Tailings Disposal Method Risk

Date: March 8, 2016 Author: Ken Kuchling Comments: 4 Replies

After the Mt Polley and Samarco tailings failures, there have been ongoing discussions about the benefits of filtered (dry stack) tailings as the only way to eliminate the risk of catastrophic failure. Mining companies would all like to see risk reductions at their projects.

However what mining companies don’t like to see are the capital and operating costs associated with dry stacking.

The filtering cost and tailings transport cost are both higher than for conventional tailings disposal. Obviously this cost increase gets offset against improved environmental risk and simpler closure.

What should a mining company do?

In my experience, when designing a new mining project, all companies will complete a trade-off study for different tailings disposal methods and disposal sites. Contrary to some environmental narratives, mining companies really do want to know what are their tailings disposal options. They would likely all adopt the dry stack approach if it was the most advantageous and least cost method.

The mining companies are fully aware of the benefits but the dilemma is the cost and being able to somehow justify the technology. Complicating their decision, companies also have other ways for reducing tailings risk.

The tailings decision gets complex.

In a tailings risk analysis, people will use a risk-weighting approach to assign an expected economic impact to their tailings plans. For example, if the cost of a failure is $200 million and the risk is 0.1%, then the Expected Cost is $200,000. The problem with this is its based on a theoretical calculation on an assumed likelihood of failure.

In reality either the dam will fail or it won’t. So failure remediation money will be spent ($200M) or it won’t be spent ($ zero), it won’t be partially spent ($200k).

The accepted tailings risk therefore becomes a subjective factor.

While implementing a dry stack may reduce the risk of catastrophic failure to near zero, implementing a $100,000 per year monitoring program on a conventional tailings pond will reduce its risk to a degree.

Implementing a more expensive $500,000 per year monitoring program would reduce that risk even further.

Installing in a water treatment plant to enable periodic water releases may further lower the tailings risk.

The company can look at various mitigation options to keep lowering their risk, although none of the options would necessarily bring the risk down to zero. Ultimately the company could compare the various risk mitigation options against the dry stack costs in order to arrive at an optimal path forward. At that point the costs for dry stack may be competative.

What level of risk is acceptable?

So the question ultimately becomes how low does one need to bring the tailings risk before it is acceptable to shareholders, regulators, and the public. I don’t think the answer is that one must lower the risk down to zero. There are not many things in today’s world that have zero risk. Driving a car, air travel, shipping oil by ocean tanker, having a gas furnace in your house.. none of these have zero risk yet we accept them as part of life.

Environmental groups continually discuss ways of forcing regulators and mining companies to take action against the risk of tailings failure. This is commendable.

However they generally fail to provide any guidance on what level of risk would be acceptable to them or to the public. It is difficult for these groups to actually define what an acceptable risk level is. They offer no solutions, other than its either zero risk or shut down all mining.

Conclusion

We know that mining is here to stay so we all should work together towards solutions.

The solutions need to be realistic in order to be taken seriously and to play a real role in redefining tailings disposal. Dry stack may not be the only solution and we should be looking for more ways to improve tailings disposal.

Since these other options don’t seem to be available yet, dry stack tends to offer the best solution in most circumstances. I have written another blog on this topic where I suggest the industry just bite the bullett and go to dry stack in all new projects. The trend appears to be going that way but no where near 100% acceptance. You can read that post at this link “Fluid Tailings – Time to Kick The Habit?”

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Do Any Junior Producers Model a Gold ETF?

Date: March 1, 2016 Author: Ken Kuchling Comments: 4 Replies

I have often wondered if any of the smaller gold producers have ever considered modelling their business plan similar to a gold Exchange Traded Fund (“ETF”).

This hybrid business model may be a way for companies to provide shareholders a way to leverage themselves to physical gold rather than leveraging to the performance of a mine.

Let me explain further

Consider two identical small mining companies each starting up a new mine. Their projects are identical; 2 million gold ounces in reserves with annual production rate of 200,000 ounces with a 10 year mine life. On an annual basis, let’s assume their annual operating costs and debt repayments could be paid by the revenue from selling 180,000 ounces of gold. This would leave 20,000 gold ounces as “profit”. The question is what to do with those 20,000 ounces?

