Articles tagged with: Study Management

Mining Due Diligence Data Rooms – Help!

Date: May 13, 2015 Author: Ken Kuchling Comments: 3 Replies
Mining reviews
Many of us have heard the statement “Have a look in the data room, it’s all in there”. This can bring a cold sweat to even the most experienced engineer who undertaking a due diligence review.  How many of you can recall being given FTP access to a data room that is full of highly disorganized folders and sub-folders, files with cryptic names, different updates of the same file in different folders?

It’s like looking for a needle in a haystack.

It can be difficult to impossible to determine which files are important and relevant and which files have been simply dumped into the data room. There is nothing worse than spending a day reviewing an Excel financial model only to find out that it wasn’t the latest version and a different un-related folder had the correct version.
Data rooms are typically created for due diligence exercises, or during advanced an engineering stage. Regardless of the purpose, it is helpful for all involved  to have a document control person who understands what is in the data room, what is important, and what is non-essential.
Large projects often have an dedicated document control person to manage the data room.  However smaller companies in a due diligence phase may tend to use a team approach.  Everyone dumps all their electronic files into the data room, including email transcripts, using some type of sensible folder structure (hopefully).
It’s then up to the user to dig through the files to locate what they need.  This can be an onerous task, costing everyone money in wasted time.

Organization of the mining data room is key

Comprehensive searchable document management systems such as Ansarada, Aconex, SharePoint, and others are available.  They can be pricey and will require a team mindset to function, organize, and catalog the information.  However a properly implemented system can make it easier to search for files, keywords, and the latest versions of files. “Properly implemented” means that the entire team takes time when putting information in to ensure it is properly tagged meta-data.  Its is not uncommon for such systems to become repositories for hundreds or thousands of different files.
When using a cloud-based data room or FTP site, try to select one that allows bulk downloading of documents rather than only allowing one file download at a time.
Some data rooms, for security and tracking purposes, require users to be online in order to open a document, even documents downloaded onto your computer.  This makes it difficult to work when one doesn’t have internet access (like on an airplane).
Some data rooms limit the cut & pasting ability from the documents.  This can make it difficult to prepare your own summary  report if you want to include pasted images from the documents.

Conclusion

The bottom line is that management of a mining data room is critically important, although I don’t know if there is any single magic solution.
Small mining companies may have tight budgets and a limited management team so organizing data properly isn’t high on the priority list.   I suggest to anyone organizing a data room, please take the time to properly set up the folder structure, develop a single bibliography of what files are in there, and assign a person to be familiar with the general contents of the data room.
Unless its a legal case involving lawyers, don’t just dump in everything. Avoid unnecessary data files or “work in progress” files that are not actually required by anyone.

Read More on the Subject

Another aspect of data rooms that can help make a due diligence taxing is the way the spreadsheet models are built.  Models can either be made simple and user friendly, or can be complex showing how clever the model creator is.   You can read some thoughts on this at the following link “Mine Financial Modelling – Please Think of Others“.
For more discussion on the topic of mining due diligence, another blog post discusses the help that a technical checklist can deliver.  There are many aspects of a mining project, from legal, social, to technical and a checklist helps to avoid missing things.  You can read more about the checklist on this at “Mining Due Diligence Checklist“. You can even request a free copy of my Excel checklist if interested.

 

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Junior Miners – Get Your Own Independent Consultant

Date: May 12, 2015 Author: Ken Kuchling Comments: 1 Reply
PEA consultants
Over the past few years I have worked in different consulting roles; as an independent consultant; as a member of a large consulting team; and as owner’s representative managing consultants.   I have learned that there is a role for both the independent consultant and larger consulting firms.  Read on for more in this self-serving article.

