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.
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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.
Pros
Like anything, nothing is perfect and NPV may have a few issues for me.
The NPV One software is an option for those wishing to standardize or simplify their financial modelling.
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.
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.
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 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.
There are several reasons why open pit and underground can be considered as two different projects within the same project.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Concentrate handling systems may not differ much between model options since roughly the same amount of final concentrate is (hopefully) generated.
4. The head grade of the deposit also determines how economically risky pre-concentration might be. In higher grade ore bodies, the negative impact of any metal loss in pre-concentration may be offset by accepting higher cost for grinding (see chart on the right).
I had a grade tonnage curve, including the tonnes of ore and waste, for a designed pit. This data is shown graphically on the right. Essentially the mineable reserve is 62 Mt @ 0.94 g/t Pd with a strip ratio of 0.6 at a breakeven cutoff grade of 0.35 g/t. It’s a large tonnage, low strip ratio, and low grade deposit. The total pit tonnage is 100 Mt of combined ore and waste.
The Hill of Value is an interesting optimization concept to apply to a project. In the example I have provided, the optimal project varies depending on what the financial objective is. I don’t know if this would be the case with all projects, however I suspect so.
One of the questions I have been asked is how valid is the 1D approach compared to the standard 2D cashflow model. In order to examine that, I have randomly selected several recent 43-101 studies and plugged their reserve and cost parameters into the 1D model.
There is surprisingly good agreement on both the discounted and undiscounted cases. Even the before and after tax cases look reasonably close.