Mining’s Lassonde Curve – A Wild Ride

Date: June 24, 2020 Author: Ken Kuchling Comments: 10 Replies
Normally I don’t write about mining stock markets, preferring instead to focus on technical matters.  However I have seen some recent discussions on Twitter about stock price trends.  For every stock there are a wide range of price expectations.  Ultimately some of the expectations and realizations can be linked back to the Lassonde Curve.
The Lassonde Curve has been touted by many as a realistic representation of the life stages of a junior mining company.  The curve can sometimes be a roller coaster ride for company management.
Pierre Lassonde, was one of the founders of Franco-Nevada, the first gold royalty company. Thirty years ago he created his curve, that has now become a foundation in the junior mining business.  The Lassonde Curve outlines the company life stages, beginning at exploration and ending at production.  It shows the perceived value (i.e. stock value) that investors may assign at each life stage.
The stock price trend illustrated by the curve can, knowingly or unknowingly, impact on a company’s decision making process.  So in effect, there are some technical ramifications from it.
People may have differing opinions on what factors are driving the curve.   Take a look at it and decide for yourself. Typically people define the curve into four life stages, but I tend to view it in five stages.

Mining Company Stages 1 to 5

Stage 1 Climb

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

Companies Staying front and center

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

Conclusion

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

Date: June 2, 2020 Author: Ken Kuchling Comments: Leave a reply
A while back I wrote a blog titled “Pre-Concentration – Savior or Not?”. That blog was touting the benefits of pre-concentration. More recently I attended a webinar where the presenter stated that the economics of pre-concentration may not necessarily be as good as we think they are.
My first thought was “this is blasphemy”. However upon further reflection I wondered if it’s true. To answer that question, I modified one of my old cashflow models from a Zn, Pb project using pre-concentration. I adjusted the model to enable running a trade-off, with and without pre-con by varying cost and recovery parameters.

Main input parameters

The trade-off model and some of the parameters are shown in the graphic below. The numbers used in the example are illustrative only, since I am mainly interested in seeing what factors have the greatest influence on the outcome.

The term “mass pull” is used to define the quantity of material that the pre-con plant pulls and sends to the grinding circuit. Unfortunately some metal may be lost with the pre-con rejects.  The main benefit of a pre-con plant is to allow the use of a smaller grinding/flotation circuit by scalping away waste. This will lower the grinding circuit capital cost, albeit slightly increase its unit operating cost.
Concentrate handling systems may not differ much between model options since roughly the same amount of final concentrate is (hopefully) generated.
Another one of the cost differences is tailings handling. The pre-con rejects likely must be trucked to a final disposal location while flotation tails can be pumped.  I assumed a low pumping cost, i.e to a nearby pit.
The pre-con plant doesn’t eliminate a tailings pond, but may make it smaller based on the mass pull factor. The most efficient pre-concentration plant from a tailings handling perspective is shown on the right.

The outcome

The findings of the trade-off surprised me a little bit.  There is an obvious link between pre-con mass pull and overall metal recovery. A high mass pull will increase metal recovery but also results in more tonnage sent to grinding. At some point a high mass pull will cause one to ask what’s the point of pre-con if you are still sending a high percentage of material to the grinding circuit.
The table below presents the NPV for different mass pull and recovery combinations. The column on the far right represents the NPV for the base case without any pre-con plant. The lower left corner of the table shows the recovery and mass pull combinations where the NPV exceeds the base case. The upper right are the combinations with a reduction in NPV value.
The width of this range surprised me showing that the value generated by pre-con isn’t automatic.  The NPV table shown is unique to the input assumptions I used and will be different for every project.

The economic analysis of pre-concentration does not include the possible benefits related to reduced water and energy consumption. These may be important factors for social license and permitting purposes, even if unsupported by the economics.  Here’s an article from ThermoFisher on this “How Bulk Ore Sorting Can Reduce Water and Energy Consumption in Mining Operations“.

