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)“.
Note: You can sign up for the KJK mailing list to get notified when new blogs are posted. Follow me on Twitter at @KJKLtd for updates and insights.

Pit Wall Angles and Bench Widths – How Do They Relate?

Date: May 10, 2015 Author: Ken Kuchling Comments: 3 Replies
open pit slopes
The wall of an open pit wall will consist of a series of stacked benches.  Geotechnical engineers will normally provide the pit slope design criteria based on the inter-ramp angle (“IRA”) for various sectors around the pit.  The IRA represents the toe-to-toe slope angle, as shown in the diagram below.

Pit Slope Image for post

The inter-ramp angle can be created in many ways, depending on the bench height (“BH”), bench face angle, and the catch bench or berm width.  Different combinations of these can be used to develop the same inter-ramp angle.
Typically the bench face angle (“BFA”) will be dictated by the rock strength, the structural fabric, and whether controlled blasting is used (minimizing damage to the walls).   The BFA may vary around the pit or in different rock types, but it typically is in the range of 60° to 75°.

Open Pit Slope

The catch bench (“CB”) or berm is used to catch spalling rock and prevent it from rolling down the pit wall,  creating a safety hazard.
A rule of thumb is that the catch bench width should be according to the formula 4.5m + 0.2H, where H is the height of the bench.   This means the recommended catch bench width for a 5m high bench should be about 5.5m; for a 10m high bench it should be 6.5m; and for 15m high bench it should be 7.5 metres.
Double benching (or triple benching) is used where the inter-ramp slopes angles are steep enough that single benching would result in an overly flatten slope.
For example if the inter-ramp slope is 50° and the BFA is 70°, then the corresponding calculated catch bench width for a 5m high bench would be 2.4 metres.  However such a small catch bench would be ineffective in catching spalliing rock.
If one double benched (i.e. left a catch bench every 10m instead of every 5m), then the calculated catch bench width would be 4.8 metres.  If one triple benched (i.e. left a catch bench every 15m), then the recommended width would be 7.1 metres.  Hence triple benching would be suggested in this case, assuming the rock mass is of sufficient strength to sustain a 15m high face.
A simple interactive calculator (Bench Slope Calculator) has been prepared to show the relationship between all of these factors.  A screenshot of the calculator is shown below.  It allows one either to calculate the IRA given a set of bench height, BFA, and catch bench criteria; or calculate the catch bench width given the height, BFA, and IRA criteria.  The yellow shaded cells represent input cells.

Bench Slope Calculator Pic

Single Bench Height (BH):  this is the input height of a single operating bench.
No. of Benches between catch benches:   this is the input for single, double, or triple benching.
Total Height (TH):  this is the calculated total height (# of benches X single bench height)
Bench Face Angle (BFA):  this is the input bench face angle, in degrees
Catch bench (CB):  this is the width of the catch bench, either as an input or a calculated value.
Inter-Ramp Angle (IRA): this is the slope angle in degrees, either as a calculated value or an input.
When double or triple benching, sometimes a small 1-2m drill berm may be left between benches due to the inability of the drill to position itself against the pit wall.  The width of the drill berm can possibly be eliminated by drilling the entire double bench or using smaller drills.
Sometimes one may see the term “geotechnical berm”.   In some pit designs a large bench is introduced periodically, e.g. every 120m-180m in continous wall height, which acts as another measure to catch ravelling rock.

Conclusion

The bottom line is that the inter-ramp angle can be achieved in different ways depending on various components of the slope profile.  Safety is of the utmost importance and therefore the adequate sizing of the catch bench is important, as is the ability to access the benches and clean up the rubble buildup.  Double and triple benching maybe required in some circumstances to achieve the design wall angles yet maintain safety catch bench widths.
For those curious about how mine economics can be impacted by increasing the pit wall angle, a small study we did  indicated that going from 45 deg to 50 deg could reduce waste quantities by 15% This was equivalent to $50 million in savings.  To read more, follow this link.  “Steeper Pit Slopes Can Save Money“.
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.