Company A

Company A sells their entire gold production each year. At $1200/oz, the 20,000 oz gold “profit” would yield $24 million. Income taxes would be paid on this and the remaining cash can be spent or saved.

Company A may decide to spend more on head offices costs by adding more people, or they may spend money on exploration, or they could look at an acquisition to grow the company. There are plenty of ways to use this extra money, but returning it to shareholders as a dividend isn’t typically one of them.

Now let’s jump forward several years; 8 years for example. Company A may have been successful on grassroots exploration and added new reserves but historically exploration odds are working against them. If they actually saved a portion of the annual profit, say $10M of the $24M, after 8 years they may have $80M in cash reserves.

Company B

Company B only sells 180,000 ounces of gold each year to cover costs. It puts the remaining 20,000 ounces into inventory. Their annual profit-loss statement shows breakeven status since their gold sales only cover their financial commitments. In this scenario, after 8 years Company B would have 160,000 gold ounces in inventory, valued at $192 million at a $1200 gold price.

If you’re an investor looking at both these companies in the latter stages of their mine life, which one would you rather invest in?

Company A has 400,000 ounces (2 years) remaining in mineral reserves and $80M cash in the bank. Company B also has 400,000 ounces of mineral reserves and $192 million worth of gold in the vault. If I’m a bullish gold investor and foresee a $1600/oz gold price, then to me Company B might theoretically have $256M in the vault (160k oz x $1600). If I’m a super bullish, their gold inventory could be worth a lot more..theoretically.

Which company is worth more?

I assume that the enterprise value (and stock price) of Company A would be based on its remaining reserves at some $/oz factor plus its cash in the bank. Company B could be valued the same way plus its gold inventory. So for me Company B may be a much better investment than Company A in the latter stages of its mine life. In fact Company B could still persist as an entity after the mine has shutdown simply as a “fund” that holds physical gold. If I am a gold investor, then Company B as an investment asset might be of more interest to me.

If Company A had good exploration results and spend money wisely, then it may have more value but not all companies are successful down this path.

Conclusion

It appears that most of the time companies sell their entire annual gold production to try to show profit on the annual income statement. This puts cash in the bank and shows “earning per share”.

My question is why not stockpile the extra gold and wait for gold prices to rise? This might be an option if the company doesn’t really need the money now or doesn’t plan to gamble on exploration or acquisitions.

This concept wouldn’t be a model for all small miners but might be suitable for a select few companies to target certain types of gold investors.

They could provide an alternative mining investment that might be especially interesting in the last years of a mine life. Who really wants to buy shares in a company who’s mine is nearly depleted? I might buy shares, if they still hold a lot of gold.

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Higher Metal Prices – Should Miners Lower the Cut-Off Grade?

Date: February 23, 2016 Author: Ken Kuchling Comments: 7 Replies

When metals prices are high, we are generally told that we should lower the cutoff grade. Our cutoff grade versus metal price formula tells us this is the correct thing do. Our grade-tonnage curve reaffirms this since we will now have more metal in the mineral reserve.

But is lowering the cutoff grade the right thing?

Books have been written on the subject of cutoff grades where readers can get all kinds of detailed logic and calculations using Greek symbols (F = δV* − dV*/dT). Here is one well known book by Ken Lane, available on Amazon HERE.

Recently we have seen a trend of higher cash costs at operating mines when commodity prices are high. Why is this?

It may be due to higher cost operating inputs due to increasing labour rates or supplies. It may also be partly due to the lowering of cutoff grades. This lowers the head grade, which then requires more tonnes to be milled to produce the same quantity of metal.

A mining construction manager once said to me that he never understood us mining guys who lower the cutoff grade when gold prices increase. His concern was that since the plant throughput rate is fixed, when gold prices are high we suddenly decide to lower the head grade and produce fewer and higher cost ounces of gold.

Do the opposite

His point was that we should do the opposite. When prices are high, we should produce more ounces of gold, not fewer. In essence, periods when supply is low (or demand is high) may not be the right time to further cut supply by lowering head grades.

Now this is the point where the grade-tonnage curve comes into play.