Conclusion

The objective of this analysis isn’t to demonstrate the NPV of pre-concentration. The objective is to show that pre-concentration might or might not make sense depending on a project’s unique parameters. The following are some suggestions:
1. Every project should at least take a cursory look at pre-concentration to see if it is viable. This should be done on all projects, even if it’s only a cursory mineralogical assessment level.
2. Make certain to verify that all ore types in the deposit are amenable to the same pre-concentration circuit. This means one needs to have a good understanding of the ore types that will be encountered.
3. Anytime one is doing a study using pre-concentration, one should also examine the economics without it. This helps to understand the  economic drivers and the risks. You can then decide whether it is worth adding another operating circuit in the process flowsheet that has its own cost and performance risk. The more processing components added to a flow sheet, the more overall plant availability may be effected.
4. The head grade of the deposit also determines how economically risky pre-concentration might be. In higher grade ore bodies, the negative impact of any metal loss in pre-concentration may be offset by accepting higher cost for grinding (see chart on the right).
5. In my opinion, the best time to decide on pre-con would be at the PEA stage. Although the amount of testing data available may be limited, it may be sufficient to assess whether pre-con warrants further study.
6. Don’t fall in love with or over promote pre-concentration until you have run the economics. It can make it harder to retract the concept if the economics aren’t there.

 

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Climbing the Hill of Value With 1D Modelling

Date: May 12, 2020 Author: Ken Kuchling Comments: Leave a reply
Recently I read some articles about the Hill of Value.  I’m not going into detail about it but the Hill of Value is a mine optimization approach that’s been around for a while.  Here is a link to an AusIMM article that describes it “The role of mine planning in high performance”.  For those interested, here is a another post about this subject “About the Hill of Value. Learning from Mistakes (II)“.
hill of value

(From AusIMM)

The basic premise is that an optimal mining project is based on a relationship between cut-off grade and production rate.  The standard breakeven or incremental cutoff grade we normally use may not be optimal for a project.
The image to the right (from the aforementioned AusIMM article) illustrates the peak in the NPV (i.e. the hill of value) on a vertical axis.
A project requires a considerable technical effort to properly evaluate the hill of value. Each iteration of a cutoff grade results in a new mine plan, new production schedule, and a new mining capex and opex estimate.
Each iteration of the plant throughput requires a different mine plan and plant size and the associated project capex and opex.   All of these iterations will generate a new cashflow model.
The effort to do that level of study thoroughly is quite significant.  Perhaps one day artificial intelligence will be able to generate these iterations quickly, but we are not at that stage yet.

Can we simplify it?

In previous blogs (here and here) I described a 1D cashflow model that I use to quickly evaluate projects.  The 1D approach does not rely on a production schedule, instead uses life-of-mine quantities and costs.  Given its simplicity, I was curious if the 1D model could be used to evaluate the hill of value.
I compiled some data to run several iterations for a hypothetical project, loosely based on a mining study I had on hand.  The critical inputs for such an analysis are the operating and capital cost ranges for different plant throughputs.
hill of valueI had a grade tonnage curve, including the tonnes of ore and waste, for a designed pit.  This data is shown graphically on the right.   Essentially the mineable reserve is 62 Mt @ 0.94 g/t Pd with a strip ratio of 0.6 at a breakeven cutoff grade of 0.35 g/t.   It’s a large tonnage, low strip ratio, and low grade deposit.  The total pit tonnage is 100 Mt of combined ore and waste.
I estimated capital costs and operating costs for different production rates using escalation factors such as the rule of 0.6 and the 20% fixed – 80% variable basis.   It would be best to complete proper cost estimations but that is beyond the scope of this analysis. Factoring is the main option when there are no other options.
The charts below show the cost inputs used in the model.   Obviously each project would have its own set of unique cost curves.
The 1D cashflow model was used to evaluate economics for a range of cutoff grades (from 0.20 g/t to 1.70 g/t) and production rates (12,000 tpd to 19,000 tpd).  The NPV sensitivity analysis was done using the Excel data table function.  This is one of my favorite and most useful Excel features.
A total of 225 cases were run (15 COG versus x 15 throughputs) for this example.

What are the results?

