Articles tagged with: Study Management

Consulting and Stock Compensation

Date: January 23, 2020 Author: Ken Kuchling Comments: 5 Replies
The other day a press release came across my desk with the following title “First Mining Issues First Tranche Of Shares To Ausenco; Pre-Feasibility Study For Springpole Gold Project Underway”.
Reading it further, it was apparent that their study consultant, Ausenco, was being paid in company stock in lieu of cash.  The arrangement included an initial financing of $750k with a further $375k to follow once the pre-feasibility study was 75% complete.  Upon completion of the study another share payment was due.
That press release was interesting. I personally had never seen one like this before.
Some may see independence as an issue with their fiscal arrangement. Maybe… but this blog isn’t about the need for independent QP’s.  In fact I don’t recall feasibility studies having that requirement.  Some 43-101 resources estimates do require independence.
An industry discussion about where independence is required would be an interesting exercise.  However I will leave that conversation for a future post.

Would you work for company shares only?

I have never been in a situation where I was consulting with  company shares as my compensation.  Neither have I ever managed a study where outside consultants were being paid in shares.   However I can see the possibility of interesting dynamics at play.
In the past I have worked as an owner’s study manager and been awarded stock options along with salary.  In that role, my job was to look after the owner’s interests, pushing for cost efficiencies and optimizations.
Regarding share compensation, there are significant risks on the consultant’s side when they agree to be paid in shares.   I can see both positive and negative aspects with that type of a relationship.
I am not passing judgement here on what is right or wrong.  My objective is to comment on some basic issues that may arise.

Pro’s and Con’s

The positive aspects one might experience include;
  • It’s easier for the company to pay for the study since there are no cash outlays from the treasury.
  • The consultants might have the company’s best interests at heart since they will now be part owners of the company.
  • Possibly there will be greater technical effort to produce optimal designs and cost estimating efficiencies in the drive for great economics.
The potential pitfalls of this approach might include;
  • A public perception that the study is not impartial.
  • There is an overhang of shares that may be dumped onto the market in the near future.
  • Possibly the consultant will charge a premium for their services due to the financial risks they are taking.
  • The company may be more tolerable of study cost overruns since there is no hard cash outlay.
Regarding the first item “impartiality”, in the past there have been questions raised about the impartiality of engineering firms. I first recall reading this claim many years ago in a public response to a mining EIA application. Unfortunately I cannot find the exact source now.
The concern was whether the consultant’s work would be overly optimistic, seeing that they would eventually gain as a project moved from PEA through to the PFS and FS stages. They didn’t want to kill the golden goose. The project’s opponents were making the argument to the regulators “don’t believe what the engineering company is telling you”.
I’m curious how many times this argument has been used, seeing that it’s been around for some time.

Conclusion

It would be interesting to know how many consulting firms would be willing to accept compensation solely in shares.  Stock prices move up and down and the outcome of the study itself can have an impact on  share performance.
Unlike being paid in bitcoin, which also fluctuates in value, shares will generally have a hold period before they can be sold off.  This further increases the consultant’s risk.
I am curious to see whether the First Mining + Ausenco financial arrangement will create a precedent. Possibly it happens more than I am aware of.  Realistically I don’t see anything wrong with the approach, although one needs to understand the perceptions that it can create.   See where you sit if you were on the owner’s or consultant’s side and this idea was being discussed.  What would you do?
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NPV and Sustainable Mining – Friends or Foes

Date: January 6, 2020 Author: Ken Kuchling Comments: 2 Replies
I recently wrote a blog about the term “sustainable mining” and the different perspectives to it. Does sustainable mining mean having a long term sustainable mining industry or does it mean providing sustainable benefits to local communities? There are two ways you can look at it. If interested, the link to that blog is here.
It’s no surprise that the mining industry wants to promote more sustainable mining practices. It’s the right thing to do. However, in my experience, sometimes NPV analysis can be at conflict with sustainable mining practices. That opinion is from my engineering perspective.  Those working in the CSR field may have a different view on it.