Financings – It Helps to Have a Credible Path Forward

Date: May 9, 2015 Author: Ken Kuchling Comments: 1 Reply
mine economics
Update: This blog was initially written in May 2015, however not much as changed to the end of 2018.
Let me say the obvious; the state of the junior mining market is not great these days.  The number of financings is down and it seems there are a lot of companies struggling to get their piece of the financing pie.   People mention to me that there actually is a fair bit of private equity funding available but only for the right projects.
I have heard from geologist colleagues that financing grass-roots exploration is still extremely difficult.  That is unless company management has had past successes or is well connected to the money scene.
I’m told that 43-101 resource estimates alone no longer generate much excitement.  For projects to be “on the radar” they need to be advanced to at least the PEA stage.  It seems that investors want some vision of what the project might eventually look like.
I have be made aware of more junior mining companies that are struggling for cash while others seemed to have no problem in getting at least some funding to continue their operations.  To me, the biggest differences between these two situations are;
  • If there is top notch management in place,
  • The type of project they had,
  • If their path forward and development plan made sense.

You don’t want to always change management

Management is what it is.  Companies attempt to bring on experienced people to the executive level or to the Board level.   Experienced management can hopefully establish if their project will have a high probability of success or if the project is going to be a hard sell.  This will provide guidance on whether to continue spending money on the project or look for a new project.
From my experience in undertaking due diligence, when a company is looking for financing it is important that  management have the capability to present an orderly, practical, and realistic path forward.  It is important to demonstrate where they will spend the money.
I have participated in due diligence meetings listening to management teams explain that they will have a resource estimate this year and be in production in two years.  Those around the table glance at one another, knowing that they will be lucky to have a feasibility study completed by that time and even more lucky to have their environmental permits in place.   This makes investors nervous.

Keep plans realistic and achievable

It does not help the perception of a management team (or the project itself) if the path forward is unrealistic and unattainable.  The exception being if the management team have done it before.   Similarly low-balling cost estimates and presenting great NPV’s will usually fool no one that has experience. It ultimately may do more harm to credibility than good.
The bottom line is that in order for a project (and the management team) to get serious attention from potential investors is to make sure there is a realistic view of the project itself and have a realistic path forward.
Even a good property can be tarnished by making the technical aspects look over-promotional rather than real.  Make sure the right technical people are involved in the entire process and that company management are listening to them.
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/.

Ore Value Calculator – What’s My Ore Worth?

Date: May 8, 2015 Author: Ken Kuchling Comments: 4 Replies
rock economic value
In my view, one of the most important things you need to understand about your orebody is the insitu rock value. Hopefully it is economic, i.e. an ore value.  Its the key driver in shaping the economics of any mining project.
The two main nature-driven factors in the economics of a mining project are the ore grade and the ore tonnage.  In simplistic terms, the ore grade will determine how much incremental profit can be generated by each tonne of rock processed.
The ore tonnage will determine whether the cumulative profit generated all the ore will be sufficient to pay back the project’s capital investment plus provide some reasonable profit to the owner.

Does the Ore Grade Generate a Profit ?

In order to understand the incremental profit generated by each ore tonne one must first convert the ore grade into a revenue dollar value.   This calculation will obviously depend on metal prices and the amount of metal recovered.  For some deposits with multiple metals, the total revenue per tonne will be based on the summation of value contributed by each metal. Some metals may have different process recoveries and different net smelter payable factors, so several factors come into play.
To help calculate the value of the insitu ore, I have created a simple cloud-based spreadsheet at this link (Rock Value Calculator).  An example screenshot is shown below.  Simply enter your own data in the yellow shaded cells and the rock values are calculated on a “$ per tonne” basis. since the table is pre-populated, one must zero out the values for metals of no interest.