Certainly one can lower the cutoff grade, lower the head grade and produce fewer ounces of gold. The upside being an extension in the mine life. A company can report more ounces in reserves and perhaps the overall image of the company looks better (if it is being valued on reserves). To read more about the value of grade-tonnage curves, you check out this blog post “Grade-Tonnage Curves – Worthy of a Good Look“.

What if metal prices drop back?

The problem is that there is no guarantee that metal prices will remain where they are and the new lower cutoff grade will remain where it is. If the metal prices drop back down, the cutoff grade will be increased and the mineral reserve will revert back to where it was. All that was really done was accept a year of lower metal production for no real long term benefit.

This trade-off contrasts a short term vision (i.e. maximizing annual production) against a long term vision (i.e. extending mineral reserves).

Conclusion

The bottom line is that there is no simple answer on what to do with the cutoff grades. Hence there is a need to write books about it.

Different companies have different corporate objectives and each mining project will be unique with regards to the impacts of cutoff grade changes on the orebody.

I would like to caution that one should be mindful when plugging in new metal prices, and then running off to the mine operations department with the new cutoff grade. One should fully understand both the long term and short term impacts of that decision.

In another blog post on the cutoff grade issue, I discuss whether in poly-metallic deposits the cutoff should be based on metal equivalent or block NSR value. Neither approach is perfect, but I prefer the NSR option. You can read that post at “Metal Equivalent Grade versus NSR for Poly-Metallics“.

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Mining Fads and the Herd Mentality

Date: February 16, 2016 Author: Ken Kuchling Comments: 1 Reply

Have worked in the mining industry for over the last 40 years it is always interesting to watch the herd mentality that exists. Its obvious how easily the industry gets caught chasing the latest fads.

All it takes is a short term spike in a commodity price or a big discovery somewhere and then off we go running in that direction. It doesn’t matter the rationale driving the event, companies know they need to be in there and investors don’t want to miss out either. Its FOMO; the fear of missing out.

Don’t be the last on the bandwagon

In my experience, the fads or crazes can be based on commodities, locations, or technologies. The mining industry is very flexible in that regard. I’ll give a few examples that I have seen. You probably have even more from your own experience.

Commodity Fads

It seems that as soon as there is a price spike or positive market narrative, a commodity specific projects can take on a life of their own. The following list gives a few examples and, when you reflect upon them, ask how many actually came into successful production. These events occur at different times in different economic cycles.

Potash: a few years ago potash prices spiked and potash leases were all the fad no matter where they were located around the globe, be it Canada, Russia, Ethiopia, Thailand, Brazil, etc. That craze has largely fizzled out as prices returned to normal. But just wait for the next temporary price spike.
Lithium / Graphite: as soon as green battery technology started to be promoted in the news in 2016, miners couldn’t run fast enough to pick up the lithium properties. The same idea holds for battery metals such graphite, vanadium, cobalt, and also rare earth categories. After a lull, the process repeats itself in 2022.
Uranium: years ago uranium prices spiked and Ur properties were hot everywhere. Prices have dropped but seem to be ramping up in late 2018.
Cobalt Excitement Curve

Cobalt: see the price chart on the right to see how cobalt went into a craze and then out of it.
Nickel: years ago a spike in nickel prices caused a surge in nickel properties, whether it was sulphide nickel, laterite nickel, or other forms.
Iron Ore: in conjunction with the Chinese construction boom, iron ore properties were hot around the globe, in high cost or low cost jurisdictions, it didn’t matter where the property was. Iron is still being pursued but mega scale projects always overhang the market.
Diamonds: in conjunction with the first diamond discoveries in Canada in the 1990’s, diamond properties became hot, whether in the Canada or around the globe. If you couldn’t get a property in Canada’s NWT boom area, anywhere else globally was fine too.
China in general: a few years ago every base metal project was thought of as either a potential supplier to China or a potential acquisition for Chinese companies. As long as it could meet Chinese investor interest it was good.

Regional Exploration Fads

We have all seen the staking rushes that occur when a world class prospect is discovered. I’m sure we can all recall getting the large claim maps (as shown) with their multicolored graphics showing the patchwork of acquisitions around a discovery. PDAC was great for distributing these. They were well done and interesting to study.

Picking up properties in hot areas became the fad and share prices would move upwards regardless of whether there was any favorable geology on the property. Who recalls the following?