Majors, mid-tiers, juniors see things differently

There are essentially three different types of mining companies; majors; mid-tiers, and junior miners. They have different financial constraints imposed upon them and these constraints will impact on their decision making.
In general to get financing and investor interest, development projects must demonstrate a high NPV, high IRR, and short payback period. This requirement tends to apply more to the small and mid tiered companies than to the major companies.  The majors normally have different access to financing.
A characteristic of NPV analysis and cashflow discounting is the penalizing of higher upfront costs whilst reducing the economic impacts of longer term deferred costs. This feature, combined with the need to manage NPV, will influence design decisions and operating philosophies.  Ultimately this will impact on the rate of adopting of sustainable mining practices.
Mining companies often have two masters they must try to satisfy. One master is the project investor(s) that wants their investment returns quickly and with limited risk. The second master is the local stakeholder that wants a safe project with long lasting benefits to the community.  NPV analysis often requires trading-off the needs of one master over that of the other. This trade-off is neither right nor wrong; it is simply a reality.
Major miners now seem to have a third master; i.e large pension funds. These funds are now demanding for more sustainable mining practices (mainly tailings related) and mining companies are trying to comply. Smaller mining companies thus far don’t have this third master to satisfy, although that may come soon. Hence smaller miners are apt to follow a somewhat different path with regards to sustainable mining implementation. NPV plays a significant role in their decision making.

NPV…friend or foe

executive meetingThere are several scenarios where NPV analysis decision making may conflict with the objectives of sustainable mining. Here are a few examples.
1. Minimizing capital expenditures at the expense of operating costs. The likelihood of success in creating a long life sustainable mine will improve by having low metal cash costs. Naturally there will be a benefit in having low operating costs. However sometimes achieving low operating costs will require higher capital investments. For example, this could involve using large capacity material handling mining systems (IPCC) to lower unit costs.
NPV analysis will tend penalize these large investments by discounting the future operating cost savings. Being in the lowest cost quartile is good thing; being in the highest cost quartile isn’t.  Higher operating costs can hurt the long term sustainability of an operation, especially during downturns in commodity prices.
2. Tailings disposal method trade-offs are affected by NPV analysis. Currently there is an industry push towards safer and sustainable tailings storage methods, like paste or dry stack. However the upfront processing and materials handling capex can be significant. Hence less desirable conventional style tailings disposal may often be the winners in tailings trade-off studies due to NPV.
3. Closure considerations incorporated in the early mine design stage are affected by NPV analysis. A large cost component of mine closure is related to waste rock and tailings reclamation. However since final closure costs are  deferred, they might be given less consideration in the initial design. In many studies, high closure costs can be deemed insignificant in the project NPV due to discounting. Eventually these high costs will need to be incurred.  Unfortunately they might have been mitigated by wise decision making earlier in the project life.
4. Low grade ore stockpiling can help to increase early revenue and profit, thereby improving the project NPV and payback. Stockpiling of low grade and prioritization of high grade means that lower grade ore will be processed in the later stages of the project life.  Who hasn’t been happy to develop a mine schedule with the grade profile shown on the right?
If low grade years are coupled with a dip in metal price cycles, the mine could become economically unsustainable.  Shutting down a mine and putting it on “care and maintenance” is short term in intention but often long term in duration (over 30 years in some cases).
Mark Bristow of Barrick briefly discussed the issue of high grading in this interview.
5. Low strip ratios in the early stages of a project are often a feature of the ore body itself. However mine plans can also be designed to defer high strip ratios into the future via the use of proper pit phasing. This is another way to defer operating costs into the future. The NPV will see the benefit, long term sustainability may not.
6. Project life selection based on NPV analysis may not show significant economic difference between a 15 year project and one with a life of 25 years. Project decisions could then favor a short life project. This could relate to smaller pit pushbacks, smaller tailings ponds, smaller waste dumps, and easier permitting.  Possibly the local community would prefer a long life project that provides more sustainable jobs and business opportunities. NPV may see it differently.
7. Accelerated depreciation, tax and royalty holidays are types of economic factors that will improve NPV and early payback. They are one tool governments use to promote economic activity. These tax holidays will greatly enhance the NPV when combined with high grading and waste stripping deferral.
Unfortunately reality hits once the tax holiday is over and suddenly taxes or royalties become payable. At the same time head grades may be decreasing and strip ratios increasing. Future cashflows may carry an additional economic burden, which may conflict with the goal of a sustainable mine.