Independents have a role

A previous blog (“9. Large Consulting Firms or Small Firms – Any Difference?”) discusses where large and small consultants fit into the overall picture.   Large technical teams are required where there are broader scopes of work, significant effort levels, and where multiple skills sets are needed.
Independent consultants are a different thing.  They are best suited for assisting the Owner directly, either independently or as part of an overall corporate advisory team.  Non-technical junior mining management teams should always have access to in-house engineering capability for brainstorming or technical direction.
Even if some of the management are technically oriented, having independent thought is valuable. The question is whether the engineer should be a cheerleader or a true independent observer.
Independent consultants will differentiate themselves from large engineering firms in several ways.
  • They don’t bring a lot of extra personnel onto a job.  They focus only on what is needed and can draw in other expertise when needed.
  • They can provide unbiased advice.  Larger firm sometimes have business development conflicts. The independent consultant does not have the motivation to win a feasibility study or EPCM contract.
  • A company can develop a long term working relationship with an independent consultant.  Everyone gets familiar with each other’s objectives and goals.  Large engineering firms can be revolving doors with people moving on to other firms.
  • Independents can work efficiently at a pace of their own choosing.  This can result in lower costs and faster deliverables.  I know many independent consultants will work evenings and weekends to meet client targets.
  • Independents can provide long term stability since they won’t have any employee turnover.  Personally I was involved for over 15 years with a mining operating in Suriname.  The expat staff at the mine site experienced significant turnover.  This was partly due to them being promised personal development relocations.  I ended up being the only constant for the mine site.  I knew the history and why things were done they way they were.  I even had copies of old study reports they could no longer find in their files on site.  I knew what was done previously, thereby avoiding re-inventing the wheel each time there was a new technical manager was brought in.

Consultants and Stocks Options

A point of discussion is whether the independent consultants should receive stock option compensation.  I have worked under both situations.
Awarding stock options might eliminate the “independent” nature of the relationship and hence negated the ability to sign off as an independent QP.  In some circumstances, the company may not require the independent consultant to be a QP since they mainly fulfill an advisory role.
Does one want independent advice, from someone who may not be a significant shareholder or option holder?
One advantage of awarding stock options is that the consultant may become more beholden to the project.  They feel it is their project too, rather than simply acting as an adviser.  They may have a longer term interest in being involved with the project and the company.
Conversely the company may prefer the consultant doesn’t have any direct ownership so that their advice can be viewed as being unbiased. Having a contrarian view of corporate plans is a good thing.
I feel that awarding stock options is a good way to foster long term commitment from the consultant. It can be easier for them to walk away without any such inducement.

Conclusion

The bottom line is that independent consultants have a role to play and should be part of all owner’s teams, whether be on the Board or on an Advisory Panel.   The independent consultants can be selected based on their technical specialization (i.e. exploration, resource modelling, mining, metallurgy, environmental) and provide valuable part time guidance to the company.
The caveat is to ensure that the consultant is technically capable.  I have seen instances where certain members of the advisory panel gave poor advice.  perhaps they weren’t that technically capable but simply friends with some of the management.  Unfortunately other advisors would see these limitations, but not say anything out of professional courtesy.
Lastly, decide whether the engineer should be an honest advisor or a cheerleader.  Companies should want to hear the truth.  If a 3rd party due diligence teams comes in, they will be looking for flaws in the project.  It would be in a company’s self interest to know what those flaws are before the due diligence teams finds them.
One of the things an advisor can help do is decide the study path the company should take.  To learn more about the 4 mining study types, you can check out this blog post “4 Mining Study Types (Concept to Feasibility)“.
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Large or Small Mining Consulting Firms – Any Difference?

Date: May 7, 2015 Author: Ken Kuchling Comments: 2 Replies
Mining feasibility pre-feasibility
Some junior mining companies select their mining study consultant based on the assumption that they need a “big name” firm to give credibility to their study.   This creates an interesting dilemma for many smaller mining companies since they the larger firms can cost more.  Its also a dilemma for smaller engineering firms trying to win jobs.  While large consultants may cost more due to higher overheads; their brand name on a study may bring some value.
In my personal experience I find that larger consultants are best suited for managing the large scale feasibility studies.  This isn’t because they necessarily provide better technical expertise.  Its because they generally have the internal project management and costing systems to manage the complexities of such larger studies.
The larger firms are normally able to draw in more management resources; for example, project schedulers, cost estimators, and document control personnel.  Ultimately one will pay for all of these people, albeit they may be a critical part in successfully completing the study.
A feasibility study is more rigorous than a pre-feasibility study, which in turn is more rigorous than a PEA or scoping study.