The results are shown below.  Interestingly the optimal plant size and cutoff grade varies depending on the economic objective selected.
The discounted NPV 5% analysis indicates an optimal plant with a high throughput (19,000 tpd ) using a low cutoff grade (0.40 g/t).  This would be expected due to the low grade nature of the orebody.  Economies of scale, low operating costs, high revenues, are desired.   Discounted models like revenue as quickly as possible; hence the high throughput rate.
The undiscounted NPV 0% analysis gave a different result.  Since the timing of revenue is less important, a smaller plant was optimal (12,000 tpd) albeit using a similar low cutoff grade near the breakeven cutoff.
If one targets a low cash cost as an economic objective, one gets a different optimal project.  This time a large plant with an elevated cutoff of 0.80 g/t was deemed optimal.
The Excel data table matrices for the three economic objectives are shown below.  The “hot spots” in each case are evident.

hill of value

hill of value

Conclusion

The Hill of Value is an interesting optimization concept to apply to a project.  In the example I have provided, the optimal project varies depending on what the financial objective is.  I don’t know if this would be the case with all projects, however I suspect so.
In this example, if one wants to be a low cash cost producer, one may have to sacrifice some NPV to do this.
If one wants to maximize discounted NPV, then a large plant with low opex would be the best alternative.
If one prefers a long mine life, say to take advantage of forecasted upticks in metal prices, then an undiscounted scenario might win out.
I would recommend that every project undergoes some sort of hill of value test, preferably with more engineering rigor. It helps you to  understand a projects strengths and weaknesses.  The simple 1D analysis can be used as a guide to help select what cases to look at more closely. Nobody wants to assess 225 alternatives in engineering detail.
In reality I don’t ever recall seeing a 43-101 report describing a project with the hill of value test. Let me know if you are aware of any, I’d be interested in sharing them.  Alternatively, if you have a project and would like me to test it on my simple hill of value let me know.
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Simple Financial Models Can Really Help

Date: April 27, 2020 Author: Ken Kuchling Comments: 3 Replies
A few years ago I posted an article about how I use a simple (one-dimensional) financial model to help me take a very quick look at mining projects. The link to that blog is here. I use this simple 1D model with clients that are looking at potential acquisitions or joint venture opportunities at early stages. In many instances the problem is that there is only a resource estimate but no engineering study or production schedule available.

By referring to my model as a 1D model, I imply that I don’t use a mine production schedule across the page like a conventional cashflow model would.
The 1D model simply uses life-of-mine reserves, life-of-mine revenues, operating costs, and capital costs. It’s essentially all done in a single column.  The 1D model also incorporates a very rudimentary tax calculation to ballpark an after-tax NPV.
The 1D model does not calculate payback period or IRR but focuses solely on NPV. NPV, for me, is the driver of the enterprise value of a project or a company. A project with a $100M NPV has that value regardless of whether the IRR is 15% or 30%.

How accurate is a 1D model?

One of the questions I have been asked is how valid is the 1D approach compared to the standard 2D cashflow model. In order to examine that, I have randomly selected several recent 43-101 studies and plugged their reserve and cost parameters into the 1D model.
It takes about 10 minutes to find the relevant data in the technical report and insert the numbers. Interestingly it is typically easy to find the data in reports authored by certain consultants. In other reports one must dig deeper to get the data and sometimes even can’t find it.
The results of the comparison are show in the scatter plots. The bottom x-axis is the 43-101 report NPV and the y-axis is the 1D model result. The 1:1 correlation line is shown on the plots.
There is surprisingly good agreement on both the discounted and undiscounted cases. Even the before and after tax cases look reasonably close.
Where the 1D model can run into difficulty is when a project has a production expansion after a few years. The 1D model logic assumes a uniform annual production rate for the life of mine reserve.
Another thing that hampers the 1D model is when a project uses low grade stockpiling to boost head grades early in the mine life. The 1D model assumes a uniform life-of-mine production reserve grade profile.
Nevertheless even with these limitations, the NPV results are reasonably representative. Staged plant expansions and high grading are usually modifications to an NPV and generally do not make or break a project.