Conclusion

NPV is one of the standard metrics used to make project decisions. The deferral of upfront costs in lieu of future costs is favorable for cashflow and investor returns. Similarly, increasing early revenue at the expense of future revenue does the same.   Both approaches will help satisfy the financing concerns. However they may not be advantageous for creating long term sustainable projects.
Riskier projects will warrant higher discount rates.  This can magnify the importance of early cashflows even more and future cashflows become even less important.
It will be interesting to see how we (the mining industry) respond as industry leaders make greater commitments to sustainable mining. Both majors and juniors will equally need to work on keeping those commitments.  Will NPV analysis help or hurt?

 

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43-101 Reports – What Sections Are Missing?

Date: October 21, 2019 Author: Ken Kuchling Comments: 4 Replies
Recently as part of a due diligence I was reviewing a couple of 43-101 technical reports and something jumped out at me. There were pages and pages of statistical plots. The plots included QA/QC and check assay diagrams, variograms, box plots, swath plots, and contact plots. There was no lack of statistical information. However, as a mining engineer, there was something missing that was of interest to me. Good geological sections were missing.
Its seems that most technical reports focus heavily on describing the mathematical aspects of the resource, but spend less time describing the physical aspects of the geology and the mineability.

Who is the audience

It’s always open to debate who these 43-101 technical reports are intended for. Generally we can assume correctly that they are not being written mainly for geologists. However if they are intended for a wider audience of future investors, shareholders, engineers, and C-suite management, then (in my view) greater focus needs to be put on the physical orebody description.
Understanding the nature of the orebody brings greater understanding of the entire project.

Everyone likes geology

Whenever I listen to investor conference calls, many of the analyst’s questions relate to the resource and the mining operation. Essentially the participants want to know if this will be an “easy” mine or a “hard” mine.
One simple way to explain this is with good geological sections. They help everyone understand any potential issues; i.e. a picture is worth a thousand words. Good cross-sections will describe the following aspects.
  • The complexity (or simplicity) of the ore zones,
  • The width of the ore zones,
  • The vertical extent of geological information,
  • The drill spacing and drilling density,
  • The spatial distribution of assay information,
  • The grade distribution laterally and vertically,
  • The waste distribution throughout the mine,
  • The mining block size in relation of the ore zone dimensions
One can learn a lot just by looking at well presented cross-sections.  The nice thing is that they are generally understood by non-technical people.

Suggestions

I would like to suggest that every technical report includes more focus on the operational aspects of the orebody.
My recommendation is that the following information becomes standard in all technical reports.
  1. At least three to five cross sections through the deposit. Don’t just present a best case typical cross-section.
  2. At least one or two longitudinal sections.
  3. At least three level or bench plans, showing the drill hole pierce points.
Each cross section/bench plan should consist of two parts.
Part 1 shows the drill holes with color coded grade intercepts, ore zone wireframes, and lithology or rock types.
Part 2 should be a block model cross section showing the wireframes, drill holes, and color coded block model grades using the ore/waste cutoff grade as one of the clearly defined grade bins.
It doesn’t really matter if the cross- sections are included in Section 14 or Section 16 of the Technical Report. However if they are included in Section 16 then one should overlay the pit design and/or underground stope shapes onto the sections.
I also recommend NOT incorporating these cross-sections in the appendices since they are too important to be hidden away. They should be described in the main report itself.

Conclusion

Improving the quality of information presented to investors is one key way of maintaining trust with investors. Accordingly we should look to improve the description of the mineable ore body for everyone. In many cases it is the key to the entire project.
I am not suggesting that one needs to remove the statistical plots since they do have their purpose and audience. I am simply suggesting that we should not forget about everyone else try to figured out the viability of the project.
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43-101 and the Shrinking Feasibility Study

Date: September 9, 2019 Author: Ken Kuchling Comments: Leave a reply
There is current sense that advanced mining studies are suffering from a lack of credibility with investors. Curiously it seems to me that many feasibility study documents are getting smaller at the same time. Might there be some link between the two?
My personal exposure to feasibility studies extends from managing them, participating in them, and undertaking due diligence reviews of them. Earlier in my career mining feasibility studies typically consisted of comprehensive documents, often contained in several binders of information. The study could generate a lot of paper. However currently it seems that often (not always) the 43-101 Technical Report can be the “final” feasibility study document.
In the past there would be binders with detailed calculations and backup for the different parts of the study. Typically there was a binder for the Executive Summary and separate sections (i.e. binders) for Geology, Mining, Processing, Infrastructure, Capital Cost, Operating Cost, Environmental, Project Execution, and Economic Analysis, etc.
The comprehensive report normally had both the report text and the details of the work done. This might include hand sketches, haul cycles, vendor price quotes, spec sheets, email correspondences, the WBS cost estimate detail, and so on.
The section appendices also included 3rd party reports like pit slope geotechnical studies, hydrogeological analysis, tailings dam designs, etc. The feasibility document might have included CD’s with the entire study in electronic format.
Generally all the supporting information for the study was in that comprehensive document. They were great. You knew you were somebody if you were given a personal copy of the entire report for your office.