Sub-contracting Parts

For certain aspects of a feasibility study, one may get better technical expertise by subcontracting to smaller highly specialized engineering firms.  However too much subcontracting may become an onerous task.  Often the larger firms may be better positioned to do this.
In my view, likely the best result will come from a combination of a large firm managing the feasibility study but undertaking only the technical aspects for which they are deemed to be experts.
The large lead firm would be supported by smaller firms for the specialized aspects, as per a previous article “Multi-Company Engineering Studies Can Work Well..Or Not”.

What about smaller studies?

For smaller studies, like scoping studies (i.e. PEA’s), which can be based on limited amounts of technical data, I  don’t see the need to award these studies to large engineering firms.  The credibility of such early studies will be linked to the amount of data used to support the study.  For example, there may be limited metallurgical testing, or limited geotechnical investigations; or the resource is largely inferred.
Not all PEA’s are equal (see “PEA’s – Not All PEA’s Are Created Equal”).  A large firm’s application of limited data may be no more accurate or defensible than a small firm’s use of the same data.
One of the purposes of an early stage study is to see if the project has economic merit and would therefore warrant further expenditures in the future.  An early stage study is (hopefully) not used to defend a production decision.  The objective of an early stage study is not necessarily to terminate a project (unless it is obviously highly uneconomic).
I have seen instances where larger firms, protecting themselves from  limited data, were only willing to use very conservative design assumptions in early stage mining studies. This may not be helpful to a small mining company trying to decide how to advance such a project.

Conclusion

The bottom line is that for early stage studies like a PEA, smaller engineering firms can do as good a job as larger firms.  However one must select the right firm.  Review some of their more recent 43-101 reports to gauge their quality of work.  Don’t hesitate to check with previous client references.
For the more advanced feasibility level studies, be wary if a smaller firm indicates they can do the entire study. Perhaps they can be responsible for some parts of the feasibility study as a sub-contractor to a larger firm. Managing these large study may be beyond their experience and internal capabilities.
Whether you are considering a small or large engineering firm, know their strengths and weaknesses as they will relate to the specific’s of your study.
In another blog post I have expanded the discussion about the importance of the study manager role. You can read that post at this link “Importance of a Study Manager – That’s the Key“.
Another blog post discusses undertaking studies using multiple engineering teams and the pitfalls to watch out for.  That blog post is at “Multi-Company Mining Studies Can Work Well…or Not“.
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Mining PEA’s – Is it Worth Agonizing Over Details

Date: May 5, 2015 Author: Ken Kuchling Comments: 3 Replies
Mining PEA
As stated in a previous article (“PEA’s – Not All PEA’s Are Created Equal“) different PEA’s will consist of different levels of detail.  This is driven by the amount of technical data available and used in the study.    The same issue applies to a single PEA whereby different chapters of the same study can be based on different degrees of data quality.
I have seen PEA’s where some of the chapters were fairly high level based on limited data, while other parts of the same study went into great depth and detail. This may not be necessary nor wise.