Conclusion

My view is that the 1D cashflow model is an indicative tool only. It is quick and simple to use. It allows me to evaluate projects and test the NPV sensitivity to metal prices, head grades, process recovery, operating costs, etc. These are sensitivities that might not be described in the financial section of the 43-101 report.
This exercise involved comparing data from existing 43-101 reports. Obviously if your are taking a look at an early stage opportunity, you will need to define your own capital and operating cost inputs.
I prefer using a conventional cashflow model approach (i.e. 2D) when I can. However when working with limited technical data, it’s likely not worth the effort to create a complex cashflow model. For me, the 1D model can work just fine. Build one for yourself, if you need convincing.
In an upcoming blog I will examine the hill of value optimization approach with respect to the 1D model.
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Connecting With Investors – Any New Ideas?

Date: April 2, 2020 Author: Ken Kuchling Comments: Leave a reply
I recently read some LinkedIn posts from junior mining executives and IR staff asking for ideas about new ways to engage with investors.  The commonly used ways rely on PowerPoints, webinars, and trade show booths.   However during this Covid-19 crisis, trade shows are no longer an option.  Therefore these face to face discussions with investors will now be missing.  This will impact on the ability of a company to connect with and establish trust with those people.

What else can be done?

Perhaps with technology, like Zoom, one can replicate the personal feel of a trade show booth. One can still have back and forth conversations with investors rather than just doing lecture style webinars.
Free discussion is good in most cases. Letting investors feel they are sitting around a table will give them a better understanding of how management thinks and how decisions are being made.  It will also help them get to know the personality of the management team.
I’m not an IR person but I admire the job they have to do, especially in today’s business environment.  I have recently sat in on several junior mining online webinars.  When listening to the Q&A’s afterwards, it is apparent that many attendees enjoyed understanding the technical aspects of a project.  However they will only get that understanding by asking questions.  Trade show booths gave them that opportunity.

Technology gives some options.  Like what?

Set up regularly scheduled Zoom meetings, enabling investors to have interactive back and forth conversations with management.  Try to avoid long presentations with questions only at the end. Have a moderator review and ask questions as they come in.
Management teams should introduce more than just the CEO or COO.  Include VP’s of geology, engineering, corporate development, from time to time.    Don’t hesitate to let the public meet more of your team.  Trade show booths are often manned by different team members.
Pick different topics for discussion on each conference call to avoid repeating the same PowerPoint over and over again.
Avoid being too scripted.
For example one call could be a fly-around of the property using Google Earth.  Another call could focus on the ore body and resource model.  Another call might discuss metallurgy and the thought process behind the flow sheet. Perhaps discuss the development options you have considered.
None of this information is likely confidential if it has been presented in your 43-101 report.
Companies file highly technical 43-101 reports on SEDAR, but then let the investors fend for themselves.   One could take some online time for high level walk through of the report.  Clearly explain technical issues and how they have been addressed or will be addressed in the future.  This is an opportunity to explain things in plain English, and field questions.
One downside to such calls is if there are significant flaws with a project.  Open discussions may help expose them.   One needs to know your own project well, be aware of all the issues, and have them under control in one way or another.

Conclusion

Better communication with investors can increase confidence in a management team.   Although some investors may not enjoy technical discussions, I think there is a subset that will find them very helpful and interesting.  There will likely be an audience out there.
Mining projects are complex with many moving parts and many uncertainties. Trust and confidence will come if a company is transparent in what they are doing and explain why they are doing it.
The mining industry is looking for new ways to reach out, so it shouldn’t be afraid to try new things. Some management teams will be great at it, others not so much.  Figure out where you fit in.
Unfortunately one of the aspects of trade shows that cannot be replicated is the ability for investors to wander around aimlessly, take a quick glance at a lot of companies, and then decide which ones they want to learn more about.