43-101 Technical Report

The original intent of the 43-101 Technical Report was for it to be a summary document, only about 80-150 pages in length. The intent was to simplify all the technical work for the benefit of non-technical investors. Currently I have noticed that in many cases the 43-101 report is now the entire feasibility study document.
These 43-101 reports contain a fair amount of detail and they can exceed 400 pages in length. I’m not sure how many non-technical people actually read them beyond the Executive Summary or even read them at all.
Unfortunately if one is undertaking a due diligence review of a project, the 400 page Technical Report won’t contain the detail needed for a proper technical review. When more detail is requested, we are usually provided with a series of production and cost spreadsheets that need to be deciphered.  Furthermore the spreadsheets themselves don’t give the sources or basis for all the input data.
In my view the 400 page Technical Report is too confusing for the investing public and not detailed enough for technical review, thereby really satisfying no one.
Why aren’t the comprehensive feasibility study documents being completed all the time? I would suggest it is because of the effort and cost. It takes time to properly document all aspects of a study, creating legible tables, scanning files, and merging it all into a single PDF document. Preparing a 43-101 Technical Report can be a chore, as many of us have experienced in trying to meet the 45 day deadline. So who wants to take on the task of preparing an even larger document?

Recommendation

My recommendation is that, where budgets permit, mining companies return to the days of preparing the comprehensive feasibility study document. It’s the right thing to do.
One doesn’t need to print the entire report on paper since PDF files will work fine. Scanning of some sketches, vendor quotes may add an extra step, but that is hardly a momentous chore. Most 3rd party documents are already been submitted in PDF format so coordinating and merging will be the main task.
The 43-101 Technical Report could return to being a more investor friendly summary style document rater than a full study report.
This comprehensive document approach would apply to both pre-feasibility and feasibility studies that are used for advanced financing purposes.  The re-adoption of the comprehensive report format should be consistent among both large miners and juniors.

What about the PEA

The preliminary economic assessment (PEA) likely does not warrant a comprehensive report. The PEA is not definitive. I have also heard that the PEA is losing some credibility with investors, with some people referring to it as mainly a sales document. I don’t necessarily agree with that sentiment, but I understand why some see it that way.
As an aside, an interesting panel discussion might be whether the PEA has actually lost credibility, and if so, how can we restore credibility. My thoughts on PEA’s were summarized in a previous blog “Not All PEA’s Are Created Equal”.

Conclusion

If any mining industry credibility has been lost, re-establishing it should be important. One way to start doing this is to focus on creating the type of reports that best serve the needs of the industry stakeholders.
Some may say returning to comprehensive reports are a step backwards while mining needs to move forward. In my opinion, moving forward is going from less documented studies towards well documented studies.
One of the most technically detailed feasibility studies that I worked on was for the Diavik diamond project. This was a one-of-a-kind project operated by a well run risk-averse company (Rio Tinto). Every aspect of the project was documented to the upmost extent, although the company had the deep pockets to do that.  Funny thing though, as part of the internal Rio Tinto engineering team I don’t recall ever producing a final report document there (perhaps my recollections have been blurred since 20 years ago).
Once you have established the type of report you want, make sure your consultants clearly understand the expected deliverable. I recommend that someone on your team prepares an RFP document to lay out your wish list, even if sole sourcing the study. A previous blog was written on this topic at Request For Proposal (“RFP”) – Always Prepare One
As an aside, it would be interesting to know if those undertaking due diligence’s in the UK or Australia (i.e. not under 43-101 domain) have seen any changes in the quality of feasibility study documentation.
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Power Generation & Desalinization – An Idea that Floats