Voisey Bay: with a mad staking rush around there, with nothing else really paying off in the long run.
Saskatchewan: the potash staking rush where almost every inch of the potash zone was staked with only a couple of companies eventually moving forward and only one going into production.
Indonesia: during Bre-X people could not acquire properties in Indonesia fast enough.
NWT: where the diamond property staking rush was crazy in the mid 1990’s.

Technology Fads

Even mining or processing technologies could get caught up in somewhat of a wave and become a fad for further study. Sometimes this is driven by suppliers or consultants. For the engineers out there, who can recall…

Paste Tailings: with numerous conferences and consultants promoting thickened or paste tailings technology as the panacea. This lead to numerous studies related to thickening, pumping, and disposal at each mine.
Block Caving: whereby in order to deliver high tonnages at low cost, bulk underground mining was being promoted. Everyone wanted their underground project to be a low cost caving style operation.
High Pressure Grinding Rolls (HPGR): where process consultants would highlight HPGR as the new replacement for conventional grinding mills. I’m not sure this technology has taken the industry by storm as they were hoping in the 1990’s.
IPCC: whereby inpit crushing and conveying systems were being promoted in many articles and global conferences as the solution to operating cost issues. I think implementation of IPCC technology isn’t as simple as envisioned and I’m not aware of many cases of its successful implementation.
Dot.com: in the early 2000’s many junior miners left exploration behind and transitioned to the dot.com boom, a fad that essentially went nowhere for most.
Pre-concentration: this seems to be a growing technology that may be gaining momentum. It isn’t new technology and it will definitely have its benefits. However a big stumbling block is how many deposits are actually suitable for its application. I have written more about this technology “Pre-Concentration – Savior or Not?“

Conclusion

Have I missed anything?

The bottom line is that over the years it has been interesting to watch the mining industry react to events. Sometimes it seems like we’re passengers on a ship, almost capsizing the industry by running from one side to other side and then back again. Unfortunately that doesn’t necessarily make for smooth sailing.

What’s the next fad going to be? I don’t know but if you can predict it you can probably make a lot of money.

Once the commodity fad is underway, the next aspect of the junior mining that comes into play is the ebb and flow of exploration and mine development. This is illustrated by the Lassonde Curve, were a project’s value rises and falls simply based on the amount of exciting news coming from it. You can read more on this at the blog post “Mining’s Lassonde Curve – A Wild Ride“.

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Global Tax Regimes – How Do They Compare?

Date: February 9, 2016 Author: Ken Kuchling Comments: 3 Replies

Update: This blog was originally written in Feb 2016, but has been updated in Aug 2019.

As a reminder for all QP’s doing economic analysis for PEA’s, don’t forget that one needs to present the economic results on an after-tax basis.

Every once in a while I still see PEA technical reports issued with only pre-tax financials. That report is likely to get red- flagged by the securities regulators. The company will need to amend their press release and technical report to provide the after tax results. No harm done other than some red faces.

Taxes can be complicated

When doing a tax calculation in your model, where can you find international tax information? PWC has a very useful tax-related website. The weblink below was sent to me by one of my industry colleagues and I thought it would be good to share it.

The PWC micro-site provides a host of tax and royalty information for selected countries. The page is located at https://www.ey.com/gl/en/services/tax/global-tax-guide-archive

On the site they have a searchable database for tax information for specific countries.

The PWC tax and financial information includes topics such as:

Corporate tax rates
Excess profits taxes
Mineral taxes for different commodities
Mineral royalties
Rates of permissible amortization
VAT and other regulated payments
Export taxes
Withholding taxes
Fiscal stability agreements
Social contribution requirements

PWC has a great web site and hopefully they will keep the information up to date since tax changes happen constantly. The website also has a guide related to the rules for the treatment of capital expenditures. Check it out. https://www.ey.com/gl/en/services/tax/global-tax-guide-archive

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Resource Estimates – Are Independent Audits A Good Idea?

Date: February 2, 2016 Author: Ken Kuchling Comments: 2 Replies

Question: How important is the integrity of a tailings dam to the successful operation of a mine?

Answer: Very important.

Tailings dam stability is so important that in some jurisdictions regulators may be requiring that mining companies have third party independent review boards or third party audits done on their tailings dams. The feeling is that, although a reputable consultant may be doing the dam design, there is still a need for some outside oversight.