Warning: zoom bombing

As an aside, if you are using Zoom make sure the host has configured the right settings.  There are instances where anonymous participants can suddenly share their own computer screen, i.e. with questionable videos, to the group.  It’s been referred to as “zoom bombing”.
Read more about how to prevent zoom bombing at the following two links.
https://www.forbes.com/sites/leemathews/2020/03/21/troll-terrifies-zoom-meeting-zoombombing/#2765abfc3e70
https://www.businessinsider.com/zoom-settings-change-avoids-trolls-porn-2020-3
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Consultants Have to Earn a Living Too

Date: March 12, 2020 Author: Ken Kuchling Comments: Leave a reply
The number of independent mining consultants is increasing daily as more people reach retirement age or are made redundant.
Nowadays it seems everyone is gradually becoming a self-employed consultant. Possibly that is because retirees need the money.  Maybe they need something post-career to keep them occupied.
Here are a couple of lesser known ways to generate income for those of you choosing this new career path.
One of these has been around for awhile while the other is relatively new.  I only have personal experience with one of them.

GLG – Give me an hour

GLG (https://glg.it/) is one of several information services that provide short term consulting assignments.  By short term, I mean 1 to 2 hours long.
GLG has been around for many years providing a platform for connecting those seeking information with those who have it.
Typically someone, like an industry analyst, poses a question that gets sent out to relevant experts.
The question could be something like “XX Mining Company owns the Bonanza mine and our client would like to learn more about that operation including reserves and operating costs”.
Anyone who has the requisite knowledge can accept the consultation and submit their credentials for review.  If you’re selected, such consultations take place very soon.  They can be for 1 to 2 hours and pay $200 to $500 dollars.  GLG are very strict that rumors or confidential information are not disclosed during any of the consultations.  Only public information is to be used.
Since I have a background in potash, I am often issued potash industry related requests.  Questions posed might be “Can you describe the Saskatchewan potash industry, including operations, expansions, marketing plans, and operating costs”.  That’s a heck of a lot of information to provide in a 1 to 2 hour time frame for $400.   Likely very few people would possess all of that knowledge.   I assume their approach is to consult with several different experts and eventually piece together the puzzle.
Check out the GLG website. It’s free to sign up as an expert and maybe you’ll get yourself an assignment. I think there is even a reward for referrals (which I assume I will get shortly).

Digbee – What’s wrong now?

Digbee (https://thedigbee.com/) is a relatively new online venture that I’ve not yet used.  It is essentially a due diligence platform where one can hire experts to undertake targeted due diligence studies.
Furthermore any expert can prepare an independent review on a topic of their choice and then offer it up for sale.
The typical report costs $1,640 to $4,680 dollars.   As of March 2020, they have 13 reports for sale and 5 more in the pipeline.  Here’s a brief explainer video from the founder
The report list can be seen at this link.  The reports appear to be focusing on potential technical flaws in a project. Some titles are listed below.
  • “Sample recoveries at shallow depths is a concern, this is not helped by the total lack of QAQC data” an analysis of Bomboré ($4,680)
  • “Has the extensive testwork at Bomboré finally found an optimum process to proceed to development?” ($4,680)
  • “Alpala’s technical merits and compares its cost estimate to other block caving development projects.” ($3,120).
  • “Cerro Blanco’s very complicated geology in Guatemala may mean more expensive mining techniques will be required.” ($4,680)
  • “Epithermal geologist raises questions on the reliability of the low grade resource at DeLamar.” ($3,120)
  • “What impact does serpentinisation have on the confidence of recovered grade at RNC’s Dumont project?” ($4,680)
I’m not sure how many report copies each consultant will be able to sell .  However a click-bait title may help sell at least one copy.  That would be to the company the report is about.   Perhaps major investors or financial analysts will also buy a copy.
So if you have some free time, pick a project that’s on your radar and write a review.   It appears that you’ll get a 50% share of the revenue.    To learn more, read an article at this link.
I’m curious if the Digbee platform will continue to grow.  It’s unique to see independent research identifying potential issues with mining projects. Someone jokingly mentioned that these are the anti-newsletter writers.  I’m also curious to see how long before the lawyers and lawsuits begin to show up.
Given the relatively low price for these reports, I think one might make a lot more money (from TMZ) if one wrote a report titled “Famous Hollywood starlet has scandalous affair with mining company CEO”.