Date: August 20, 2019 Author: Ken Kuchling Comments: 2 Replies
Access to a fresh water supply and a power supply are issues that must be addressed by many mining projects. Mining operations may be in competition with local water users for the available clean water resources. In addition, the greenhouse gas emissions from mine site power plants are also an industry concern. If your project has both water and power supply issues and it is close to tidewater, then there might be a new solution available.
I recently attended a presentation for an oil & gas related technology that is now being introduced to the mining industry. It is an innovative approach that addresses both water and power issues at the same time.
The technology consists of a floating LNG (liquefied natural gas) turbine power plant combined with high capacity seawater desalinization capabilities. MODEC is offering the FSRWP® (Floating Storage Regasification Water-Desalination & Power-Generation) system.
MODEC also has associated systems for power only (FSR-Power®) and water only (FSR-Water®)

FSRWP capabilities

The technology is geared towards large capacity operations that have access to tidewater. It provides many tangible and intangible operational and environmental benefits.  It can:
  • Generate fresh water supply (10,000 – 600,000 m3 /day)
  • Generate electrical power (80 to 1000 MW) using LNG
  • Can provide power inland (>100 km) from a tidewater based floating power plant
  • Can provide natural gas distribution on land via on-board re-gasification systems
  • Has LNG storage capacity of 135,000 cu.m
  • Has a refueling autonomy of 20 to 150 days
  • Allows low cost marine delivery of bulk LNG supply

Procurement & Application

The equipment can be procured in several ways. For instance it can be contracted as an IPP (Independent Power Producer), purchased as an EPCI (Engineering, Procurement, Construction and Installation), BOO (Build, Own and Operate) or BOOT (Build, Own, Operate and Transfer).
Typically it takes 18-24 months of contract award to deliver to the project site, although temporary power solutions can be provided within 60-90 days.
From a green mining perspective, the FSRWP produces clean power with the highest thermal efficiency and lowest carbon foot-print.
See the table for a comparison of different power generation efficiencies and carbon emissions per kW.
Gas turbines are not new technology to MODEC.  They currently own & operate 42 such generators, which can produce roughly 43 MW (each) in combined-cycle mode.

Mooring options

Currently there are three mooring options for the floating system that should fit most any tidewater situation.
Jetty or Dolphin mooring is suitable for protected areas or near-shore applications where the water depth is in the range of 7 to 20 meters.
Tower Yoke mooring is ideal for relatively calm waters where the water depth is between 20 to 50 meters.
External Turret mooring is similar to a Tower-Yoke and is ideal for water depths exceeding 50 meters or where the seabed drops off steeply into the ocean.

Power transmission

Twenty years ago it was impractical to transmit AC power long-distances and subsea power cable technology was not as advanced as it is today. Hence an offshore power plant like a FSRWP was not technically viable. Due to R&D efforts over the last 15 years it is now possible to economically transmit AC. For example it is possible to transmit up to 100 MW over 100 miles through a single subsea cable. In addition, it is also viable to transit 200 MW at 145 kV from a vessel to shore.

Water treatment

Modern FSRWP’s use reverse osmosis membrane technology to produce industrial or potable water.  This is similar to most conventional onshore desalination plants.
The main benefits of floating offshore desalination are increased overall thermal efficiency if both power and water production are combined on a single vessel. In addition, seawater sourced offshore and rejected brine discharged offshore minimizes risk to coastal marine life.

Conclusion

The bottom line is that if your mining project is near shore, and has both water supply and power issues, take a look at the FSRWP technology. One might say it is greener technology by using LNG (rather than coal, heavy fuel oil, or diesel) to generate power.  At the same time it avoids competition with locals for access to fresh water.
This technology won’t be suitable for all mining situations, but perhaps your mine site fits the model. Reportedly rough costs for power are in the range of $0.10-$0.14/kwh with a capital cost of $1M-$1.5M per MW.
There will be minimal closure costs associated with dismantling the power plant.  One just floats it away at the end of the mine life.
Check out the MODEC website if you wish to learn more: https://www.modec.com/fps/fsrwp/index.html
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Flawed Mining Projects – No Such Thing as Perfection

Date: May 29, 2019 Author: Ken Kuchling Comments: 2 Replies
Recently I read a post on LinkedIn where somebody was asking what key metrics companies are looking for in order to develop (or provide financing to) a new mining project. It’s more than just a project having a good NPV or IRR.  They are also looking at how difficult it is to achieve the targeted NPV.
Mining companies are always on the hunt for new projects to grow their cashflows. They would all like to find the “perfect” project; one with ideal conditions and great attributes.
However those perfect projects likely don’t exist anymore, if they ever even did.
Consequently companies must be willing to accept some potential flaws (or risks) in their go-forward projects.
The question is what flaws are they willing to accept and how far away from the ideal situation are they willing to go.