Differences in interpretation, experience, or errors of omission are a possibility regardless of who does the design. Hence a second set of eyes can be beneficial.

Is the resource estimate important?

Next question is how important is the integrity of the resource and reserve estimate to the successful operation of a mine?

Answer: Very important. The mine life, project economics, and shareholder value all rely on it. So why aren’t a second set of eyes or third party audits very common?

NI 43-101 was the first step

In the years prior to 43-101, junior mining companies could produce their own resource estimates and disclose the results publicly. With the advent of NI 43-101, a second set of eyes was introduced whereby an independent QP could review the company’s internal resource and/or prepare their own estimate. Now the QP ultimately takes legal responsible for the estimate.

Nowadays most small companies do not develop their own in-house resource estimates. The task is generally awarded to an independent QP.

Resource estimation is a special skill

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

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

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

As we have seen, some resources estimates have been mishandled and disciplinary actions have been taken against QP’s. The conclusion is that not all QP’s are perfect.

Just because someone meets the requirements to be a Competent Person or a Qualified Person does not automatically mean they are competent or qualified. Geological modeling is not an exact science and will be based on their personal experience.

What is good practice?

The question being asked is whether it would be good practice for companies to have a second set of eyes take a look at their resource estimates developed by independent QP’s?

Where I have been involved in due diligence for acquisitions or mergers, it is not uncommon for one side to rebuild the resource model with their own technical team. They don’t have 100% confidence in the original resource handed over to them. The first thing asked is for the drill hole database.

One downside to a third party review is the added cost to the owner.

Another downside is that when one consultant reviews another consultant’s work there is a tendency to have a list of concerns. Some of these may not be material, which then muddles the conclusion of the review.

On the positive side, a third party review may identify serious interpretation issues or judgement decisions that could be fatal to the resource.

If tailings dams are so important that they require a second set of eyes, why not the resource estimate? After all, it is the foundation of it all.

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Disrupt Mining Challenge – Watch for it at PDAC

Date: January 26, 2016 Author: Ken Kuchling Comments: 2 Replies

Update: This blog was originally written in January 2016, and has been updated for Jan 2018.

In 2016 at PDAC, Integra Gold held the first the Gold Rush Challenge. It was an innovative event for the mining industry. It was following along on the footsteps of the Goldcorp Challenge held way back in 2001.

The Integra Gold Rush Challenge was a contest whereby entrants were given access to a geological database and asked to prepare submissions presenting the best prospects for the next gold discovery on the Lamaque property. Winners would get a share of the C$1 million prize.

Integra Gold hoped that the contest would expand their access to quality people outside their company enabling their own in-house geological team to focus on other exploration projects. In total 1,342 entrants from over 83 countries registered to compete in the challenge. A team from SGS Canada won the prize.

Then Disrupt Mining came along

In 2017, its seem the next step in the innovation process was the creation of Disrupt Mining sponsoerd by Goldcorp. Companies and teams developing new technologies would compete to win a $1 million prize.

In 2017, the co-winning teams were from Cementation Canada (new hoisting technology) and Kore Geosystems (data analystics for decision making).

In 2018, the winning team was from Acoustic Zoom, an new way to undertake seismic surveys.

The 2019 winners will be announced at PDAC. The entry deadline has passed so you’re out of luck for this year.

Conclusion

At PDAC there are always a lot of things to do, from networking, visiting booths, presentations, trade shows, gala dinners, and hospitality suites.

Now Disrupt Mining brings another event for your PDAC agenda.

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Measured vs. Indicated Resources – Do We Treat Them the Same?

Date: January 19, 2016 Author: Ken Kuchling Comments: 6 Replies

One of the first things we normally look at when examining a resource estimate is how much of the resource is classified as Measured or Indicated (“M+I”) compared to the Inferred tonnage. It is important to understand the uncertainty in the estimate and how much the Inferred proportion contributes. Having said that, I think we tend to focus less on the split between the Measured and Indicated tonnages.

Inferred resources have a role

We are all aware of the regulatory limitations imposed by Inferred resources in mining studies. They are speculative in nature and hence cannot be used in the economic models for pre-feasibility and feasibility studies. However Inferred resource can be used for production planing in a Preliminary Economic Assessment (“PEA”).