Think about the level of detail justifiable

If the resource is largely inferred ore, then the mine production plan will have an inherent degree of uncertainty in  it.  So there is not a lot of justification for other engineers (for example) to prepare detailed tailings designs  associated with that mine plan.
Similarly there is little value in developing a very detailed operating cost model or cashflow model for a study that has many underlying key uncertainties.  Such technical exercises may be a waste of time and money, adding to the study duration, increasing engineering costs, and giving the unintended impression that the study is more accurate than it really is.
Different levels of detail in the same study can crop up when diverse teams are each working independently on their own aspect of the study.   Some teams may feel they are working with highly accurate data (e.g. production tonnage) when in reality the data they were provided is somewhat speculative.
The bottom line is that it is important for the Study Manager and project Owner to ensure the entire technical team is on the same page and understands the type of information they are working with.   The technical detail in the final study should be consistent throughout.
Experienced reviewers will recognize the key data gaps in the study and hence view the entire study in that light regardless of how detailed the other sections of the report appear to be.
You can read more on the subject of uncertainty in PEA’s in another blog post at this link “Mining PEA’s – Not All PEA’s Are Created Equal“.
Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website.  Otherwise I post notices on LinkedIn, so follow me at: https://www.linkedin.com/in/kenkuchling/.
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Multi-Company Mining Studies Can Work Well…or Not

Date: May 4, 2015 Author: Ken Kuchling Comments: Leave a reply
Mining studies
These days most, if not all, economics mining studies rely on a engineering teams comprised of participants from different consulting firms or from different regional offices of the same firm.   This approach gives the opportunity to use specific experts for different aspects of the study.
My recollection is that many years ago larger consulting firms would offer to do an entire study in-house. They would have the in-house team to cover almost the entire study. That approach seems to have changed and now the multi-company path is the norm.
This approach is partly being driven by the clients who wish to use specific consultants they are familiar with and have existing relationships with.
In some instances, larger firms may still make the argument they can take on all of the project scope themselves.  However one must reflect on such offers.  The danger being a less qualified technical team seconded from offices that are not busy.  Possibly you won’t get the best team; you  get who is available.
In many multi-company studies, it is not uncommon that few of the team members have ever worked together before.  It may be a consultant’s team building exercise right from the start.
I have had both good and bad experiences with these types of engineering teams.  Some of them work very well while others floundered.  Even when working with different offices of the same firm, things may not go as planned.

The Study Manager is Key

To have a successful mining study team, in my experience the two key factors are;
  1. The competency of the Study Manager;
  2. The amount (and style) of team communication.
The Study Manager is vital to keeping everyone working on the same page and ensuring timelines are met.   A single team member delaying their deliverables will delay others on the team.
Some consulting firms have multiple projects underway at the same time.  Unexpected delays in one study may cause them to shift idle personnel onto other studies.  Unfortunately sometimes it is difficult to bring the team back together on the original study at a moment’s notice.
The Study Manager must ensure that everyone understands what their deliverables are.   Generally this is done using a “Responsibility Matrix”, but these can sometimes be too general.
Where cost estimation is involved, the Responsibility Matrix should be supported by a Work Breakdown Structure (“WBS”) assigning the costing responsibilities.  Given that the contentious parts of many studies are the capital and operating cost estimates, I personally view the WBS equally as important as the Responsibility Matrix.
Team communication is vital and there are different ways to do it.   Weekly or bi-weekly conference calls work well but these need to be carefully managed.  With a large team on a conference call, there is a fine line between getting too much technical detail versus not enough detail.
On some studies I have seen a weekly call restricted to one-hour long and then everyone flees until next week’s call.  At the end of these conference calls, one might have an uneasy feeling of it being incomplete. Perhaps people were not clear on something but hesitated to ask become the one-hour time limit is up.   In such cases it is important for the relevant parties to continue on or to have a separate call.

Make it important to  speak up

The bottom line is that multi-company teams will work fine as long as the study manager is capable.  Its not a simple task, and not everyone can do it well.  However everyone (client and the other team members) appreciate working under a really good study manager.
In another blog post I have expanded the discussion about the importance of the study manager role.  You can read that post at this link “Importance of a Study Manager – That’s the Key“.
In another blog post I have gone into a bit more depth on the role a Work Breakdown Structure plays.   You can read that post at this link “Work Breakdown Structures – Don’t Forget About The WBS“.
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Mining PEA’s – Not All PEA’s Are Equal