What makes a perfect project?

If one could envision a perfect mining project, what might it look like?   Here are some attributes that one would want to see (in random order). If a project had 100% of these, it would be a fantastic project.
    • A high grade ore orebody
    • A large reserve and long mine life to ride out commodity price cycles
    • Low operating cost
    • Low cash cost, in the bottom quartile of costs
    • Well defined ore zones, allowing simple mining with low dilution
    • A geotechnically competent rock mass
    • Clean and straightforward metallurgy
    • Consistent and straightforward permitting regulations
    • A stable government and stable fiscal regime
    • Safe security conditions for site personnel
    • High NPV and high IRR
    • No acid runoff issues from waste products
    • Stable tailings disposal conditions
    • Readily available local workforce / local power supply / good water supply
    • Favorable local community and stakeholder support
Other readers may have more attributes that they would like to see if asked to theorize “What constitutes a perfect mining project?”

Take off the promoter hat

backhoe on soft claysNow take an honest look at some recent (or past) projects that you have been involved with. How many of the perfect attributes listed above would be represented? It would be surprising to see them all checked off. Unfortunately that means certain flaws (risks) must be accepted when developing a project.
Each company (or financier) will have their vision as to which attributes are “must have” and which ones are “nice to have”.

But we have risk tools

There are many risk tools available to help in evaluating the potential flaws in a project. Unfortunately these tools don’t make the decisions for management.
Risk based Monte Carlo analysis requires management to pre-define the magnitude of the risks and then decide upon what probability of success is acceptable. Real option analysis or decision trees or Kepner-Tregoe are examples of other tools that can help in the decision making process.
Ultimately risk is risky.  Management must make the go/no-go decision regardless of how many probabilistic histograms and tables they have generated. A 90% chance of success still means there is a 10% chance of failure. The probability of failure may be low, but it is not zero.
It would be interesting to examine recent failed projects to define the cause(s) of failure. One could then see if the cause was something that was pre-determined as a risk, either as a small risk or a large risk. Perhaps the cause was something that management felt could be mitigated or perhaps it was something viewed as highly unlikely. No doubt that successful projects also had risks, which were either mitigated or which (luckily) never occurred.

Conclusion

The bottom line is that management understandably have a difficult task in making go/no-go decisions. Financial institutions have similar dilemmas when deciding on whether or not to finance a project.
In my career I have sat in on such management discussions and it’s never been a simple process, mainly because no project is perfect. Management know all the flaws (at least they think they do) and thus have to decide whether to push forward knowing the flaws exist.
I fully expect that future mining project risk will increase due to the complexity of project designs and broadening of stakeholder dynamics. Hence decision making in the mining industry isn’t going to get any easier regardless of the decision tools being used.  Look at your own situation, are your projects getting easier or harder?
One should examine the impact of the project flaws on the project economics.  The most common way to do this is the sensitivity chart (i.e. spider graph).  However this itself is a flawed way to evaluate the flaws.  You can read why at this blog post “Mining Cashflow Sensitivity Analyses – Be Careful“.
A better approach is to use a probabalistic analysis, like Monte Carlo simulation, that can examine multiple factors at the same time.   I discuss the benefits of this approach in a blog post ” Mining Financial Modeling – Make it Better!“
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Mining Due Diligence Checklist

Date: February 25, 2019 Author: Ken Kuchling Comments: 41 Replies
It doesn’t matter how long you have worked in the mining industry, at some point you will probably take part in a due diligence review. You might have been asked to help create a data room. Perhaps your company is looking at a potential acquisition. Maybe you’re a consultant with a particular expertise needed by a due diligence team. It’s likely that due diligence has impacted on many of us at some point in our careers.
The scope of a due diligence can be exceptionally wide. There are legal, marketing, and environmental aspects as well as all the technical details associated with a mining project. The amount of information provided can be overwhelming.

Checklists are great

Checklists are great and can be very helpful in a due diligence review. A detailed technical scope checklist is a great way to make sure things don’t fall through the cracks. A checklist helps keep a team on the same page and clarifies individual roles and tasks. Checklists bring focus and minimize sidetracking down unnecessary paths.
Recognizing this, I have created a personal due diligence checklist for these exercises. A screen shot of it is shown below. The list is mainly tailored for an undeveloped mining project still at the study stage, but it still has over 230 items that might need to be considered.