Conclusion

If you’re becoming an independent consultant, check out these two revenue channels.   They are tailor made for our growing numbers.
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Benchmarking – Let’s See More Of It

Date: February 18, 2020 Author: Ken Kuchling Comments: Leave a reply
Benchmarking is the process of measuring performance of a company’s attributes against those of another. Ideally the benchmarking comparison is made against what are considered to be the best in the industry.  Sometimes however the comparison is simply made between industry peers.
We often see junior mining companies benchmarking themselves against others. Sometimes corporate presentations provide graphs of enterprise value per gold ounce to demonstrate that a company might be undervalued.
We also see cash cost charts (an example to the right) benchmarking where a company’s production cost will rank among its competitors.
I view benchmarking as a great thing. The information can be very insightful, but with the caveat that it takes effort to ensure the comparative data is accurate.

Can we see more benchmarking?

Given the benefits of benchmarking, another area that might warrant such effort is related to capital cost estimates.
When a project moves into the development stage, the first two observable metrics are the construction progress and the capital cost expenditures. The capital cost trend is generally given very close scrutiny since it is a key indicator describing where a project is heading.
Lenders may have observers at site monitoring both construction progress and cash expenditures. Shareholders and analysts are watching for news releases that update the capital spending. Their concern is well founded due to several significant cost over-run instances.
Some of these over-runs have been fatal whereby the company has been unable to secure additional financing for the extra costs. There are others instances where a financing white knight has come in and essentially wrestled company ownership away from current shareholders.
Some industry people also feel that capital cost performance can foreshadow a project’s performance once it goes into commercial production.
Capital cost over-runs may be caused by poor execution and/or unforeseen events, or due to inaccurate cost estimation to begin with.  Many investors still have apprehension with capital cost estimates from advanced studies. This is where benchmarking may play a role. Mining company shareholders may want to see a comparison of their project capital cost with other similar projects.

Project databases

It would be a good thing if the mining industry (or other concerned parties) work together to create open source project databases. These would incorporate summary information and cost information for global mining projects.  The information is already out there, it just needs to be compiled.
One nice thing is that younger workers coming into the mining industry exhibit an interest in collaboration and information sharing. Hence maintaining the databases could be done by interested parties, industry experts, and/or crowd sourcing.
The databases would be public domain accessible to everyone and  could be used to benchmark a project against other similar projects.  The Global Tailings Portal (tailing.grida.no/about) is working to build a freely accessible database for the thousands of tailings dam globally. Its the same idea.
I realize that many mining projects are unique with site specific features and conditions. However many projects are also very similar to one another. For example West African gold projects in many cases can be replicates of one another with similar capital costs.
Published technical reports could include a chapter on benchmarking, whereby a project is compared with other similar projects. A company could provide rationale why their project will be costlier (or less expensive) than the others.

Conclusion

Benchmarking can be a great tool when done correctly. Benchmarking  capital costs might bring more transparency to the project development process. It may help convince nervous investors that the proposed costs are reasonable.
We already see corporate presentations using benchmarking, so why stop at production costs and share price valuation.
One could expand the reach to include operating costs but internal confidentiality may be an issue.  Furthermore operating costs are longer in duration and subject to change with global influences.
Capital cost accuracy is one of the primary concerns in the development of new projects. Possibly more benchmarking is part of the solution.

 

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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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Sustainable Mining – What Is It Really?

Date: December 6, 2019 Author: Ken Kuchling Comments: 4 Replies
We hear a lot about the need for the mining industry to adopt sustainable mining practices. Is everyone certain what that actually means? Ask a group of people for their opinions on this and you’ll probably get a range of answers.   It appears to me that there are two general perspectives on the issue.
Perspective 1 tends to be more general in nature. It’s about how the mining industry as a whole must become sustainable to remain viable. In other words, can the mining industry continue to meet the current commodity demands and the needs of future generations?
Perspective 2 tends to be a bit more stakeholder focused. It relates to whether a mining project will provide long-term sustainable benefits to local stakeholders. Will the mining project be here and gone leaving little behind, or will it make a real (positive) difference? In other words, “what’s in it for us”?
There are still some other perspectives on what is sustainable mining. For example there are some suggestions that sustainable mining should have a wider scope. It should consider the entire life cycle of a commodity, including manufacturing and recycling. That’s a very broad vision for the industry to try to satisfy.