Inferred resources are so speculative that one cannot legally add them to the Measure and Indicated tonnages in a resource statement (although that is what everyone does). I don’t really understand the concern with a mineral resource statement if it includes a row that adds M+I tonnage with Inferred tonnes, as long as everything is transparent.

When a PEA mining schedule is developed, the three resource classifications can be combined into a single tonnage value. However in the resource statement the M+I+I cannot be totaled. A bit contradictory.

Are Measured resources important?

It appears to me that companies are more interested in what resource tonnage meets the M+I threshold but are not as concerned about the tonnage split between Measured and Indicated. It seems that M+I are largely being viewed the same. Since both Measured and Indicated resources can be used in a feasibility economic analysis, does it matter if the tonnage is 100% Measured (Proven) or 100% Indicated (Probable)?

The NI 43-101 and CIM guidelines provide definitions for Measured and Indicated resources but do not specify any different treatment like they do for the Inferred resources.

Relationship between Mineral Reserves and Mineral Resources (CIM Definition Standards).

Payback Period and Measured Resource

In my past experience with feasibility studies, some people applied a rule-of-thumb that the majority of the tonnage mined during the payback period must consist of Measure resource (i.e. Proven reserve).

The goal was to reduce project risk by ensuring the production tonnage providing the capital recovery is based on the resource with the highest certainty.

Generally I do not see this requirement used often, although I am not aware of what everyone is doing in every study. I realize there is a cost, and possibly a significant cost, to convert Indicated resource to Measured so there may be some hesitation in this approach. Hence it seems to be simpler for everyone to view the Measured and Indicated tonnages the same way.

Conclusion

NI 43-101 specifies how the Inferred resource can and cannot be utilized. Is it a matter of time before the regulators start specifying how Measured and Indicated resources must be used? There is some potential merit to this idea, however adding more regulation (and cost) to an already burdened industry would not be helpful.

Perhaps in the interest of transparency, feasibility studies should add two new rows to the bottom of the production schedule. These rows would show how the annual processing tonnages are split between Proven and Probable reserves. This enables one to can get a sense of the resource risk in the early years of the project. Given the mining software available today, it isn’t hard to provide this additional detail.

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Claim Fees Paid for a Royalty Interest – Good Deal or Not?

Date: January 12, 2016 Author: Ken Kuchling Comments: 2 Replies

In 2016 I read several articles about how the junior mining industry must innovate to stay relevant. Innovation and changing with the times are what is needed in this economic climate.

One company that was trying something new is Abitibi Royalties. They were promoting a new way for them to acquire royalty interests in early stage properties. They were offering to fund the claim fees on behalf of the property owner in return for a royalty.

Their corporate website states that they would pay, for a specified period of time, the claim fees/taxes related to existing mineral properties or related to the staking of new mineral properties.

In return, Abitibi Royalties would be granted a net smelter royalty (“NSR”) on the property. It may be a gamble, but it’s not a high stakes gamble given the relatively low investment needed.

Not just anywhere

Abitibi were specifically targeting exploration properties near an operating mine in the Americas. They were keeping jurisdiction risk to a minimum. Abitibi stated that their due diligence and decision-making process was fast, generally within 48 hours. No waiting around here but likely this is possible due to the low investment required and often the lack of geological information to do actually do a due diligence on.

To give some recent examples, in a December 14, 2015 press release, Abitibi state that the intend to acquire a 2% NSR on two claims in Quebec and will pay approximately $11,700 and reimburse the claim owner approximately $13,750 in future exploration expenses. This cash will be used by the owner towards paying claim renewal fees and exploration work commitments due in 2016. Upon completion of the transaction, these will be the ninth and tenth royalties acquired through the Abitibi Royalty Search. For comparison, some of their other royalty acquisitions cost were in the range of $5,000 to $10,000 each (per year I assume). I think that those NSR interests are being acquired quite cheaply.

The benefit to the property owner may be twofold; they may have no other funding options available and they are building a relationship with a group that will have an interest in helping the project move forward. The downside is that they have now encumbered that property with a NSR royalty going forward.