Every mining due diligence is unique

Not all of the items in the checklist are required for each review. Maybe you’re only doing a high level study to gauge management’s interest in a project. Maybe you’re undertaking a detailed review for an actual acquisition or financing event. It’s up to you to create your own checklist and highlight which items need to be covered off. The more items added the less risk of missing something in the end.
You a create your own checklist but if you would like a copy of mine just email me at KJKLTD@rogers.com and let me know a bit about how you plan to use it (for my own curiosity). Specify if you would prefer the Excel or PDF versions.
Please let me know if you see any items missing or if you have any comments.

Due Diligence isn’t for everyone

Mining due diligence exercises can be interesting and great learning experiences, even for senior people that have seen it all. However they can also be mentally taxing due to the volumes of information that one must find, review, and comprehend, all in a short period of time.
Some people are better at due diligence than others. It helps if one has the ability to quickly develop an understanding of a project. It also helps to know what key things to look for, since many risks are common among projects.
Further on the topic of mining due diligence, I have a previous blog post triggered by my frustrations with some poorly set up data rooms.  You can read that at “Due Diligence Data Rooms – Help!”  My request is that when setting up a mining data room, please think about the people who will be using it.
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Does the Mining Industry Employ Interns?

Date: May 22, 2017 Author: Ken Kuchling Comments: Leave a reply
employing interns
Over the couple of years I have been working on a side project in the tech industry.   One of the things that struck me was the hiring of interns, both paid and unpaid.
I’m now aware that interns are being hired in other industries such as legal, politics, journalism, and marketing.  However I have never come across the use of interns within the mining industry.
Intern

Why hire interns?

I was recently talking to a marketing consultant about tips on tech marketing and one of the suggestions she made was to hire an unpaid intern.  They would do much of the legwork of finding sales contacts and establishing contact with them.
My first question was why would anyone work for free?  There are  three main reasons:
  1. For school credit; as part of a course credit in college or university where an internship is part of the program requirement.
  2. For experience; it is difficult to get a real job without experience and so the internship teaches, builds  experience, and establishes a portfolio of work.
  3. Networking; building up industry connections can possibly lead to permanent work down the road.

Its the right thing to do

At first I was taken aback at the thought of asking someone to work for my company for free.  Are we that cheap?
Thinking about it further, if you are paying someone a salary the expectation is that they should be somewhat skilled at their job.  I have come to realize that the internship may actually be a win-win for both parties.

Its a win-win

The company gets a chance to learn about potential employees and also gets productive service from them.
The intern gains employment experience and learns about the realities of the business world.  Students have already paid the schools to teach them.  Now businesses can help teach them more, but at no cost.   It’s a win-win for both.
So how did our unpaid intern search go?  We posted a free ad on indeed.ca.  Within 72 hours we received over ten replies, of which only 2-3 came close to meeting the actual qualifications.  Some of the applicants had no relevant experience at all.
Possibly in today’s job market people are willing to work for free on the hope that they can get some experience, which will hopefully lead to a permanent job in the future.

Conclusion

The question is whether the mining industry can make use of interns in the areas of geology, engineering, marketing, presentation graphics, websites, etc?
There may be many students or recent grads looking for an opportunity and are willing to do whatever it takes to  advance their careers.
Even if your operating budget can’t afford the cost of hiring another person, you may still have a chance to help out someone new in the industry.
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Underground Feasibility Forecasts vs Actuals

Date: January 28, 2017 Author: Ken Kuchling Comments: Leave a reply
underground costing
I recently attended a CIM Management and Economics Society presentation here in Toronto discussing the differences between actual underground production versus the forecast used in the feasibility study. The presenter was Paul Tim Whillans from Vancouver Canada.
His topic is interesting and relevant to today’s mining industry.  Paul raised many thoughtful points supported by data. He gave me permission to share his information.
The abstract for his paper is inerted below.  The paper can be downloaded at this LINK and here are the presentation slides.