 

Rock Value Calculator Pic

Price: represents the metal prices, in US dollars for the metals of interest.
Ore Grade: represents that head grades for the metals of interest in the units as shown (g/t and %).
Process Recovery: represents the average % recovery for each of the metals of interest.
Payable Factor: represents the net payable percentage after various treatment, smelting, refining, penalty charges.  This is simply an estimate depending on the specific products produced at site.  For example, concentrates would have an overall lower payable factor than say gold-silver dore production.
Insitu Rock Value: this output is the dollar value of the insitu rock (in US dollars), without any process recovery or payable factors being applied.
NSR Rock Value: this output represents the net smelter return dollar value after applying the recovery and payable factors.  This represents the actual revenue that could be generated and used to pay back operating costs.  One can see the impact that these payables have on the overall value.

Mining Profit = Revenue – Cost

The final profit margin will be determined by subtracting the mine operating cost from the NSR Rock Value.  These operating costs would include mining, processing, G&A, and some offsite costs.  Typically large capacity open pit operations may have total operating costs in the range of $10-15/tonne, while conventional hardrock underground operations would be much higher ($50->$100/t).

Conclusion

The bottom line is that very early on one should understand the net revenue that your project’s head grades may deliver.   How valuable is the rock?   It is a fairly simple calculation to undertake.
You can even start evaluating the rock at the exploration drilling stage.  I have a cloud-based calculator for this at the link “Drill Intercept Analysis“.  This calculator is a bit more complex than the Rock Value Calculation but relies on inputting drill intercept data.
Ore value will give sense for whether its a high margin project or whether the ore grades are marginal and higher metal prices or low operating costs will be required. The earlier one understands the potential economics of the different ore types, the better one will be able to visualize, design, and advance the project.
For gold deposits, I have another blog post that discusses grades, values, and how they related to open pit or underground mining costs.  Low grade narrow intervals like have much less economic potential than wide low grade interval or narrow high grade gold intervals. You can read that post at this link “Gold Exploration Intercepts – Interesting or Not?“

 

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/.

 

Google Earth – Keep it On Hand

Author: Ken Kuchling Comments: 1 Reply
Mining studies
In a previous blog post “Mine Site Visit – What Is the Purpose?” I briefly discussed the requirements for a mine site visit to be completed by one or more Qualified Persons (“QP”) in a 43-101 compliant study.    Unfortunately normally the entire study team cannot participate in a site visit; however the next best thing may be Google Earth.

See the Mine Site with Google Earth

Gather your team around their computers and fire up screen sharing software like Teams, GoToMeeting, Skype, or Zoom.  Give control of the mouse to someone who knows the site well.  Here are some of the things you can do on your group tour.
  • You can fly-around the project site examining the topography.
  • You can view regional features, regional facilities, land access routes, and existing infrastructure.
  • You can measure distances (or areas), either in a straight line or along a zigzag path.
  • You can view historical aerial photos (if they exist) to show how the area may have changed over time.
  • You can import GPS tracks and survey waypoints.  If a member of the study team has visited the site with a GPS, they can illustrate their route and their observations.
My recommendation, at the start of a study, is to always have a Google Earth session with your technical team to examine the project site and the regional infrastructure.
A group session like this ensures that everyone sees and hears the same thing. It’s like taking a helicopter tour of the site with your entire study team at once.   A “helicopter tour” would be a good agenda item at the very first kickoff meeting.
Another option is to check the aerial photos and Bird’s Eye views on the Bing Maps website (www.bing.com/maps).  Sometimes those images will be different than what you will find in Google Maps or Google Earth.
As mentioned above, for those still interested the  previous blog post is at “Mine Site Visit – What Is the Purpose?“
Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website.  

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“.
Note: You can sign up for the KJK mailing list to get notified when new blogs are posted.

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/.

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“.