The benefit to Abitibi Royalties is that they have acquired an early stage NSR royalty quite cheaply although there will be significant uncertainty about ever seeing any royalty payments from the project. Abitibi may also have to continue to make ongoing payments to ensure the claims remain in good standing with the owner.

It’s good to see some degree of innovation at work here, although the method of promotion for the concept may be more innovative than the concept itself. Unfortunately these Abitibi cash injections investments are not enough to pay for much actual exploration on the property and this is where the further innovation is required, whether through crowd funding, private equity, or some other means. I’m curious to see if other companies will follow the Abitibi royalty model but extend it to foreign and more risky properties.

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3D Model Printing – Who To Contact?

Date: January 2, 2016 Author: Ken Kuchling Comments: 7 Replies

One of the technologies that is still getting a lot of press is 3D printing. It seems new articles appear daily describing some fresh and novel use. Everything from home construction, food preparation, medical supplies, and industrial applications, 3D printing continues to find new applications in a wide range of disciplines.

Mining can take advantage of 3D printing

In a previous blog “3D Printing – A Simple Idea”, I discussed the helpfulness of printing 3D topographic models for the team members of a mining study. I was recently contacted by a consulting firm in Texas that specializes in printing 3D mining models. Here is their story and a few model images as provided to me by Matt Blattman of Blattman Brothers Consulting. (www.blattbros.com/3dprinting)

Blattman Brothers Consulting

Their 3D printed models are used in the same way geologists and mining engineers have employed models for decades. In the past we saw the physical models made of stacked mylar or plexi-glass maps, wood or foam core. We recognized that there is value in taking two dimensional sections or plan maps and making a 3D representation. This provides more information than those viewed on a computer screen.

Physical models convey scale, interactions and scope in ways that no other method can. Technology like 3D printing improves the model-making process by allowing the addition of high def orthophotos, reducing the model cost, increasing its precision and delivery time.

Currently 3D models can be made in a variety of materials, but the primary three are extruded plastic, gypsum powder, or acrylics.

Plastic models (ABS or PLA) are cheap, fast and can created on relatively inexpensive, hobbyist printers. The downside to these models is that the number of colors available in a single model are limited, typically a single color.

Powder-based printers can typically print in 6.5M colors, allowing for vibrant, photo-realistic colors and infinite choices for title blocks, logos and artistic techniques. However, gypsum models can be as fragile as porcelain and require some care in handling.
Acrylic models allow for translucent printing (“looking into the ground to see the geological structure”) and are more durable than the gypsum. Nevertheless, acrylic models are significantly more expensive than the other two types and the color palettes are limited.

Here are some examples.

Leapfrog Model

Acrylic Model

Powder Based 3D Model

Blattman’s models are created from the same 3D digital data already in use by most companies involved in geological modeling and mine design. Other than the units (meters versus millimeters), the triangulated surfaces created by the software are no different than those created by mechanical or artistic 3D modeling programs.

While many 3D printing services are available on the market, not all of them are able to speak “mining”. They may not be able to walk the skilled geologist or mining engineer through the process of creating the necessary digital formats and that’s where Blattman comes in. With more than 20 years of mining experience and having already gone through the 3D printing learning curve, they can assist any natural resource company through the process, either as a full-service/turn-key project or just to advise the client on how to prepare their own files.

Conclusion

The bottom line is that 3D printing is here to stay and its getting better each year. Go ahead and check out the technology to see if it can advance your path forward .

After the Mt Polley and Samarco tailings failures, there have been ongoing discussions about the benefits of filtered (dry stack) tailings as the only way to eliminate the risk of catastrophic failure. Mining companies would all like to see risk reductions at their projects.

However what mining companies don’t like to see are the capital and operating costs associated with dry stacking.

The filtering cost and tailings transport cost are both higher than for conventional tailings disposal. Obviously this cost increase gets offset against improved environmental risk and simpler closure.

What should a mining company do?

The mining companies are fully aware of the benefits but the dilemma is the cost and being able to somehow justify the technology. Complicating their decision, companies also have other ways for reducing tailings risk.

The tailings decision gets complex.

In reality either the dam will fail or it won’t. So failure remediation money will be spent ($200M) or it won’t be spent ($ zero), it won’t be partially spent ($200k).

