CIL versus HL processing methods for different head grades.
The cross-over point is the head grade where profit is better for CIL than Heap Leach. For soft ore, this cross-over point is 0.53 g/t. For hard ore, this cross over point is at 0.74 g/t.
The cross-over point will be contingent on the gold price used, so a series of sensitivity analyses were run.
The typical result, for hard ore, is shown in Table 2. As the gold price increases, the HL to CIL cross-over grade decreases.
These cross-over points described in Table 2 are relevant only for the costs shown in Table 1 and will be different for each project.

Conclusion

It may make sense for some deposits to have both CIL and heap leach facilities. However one should first examine the trade-off for the CIL versus HL to determine the cross-over points.
Then confirm the size of the heap leach tonnage below that cross-over point. Don’t automatically assume that all lower grade ore is optimal for the heap leach.
If some of the lower grade deposits are further away from the CIL plant, the extra haul distance costs will tend to raise their cross-over point. Hence each satellite pit would have its own unique cross-over criteria and should be examined individually.
Since Teranga complete the takeover in mid 2013, we were never able to pursue these trade-offs any further.
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Mining’s Lassonde Curve – A Wild Ride

Normally I don’t write about mining stock markets, preferring instead to focus on technical matters.  However I have seen some recent discussions on Twitter about stock price trends.  For every stock there are a wide range of price expectations.  Ultimately some of the expectations and realizations can be linked back to the Lassonde Curve.
The Lassonde Curve has been touted by many as a realistic representation of the life stages of a junior mining company.  The curve can sometimes be a roller coaster ride for company management.
Pierre Lassonde, was one of the founders of Franco-Nevada, the first gold royalty company. Thirty years ago he created his curve, that has now become a foundation in the junior mining business.  The Lassonde Curve outlines the company life stages, beginning at exploration and ending at production.  It shows the perceived value (i.e. stock value) that investors may assign at each life stage.
The stock price trend illustrated by the curve can, knowingly or unknowingly, impact on a company’s decision making process.  So in effect, there are some technical ramifications from it.
People may have differing opinions on what factors are driving the curve.   Take a look at it and decide for yourself. Typically people define the curve into four life stages, but I tend to view it in five stages.

Mining Company Stages 1 to 5

Stage 1 Climb

Stage 1 is the earliest stage, consisting of exploration.  This period generates rising anticipation from promotion and exciting press releases. The stock value climbs as the perceived value of the insitu geology increases.  Great Bear is an example of company currently in Stage 1 (as of June 2020), and appears to be in no hurry to exit from Stage 1.
Stage 2 is when the prospect moves into technical evaluation.  In other words, the engineers now climb aboard the ride.  This stage encompasses the PEA, PFS, and FS studies. Each of these can take months to complete, meantime new information releases may be lacking.
If the stock value declines, perhaps its because the engineers bring reality into the picture.  Investors may see that the project isn’t as easy or great as they anticipated during Stage 1.
Companies can also lose some presence in the market with no new news. Investors may begin looking at other companies that are still in Stage 1 and hence sell their shares.
Some companies may try to shorten Stage 2 and even skip over Stage 3 by going from a PEA directly into Stage 4 construction.
Stage 3 is the period when the studies have largely been completed and a production decision is pending.  At this time the company will be seeking strategic partners and project funding.  Permitting is also underway.  Unfortunately a lack of financing or poor permitting efforts will extend the time in Stage 3, which can extend for decades or even perpetuity. It’s easy to rattle off the names of companies sitting in Stage 3; for example Donlin Creek, Casino, KSM, and Galore Creek. It seems that once locked in a prolonged Stage 3, it can be difficult to get out of it.  Company promotion and marketing can be difficult.
Stage 4 begins when the financing is done and construction begins.  This is a sign that the project has been figured out, permits approved, and third-party due diligence found no fatal flaws.  The stock value may increase on this positive news, especially if construction is on time and on budget. Its even better news if it’s a period of rising commodity prices.
Stage 5 is the start-up and commercial production period, possibly nerve-racking for some investors. This is where the rubber hits the road. The stock price can fall if milled grades, operating costs, or production rates are not as expected.
Investors may need to decipher press releases to figure out if things are going well or not.  Some investors may now bail out at this time to companies in Stage 1 for greater upside (the 10 bagger).

Companies Staying front and center

Companies know that investors can move elsewhere at any time, so they will try to address the Stage 2 and Stage 3 doldrums in different ways.   They can:
  • Find new exploration prospects elsewhere while the engineering work is underway.
  • Undertake a series of optimization studies on the same project to keep up the news flow.
  • Continue step out drilling on the same property to expand resources and generate new excitement.
  • Have management appear regularly on podcasts, webinars, conferences, and keep promoting on LinkedIn, Twitter, and with newsletter writers.
Ideally one would like to stagger multiple prospects at different stages of the Curve. While this makes sense, it also takes a fair bit of funding to do it.   It also may bring criticism that the company is losing focus on their flagship project.  Generally if the stock price is improving, you don’t see this complaint.

Conclusion

In closing, I just wanted to present the Lassonde Curve for those who may not have seen it before. For those playing the junior stocks, it may help explain why their prices fluctuate for essentially the same project.  For some companies, the curve can be a wild ride.
Some corporate presentations will highlight the Lassonde Curve, particularly when they are rising in Stage 1.  You are less likely to see the curve presented when they are rolling along in Stages 2 or 3.
Some say the Curve relates to the de-risking of a project as it advances, with risks shifting from exploration related to development related.   That may be true, but I suggest the curve is simply based on investor perception and impatience.
The ability to promote oneself and stay relevant in the market plays a key role in defining the shape of a company’s curve.
As a final note, people looking at the Lassonde curve often focus on the rise and dip in the middle part. There is less focus on what happens on the far right side of the graph as it trends into the future. There is an often (but forgotten) dip there too.
Another interesting aspect of the junior mining industry is how the herd mentality and fear of missing out is standard operating policy.  Companies will rush into areas, acquire whatever ground they can, as long they can tout it as being a certain commodity project.   And its not only commodities that generate excitement; its also locations and technologies.  Read more at the blog post “Mining Fads and the Herd Mentality“.
The entire blog post library can be found at this LINK with topics ranging from geotechnical, financial modelling, and junior mining investing.
Note: You can sign up for the KJK mailing list to get notified when new blogs are posted.   Follow us on Twitter at @KJKLtd for updates and insights.
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