Date: April 30, 2015 Author: Ken Kuchling Comments: Leave a reply
Mining Preliminary Assessments
A Preliminary Economic Assessment (“PEA”) is defined in NI 43-101 as “…a study, other than a pre-feasibility or feasibility study, that includes an economic analysis of the potential viability of mineral resources”.  This is a fairly broad definition that provides for plenty of flexibility.  While there are generally accepted industry norms for a pre-feasibility or feasibility study, the mining PEA can have a broad scope.
Some PEA’s might be based on a large database of test work and site information while others may rely on very preliminary data and require design projections based on that data.
Some PEA’s may have production schedules consisting largely on Inferred resources while other schedules may be based on higher proportion of Indicated resource.
Some PEA’s are able to incorporate information from advanced socio-environmental work while other PEA’s may not have access to advanced information.
Therefore one should not view all PEA’s are being created equal. Perhaps that is what investors are doing it seems, in many cases ignoring the results of newly issued PEA’s.
The PEA is normally developed at a fairly early stage in the project life.  The initial PEA may then be superseded with a series of updated PEA’s as more data is acquired.  Typically one would expect to see changes in project size or scope in these updates and hopefully improved economics.  Shareholders appreciate being updated on positive growth trends.

Sequential PEA’s

The sequential PEA approach is a convenient way to continue advancement of the project without making the step to a Pre-Feasibility study or bigger step to a Feasibility study.  Maybe the project is still growing in size and a feasibility study at this stage would not be presenting the true potential, hence the updated PEA.
On the downside of the sequential PEA approach is that investors may get tired of hearing about PEA after PEA.  They may want to see a bigger advance towards a production decision.  They ask “How long can they keep studying this project?”.

 

There is no right or wrong as to what constitutes a PEA.

The securities commissions consider that the cautionary language an important component of the PEA Technical Report and may red-flag it if it’s not in all the right places.   However this cautionary language is generally focused on the resource.
For example the typical “The reader is cautioned that Inferred Resources are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as Mineral Reserves, and there is no certainty that value from such Resources will be realized either in whole or in part.”
In that cautionary statement there is no mention of all the other speculative assumptions that may have been used in the study.
For example, the Inferred resource may not be that significant however the amount of metallurgical test work might be a more significant uncertainty.  The previous cautionary language doesn’t address this issue.  Therefore it is important to consider the chapters in the Report pertaining to risks and recommendations for a more complete picture of the entire report.

Conclusion

The bottom line is that when reviewing a PEA report, be aware of all the uncertainties and assumptions that have been incorporated into the study.   The report may be well founded or built on a shaky foundation.  No two PEA’s are the same and this must be clearly understood by the reviewer.
Currently it seems that share prices do not move much with the issuance of a PEA.  It seems there is a lack of confidence in them.  On the other hand, I have also heard that it is better for future financings if a project has at least reached the PEA stage.
Develop your own personal PEA “checklist” to identify the amount and quality of data used for the different parts of the study to help understand where data gaps may exist.
In another blog post I discuss how it is important for the Study Manager and project Owner to ensure the entire technical team is on the same page and understands the type of information they are working with.   The technical detail in the final study should be consistent throughout.   You can read that blog at “PEA’s – Is it Worth Agonizing Over Details“.
Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website.  Otherwise I post notices on LinkedIn, so follow me at: https://www.linkedin.com/in/kenkuchling/.
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4 Mining Study Types (Concept to Feasibility)

Date: April 29, 2015 Author: Ken Kuchling Comments: 2 Replies
Over my career I have been involved in various types of mine studies, ranging from desktop conceptual to definitive feasibility.    Each type of study has a different purpose and therefore requires a different level of input and effort, and can have hugely different costs.
I have sat in on a few junior mining management discussions regarding whether they should be doing a PEA or a Pre-Feasibility Study, or a Feasibility instead of a Pre-Feasibility Study.    Everyone had their opinion on how to proceed based on their own reasoning.   Ultimately there is no absolute correct answer but there likely is one path that is better than the others.  It depends on the short term and long term objectives of the company, the quality and quantity of data on hand, and the funding available.