How might mining be sustainable?

The solutions proposed to foster sustainable mining depend on which perspective is considered.
With respect to the first perspective, the solutions are board brush. They generally revolve around using best practices in socially and environmentally sound ways. A sustainable mining framework is typically focused on reducing the environmental impacts of mining.
Strategies include measuring, monitoring, and continually improving environmental metrics. These metrics can include  minimizing land disturbance, pollution reduction, automation, electrification, renewable energy usage, as well as proper closure and reclamation of mined lands.
Unfortunately if the public hates the concept of mining, the drive towards sustainability will struggle. Trying to fight this, the industry is currently promoting itself by highlighting the ongoing need for its products. Unfortunately some have interpreted this to mean “We make a mess because everyone wants the output from that mess”. I’m not sure how effective and convincing that approach will be in the long run.

Focusing on localized benefits

If one views sustainable mining from the second perspective, i.e. “What’s in it for us”, then one will propose different solutions. Maximizing benefits for the local community requires specific and direct actions. Generalizations won’t work.  Stakeholder communities likely don’t care about the sustainability of the mining industry as a whole.
They want to know what this project can do for them. Will the local community thrive with development or will they be harmed? Are the economic benefits be short lived or generational in duration? Can the project lead to socio-economic growth opportunities that extend beyond the project lifetime? Will the economic benefits be realized locally or will the benefits be distributed regionally?
One suggestion made to me is that all mining operations be required to have long operating lives. This will develop more regional infrastructure and create longer business relationships. A mine life of ten years or less may be insufficient to teach local entrepreneurship.  It maybe too short to ensure the long term continuation of economic impacts. Mine life requirement is an interesting thought but likely difficult to enforce.
Nevertheless the industry needs to convince local communities about the benefits they will see from a well executed mining project. Ideally the fear of a mining project would be replaced by a desire for a mining project. Preferably your stakeholders should become your biggest promoters. Working to make individual mining projects less scary may eventually help sustain the entire industry.

What can the industry do?

We have all heard about the actions the industry is considering when working with local communities. Some of these actions might include:
  • Being transparent and cooperative through the entire development process.
  • Using best practices and not necessarily doing things the “cheapest” way.
  • Focusing on long life projects.
  • Helping communities with more local infrastructure improvements.
  • Promoting business entrepreneurship that will extend beyond the mine life.
  • Transferring of post-closure assets to local communities.
There are teams of smart people representing mining companies  working with the local communities. These sustainability teams will ultimately be the key players in making or breaking the sustainability of mining industry.  They will build and maintain the perception of the industry.
While geologists or engineers can develop new technology and operating practices, it will be the sustainability teams that will need to sell the concepts and build the community bridges.
The sustainability effort extends well beyond just developing new technical solutions. It also involves politics, socio-economics, personal relationships, global influences, hidden agendas. It can be a minefield to navigate.

Conclusion

As a first step, the mining industry needs to focus more on local stakeholders and communities. Remove the fear of a mining project and replace it with a desire for a mining project. Mining companies must avoid doing things in the least expensive ways. They must do things in ways that inspire confidence in the company and in the project.
The ultimate goal of sustainable mining will require changing the public’s attitude about mining. Perhaps this starts with the local grass roots communities rather than with global initiatives. As a speaker said at the recent Progressive Mine Forum in Toronto, the mining industry has lost trust with everyone. It is now up to the mining companies, ALL OF THEM, to re-establish it. Unfortunately just one bad apple can undo the positive work done by others.  The industry is not a monolith, so all you can do is at least make sure your own company inspires confidence in the way you are doing things.
As an aside, I have recently seen suggestions that discounted cashflow analysis (i.e. NPV analysis) and sustainable mining practices may be contradictory. There may be some truth to those comments, but I will leave that discussion for a future blog.  You can read that blog at this link.
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