Metal Equivalent Grade versus NSR for Poly-Metallics

Date: May 1, 2015 Author: Ken Kuchling Comments: 4 Replies
NSR for poly-metallics
Many of the mining studies that I have worked on were deposits containing multiple recoverable metals.  For example this might be Ag-Pb-Zn mineralization or Cu-Pb-Zn-Au-Ag mineralization.    Discussions were held regarding whether to use a “metal-equivalent grade” to quantify the deposit grade or to use a Net Smelter Return (“NSR”) dollar value.
This also becomes an issue since one must decide how to apply a cut-off grade for mine planning and reporting.  It can be applied to the major metal grade only, to the equivalent grade, or to an NSR dollar value.

The NSR represents a $/tonne recovered

I have found that the geologists tend to prefer using a metal-equivalent grade approach.  This is likely due to the simpler logic and calculation required for an equivalent grade formula.  At an early stage it’s also simpler to select a reporting cutoff grade based on similar projects.
Generally I have no major concerns with the metal-equivalent approach at the resource estimate stage.   However from an engineer’s view, an equivalent grade does not provide a meaningful representation of the ore quality.
It is more difficult to relate an equivalent grade to an operating scenario that may rely on different mining or processing methods generating different final products (e.g. dore versus concentrates).  The NSR approach makes it easier to understand the actual quality of the ore.
On the downside, the NSR calculation will require more input data.  Assumptions needed relate to metallurgical recoveries, concentrate characteristics and costs, and smelter payables.  However the end result is an NSR block value that can be related directly to the site operating costs.
For example if a certain ore type has an on-site processing cost of $20/tonne and G&A cost of $5/tonne, then in order to breakeven the ore block NSR value must exceed $25/tonne.   If one decides to include mining costs and sustaining capital costs, then the NSR cutoff value would be higher.   In all cases one can directly relate the ore block value to the operating cost and use that to determine if it is ore or waste.  This is more difficult to do using equivalent grades.
Where the equivalent grade can become a problem is when one cosiders the impact of metal prices.  For example, the rock grades can be aggregated to, say, an Ag- equivalent.  However this does not mean that if the silver price goes up by 20% that the rock value also goes up by 20%.  The other metal prices may not have changed, and hence only the equivalent formula would change.   The rock value would go up, but not by 20%.

Using the NSR approach, the operating margin per block is evident.

One drawback to the NSR block value approach is that the calculation will be based on specific metal prices.  If one changes the metal prices, then one must recalculate all of the NSR block values and re-populate the model.
In some studies, I have seen higher metal prices used for resource reporting and then lower metal prices for mine planning or reserves.  In such cases, one can generate two different NSR values for each block.  One can use the same NSR cutoff value for reporting tonnages.   This two NSR approach is reasonable in my view since Resources and Reserves are different entities.

Pit Optimization

Pit optimization can also be undertaken using the block NSR values rather than ore grade values, so the application of NSR’s should not create any additional problems in this area.
For projects that involve metal concentrates, the cashflow model usually incorporates detailed net smelter return calculations, which include penalties, deductions, different transport costs, etc.  The formula used for the calculation of NSR block values can be simpler than the cashflow NSR calculation.   For example, one could try to build in penalties for arsenic content thereby lowering the NSR block value; however in actuality such ore blocks may be blended and the overall arsenic content in the concentrate may be low enough not to trigger the penalty.
Since the NSR block value is mainly used for the ore/waste cutoff, I don’t feel it is necessary to get overly detailed in its calculation.  The cashflow model should always calculate revenues from individual metals rather than using the block NSR value.
The bottom line is that from an engineering standpoint and to improve project clarity, I always prefer to use NSR values rather than equivalent grades.   Geologists may feel differently.
The cutoff grade is an important parameter in mine planning.  In another blog post I discuss whether in times of high metal prices, should the cutoff grade be lowered, raised, or kept the same.  You can read that at “Higher Metal Prices – Should We Lower the Cut-Off Grade?“
Note: You can sign up for the mailing list to get notified when new blogs are posted.

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/.