4 types of mining studies

In general there are 4 basic levels of study, which are listed below.  In this blog I am simply providing an overview of them.  On the web there are detailed comparison tables, but anyone can contact me at KJKLTD@rogers.com for an a full copy of my table (an excerpt is shown below).

Four Studies Table

1. Desktop or Conceptual Mining Study
This would likely be an in-house study, non-43-101 compliant, and simply used to test the potential economics of the project.  It lets management know where the project may go (see a previous blog at the link “Early Stage “What-if” Economic Analysis – How Useful Is It?”.    I always recommend doing a desktop study, and preparing some type of small internal document to summarize it.  It doesn’t take much time and is not made public so the inputs can be high level or simply guesses.  This type of early stage study helps to frame the project for management and lets one test different scenarios.
2. Preliminary Economic Assessment (“PEA”)
The PEA (or scoping study) can be 43-101 compliant and present the first snapshot of the project scope, size, and potential economics to investors.  Generally the resource may still be uncertain (inferred classification), capital and operating costs are approximate (+/- 40%) since not all the operational or environmental issues are known at this time.   Avoid promoting the PEA as an “almost” feasibility level study.

Don’t Announce a PEA Until You Know the Outcome

I recommend not announcing the start of a PEA until you are confident in what the outcome of that PEA will be.   A reasonable desktop study done beforehand will let a company know if the economics for the PEA will be favorable.  I have seen situations where companies have announced the start of a PEA and then during the course of the study, things not working out economically as well as envisioned.  The economics were poorer than hoped and so a lot of re-scoping of the project was required.  The PEA was delayed, and shareholders & analysts negative suspicions were raised in the meantime.
The PEA can be used to evaluate different development scenarios for the project (i.e. open pit, underground, small capacity, large capacity, heap leach, CIL, etc.).  However the accuracy of the PEA is limited and therefore I suggest that the PEA scenario analysis only be used to discard obvious sub-optimal cases.  Scenarios that are economically within a +/-30% range of each other many be too similar to discard at this PEA stage.  This is where the PFS comes into play.
3. Pre-Feasibility Study (“PFS”)
The PFS will be developed using only measured and indicated resources (no inferred resource used) so the available ore tonnage may decrease from a previous PEA study.  The PFS costing accuracy will be greater than a PEA.  Therefore the PFS is the proper time to evaluate the remaining mine development scenarios.  Make a decision on the single path forward going into the Feasibility study.

Use the PFS to determine the FS case

More data will be required for the FS, possibly a comprehensive infill drilling program to upgrade more of the the resource classification from inferred to indicated.  Many companies, especially those with smaller projects might skip the PFS stage  entirely and move directly to Feasibility.  I don’t disagree with this approach if the project is fairly simple and had a well defined scope at the PEA stage.
4. Feasibility Study (“FS”)
The Feasibility Study is the final stage study prior to making a production decision.  The feasibility study should preferably be done on a single project scope.  Try to avoid more scenario option analysis at this stage.
Smaller companies should be careful when entering the FS stage.  Once the FS is complete, shareholders will be expecting a production decision.  If the company only intends to sell the project with no construction intention, they have now hit a wall.  What to do next?

Sometimes management feel that a FS may help sell the  project.

I don’t feel that a FS is needed to attract buyers and sell a project.  Many potential buyers will do their own in-house due diligence, and possibly some alternate design and economic studies.   Likely information from a PFS would be sufficient to give them what they need.  A well advanced Environmental-Socio Impact Assessment may provide more comfort than a completed Feasibility Study would.