ABSTRACT

“An underground mining study that is done in accordance with NI43-101, JORC or similar reporting code is generally assumed by the public to be representative, independent and impartial. However, it has been well documented by academics and professionals in our industry that there is a sharp difference between the forecasts presented in these underground studies and the actual costs when a mine is put into production.
For underground mines, the risks associated with obtaining representative information are much greater than for surface mining and the cost of accessing underground ore is also proportionally much greater. There is a pressing need to align expectations, by improving the accuracy of projections. This will result in reduced risk to mining companies and investors and provide more reliable information to government agencies, the public, and more importantly, the communities in which the proposed mine will operate.
The objective of this article and an article currently being written titled “Mining Dilution and Mineral Losses” is to:
– Discuss the dynamics of intention that lead to over-optimism;
– Provide simple tools to identify which studies are likely to be more closely aligned with reality;
– Identify some specific points where underground mining studies are generally weak;
– Discuss practices currently in use in our industry that lead to a composite or aggregate effect of over optimism;
– Describe the effects of overly optimistic studies;
– Outline specific changes that are necessary to overcome these challenges; and
– Stimulate discussion and awareness that will lead to better standards.”

Conclusion

I agree with many of the points raised by Paul in his study. The mining industry has some credibility issues based on recent performance and therefore understanding the causes and then repairing that credibility will be important for the future.
Credibility ultimately impacts on shareholder returns, government returns, local community benefits, and worker health and safety; so having a well designed mine will realize benefits for many parties.
If you need more information Paul’s website is at http://www.whillansminestudies.com/
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Resource Estimates – Are Independent Audits A Good Idea?

Date: February 2, 2016 Author: Ken Kuchling Comments: 2 Replies
mining reserves
Question: How important is the integrity of a tailings dam to the successful operation of a mine?
Answer: Very important.
Tailings dam stability is so important that in some jurisdictions regulators may be requiring that mining companies have third party independent review boards or third party audits done on their tailings dams.  The feeling is that, although a reputable consultant may be doing the dam design, there is still a need for some outside oversight.
Differences in interpretation, experience, or errors of omission are a possibility regardless of who does the design.  Hence a second set of eyes can be beneficial.

Is the resource estimate important?

Next question is how important is the integrity of the resource and reserve estimate to the successful operation of a mine?
Answer: Very important.  The mine life, project economics, and shareholder value all rely on it.     So why aren’t a second set of eyes or third party audits very common?

NI 43-101 was the first step

In the years prior to 43-101, junior mining companies could produce their own resource estimates and disclose the results publicly.  With the advent of NI 43-101, a second set of eyes was introduced whereby an independent QP  could review the company’s internal resource and/or prepare their own estimate.  Now the QP ultimately takes legal responsible for the estimate.
Nowadays most small companies do not develop their own in-house resource estimates.  The task is generally awarded to an independent QP.

Resource estimation is a special skill

Possibly companies don’t prepare their own resource estimates due to the specialization needed in modelling and geostatistics. Maybe its due to the skills needed to operate block modeling software.   Maybe the companies feel that doing their own internal resource estimate is a waste of time since an independent QP will be doing the work anyway.

The QP is the final answer..or is it?

Currently it seems the project resource estimate is prepared solely by the QP or a team of QP’s.   In most cases this resource gets published without any other oversight. In other words no second set of eyes has taken a look at it.  We assume the QP is a qualified expert, their judgement is without question, and their work is error free.

Leapfrog Model

As we have seen, some resources estimates have been mishandled and disciplinary actions have been taken against QP’s.   The conclusion is that not all QP’s are perfect.
Just because someone meets the requirements to be a Competent Person or a Qualified Person does not automatically mean they are competent or qualified. Geological modeling is not an exact science and will be based on their personal experience.

What is good practice?

The question being asked is whether it would be good practice for companies to have a second set of eyes take a look at their resource estimates developed by independent QP’s?
Where I have been involved in due diligence for acquisitions or mergers, it is not uncommon for one side to rebuild the resource model with their own technical team.  They don’t have 100% confidence in the original resource handed over to them.   The first thing asked is for the drill hole database.
One downside to a third party review is the added cost to the owner.
Another downside is that when one consultant reviews another consultant’s work there is a tendency to have a list of concerns. Some of these may not be material, which then muddles the conclusion of the review.
On the positive side, a third party review may identify serious interpretation issues or judgement decisions that could be fatal to the resource.
If tailings dams are so important that they require a second set of eyes, why not the resource estimate?  After all, it is the foundation of it all.
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