Conclusion

executive meetingMy final recommendation is that there is no right answer as to what study is required at any point in time.  Different paths can be followed but consideration must be given to future plans for the company after the study is completed.   Also consider what is the best use of shareholder money?
Company management may see pressure from retail shareholders, major shareholders, financial analysts, and the board of directors to “do a study”.  Management must decide which mining study path is in the best longer term interests of the company.  Maybe no study is warranted.
Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website. Follow us on Twitter at @KJKLtd for updates and insights.
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Early Stage “What-if” Mine Economic Analysis – Its Valuable

Date: April 27, 2015 Author: Ken Kuchling Comments: Leave a reply
Mining study economics
Over my career I have worked with large and small mining companies and seen how they studied projects and potential acquisitions.
Large mining companies have their in-house evaluation teams that will jump on a potential opportunity that comes around and start examining it quickly.  These evaluation teams may consist of a specialized head office group supported by people temporarily pulled in from their mining operations.
They are experienced at what they do and can provide management with solid advice even if working with only limited data.  This help management decide very early on whether to further pursue the opportunity or walk away immediately.
Early stage economics are normally part of this evaluation approach.   Although they are not correct all of the time, more than often they save their company from wasting money on projects unlikely to fly.
However if you are a small mining company, what are your options?
You don’t have an in-house technical team sitting around ready to go.  Management still needs to know if this project has a chance.  If the project is early stage, sometimes management thinks its fine to take a gamble, acquire the project, and then put money into the ground rather than spending on early studies.

It is possible to do both

Management and the exploration team usually have a vision for their projects, even those projects with only limited information.   Each person may have a different opinion on the potential size and scope of what may ultimately exist there.  However the question is whether any of those visions have sufficient accuracy to warrant spending more shareholder money on the project.
Some of the junior mining management teams that I have worked with have found it beneficial early on to have a basic internal cashflow model on hand.   If properly constructed, these are simple to tweak to examine “what-if’s” scenarios.  Input the potential deposit size and mine life, potential head grades, expected metallurgy, and typical costs to see what the economic outcome is.  Does this project have a chance and, if not, what tonnage, head grade, recovery, or metal price is required to make it work?   The simple cashflow model can tell you all of this.

Early stage modelling adds value

The tangible benefits to very early financial modelling are:
  • It helps management to conceptualize and understand their project.  If done honestly, it will reveal both the opportunities and threats to success.
  • It helps management to understand what technical parameters will be most important for them to resolve and what technical factors can be viewed as secondary. This helps guide the on-going exploration and data collection efforts.
  • Periodically refreshing the economic model with new information will reveal if the economic trends are getting better or worse.

Its not 43-101 compliant

I must caution that this type of early stage economic analysis is not 43-101 compliant and hence can not be shared externally, no matter how much one might wish to.
Another caution is that in some cases these early stage un-engineered projections become “cast in stone”, with management treating them as if they are accurate estimates.  Then suddenly all subsequent advanced studies must somehow agree with the original cost guesses, thereby placing unreasonable expectations on the project and the people doing the work.
The early stage economic models can consist of simple one-dimensional tables using life-of-mine tonnages or two-dimensional tables showing assumed annual production by year.  Building simple cashflow models may take only 2-3 days of effort.  That is not an onerous exercise compared to the overall benefit they can provide.
The bottom line is that it is useful to take a few days to develop a simple cashflow model.  “Simple” also means that management themselves can tweak the models and don’t need to be modeling expert on hand at all times.  “Simple” means the model should be well.  In another block post I discuss why to avoid demonstrating one’s Excel skills in building models. Read more on that at this link  Financial Spreadsheet Modelling – Think of Others.
Most companies have a CFO that can easily undertake this type  of modelling, with the help of some technical input.  Be careful though, often CFO’s take the simple cashflow model to an unwarranted level of complexity.
The simplest of all models is the one-dimensional approach.  To learn more about the concept behind a simple 1D financial models, read the blog post “Project Economics – Simple 1D Model” .
The entire blog post library can be found at this LINK with topics ranging from geotechnical, financial modelling, and junior mining investing.
Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website.  Otherwise I post notices on LinkedIn, so follow me at: https://www.linkedin.com/in/kenkuchling/.
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