The accepted tailings risk therefore becomes a subjective factor.

While implementing a dry stack may reduce the risk of catastrophic failure to near zero, implementing a $100,000 per year monitoring program on a conventional tailings pond will reduce its risk to a degree.

Implementing a more expensive $500,000 per year monitoring program would reduce that risk even further.

Installing in a water treatment plant to enable periodic water releases may further lower the tailings risk.

What level of risk is acceptable?

Environmental groups continually discuss ways of forcing regulators and mining companies to take action against the risk of tailings failure. This is commendable.

However they generally fail to provide any guidance on what level of risk would be acceptable to them or to the public. It is difficult for these groups to actually define what an acceptable risk level is. They offer no solutions, other than its either zero risk or shut down all mining.

Conclusion

We know that mining is here to stay so we all should work together towards solutions.

The solutions need to be realistic in order to be taken seriously and to play a real role in redefining tailings disposal. Dry stack may not be the only solution and we should be looking for more ways to improve tailings disposal.

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I have often wondered if any of the smaller gold producers have ever considered modelling their business plan similar to a gold Exchange Traded Fund (“ETF”).

This hybrid business model may be a way for companies to provide shareholders a way to leverage themselves to physical gold rather than leveraging to the performance of a mine.

Let me explain further

Company A

Company A sells their entire gold production each year. At $1200/oz, the 20,000 oz gold “profit” would yield $24 million. Income taxes would be paid on this and the remaining cash can be spent or saved.

Company B

If you’re an investor looking at both these companies in the latter stages of their mine life, which one would you rather invest in?

Which company is worth more?

If Company A had good exploration results and spend money wisely, then it may have more value but not all companies are successful down this path.

Conclusion

It appears that most of the time companies sell their entire annual gold production to try to show profit on the annual income statement. This puts cash in the bank and shows “earning per share”.

My question is why not stockpile the extra gold and wait for gold prices to rise? This might be an option if the company doesn’t really need the money now or doesn’t plan to gamble on exploration or acquisitions.

This concept wouldn’t be a model for all small miners but might be suitable for a select few companies to target certain types of gold investors.

They could provide an alternative mining investment that might be especially interesting in the last years of a mine life. Who really wants to buy shares in a company who’s mine is nearly depleted? I might buy shares, if they still hold a lot of gold.

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When metals prices are high, we are generally told that we should lower the cutoff grade. Our cutoff grade versus metal price formula tells us this is the correct thing do. Our grade-tonnage curve reaffirms this since we will now have more metal in the mineral reserve.

But is lowering the cutoff grade the right thing?

Books have been written on the subject of cutoff grades where readers can get all kinds of detailed logic and calculations using Greek symbols (F = δV* − dV*/dT). Here is one well known book by Ken Lane, available on Amazon HERE.

Recently we have seen a trend of higher cash costs at operating mines when commodity prices are high. Why is this?

It may be due to higher cost operating inputs due to increasing labour rates or supplies. It may also be partly due to the lowering of cutoff grades. This lowers the head grade, which then requires more tonnes to be milled to produce the same quantity of metal.

Do the opposite

His point was that we should do the opposite. When prices are high, we should produce more ounces of gold, not fewer. In essence, periods when supply is low (or demand is high) may not be the right time to further cut supply by lowering head grades.

Now this is the point where the grade-tonnage curve comes into play.

What if metal prices drop back?

This trade-off contrasts a short term vision (i.e. maximizing annual production) against a long term vision (i.e. extending mineral reserves).

Conclusion

The bottom line is that there is no simple answer on what to do with the cutoff grades. Hence there is a need to write books about it.

Different companies have different corporate objectives and each mining project will be unique with regards to the impacts of cutoff grade changes on the orebody.

I would like to caution that one should be mindful when plugging in new metal prices, and then running off to the mine operations department with the new cutoff grade. One should fully understand both the long term and short term impacts of that decision.

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/.

Have worked in the mining industry for over the last 40 years it is always interesting to watch the herd mentality that exists. Its obvious how easily the industry gets caught chasing the latest fads.

Don’t be the last on the bandwagon

In my experience, the fads or crazes can be based on commodities, locations, or technologies. The mining industry is very flexible in that regard. I’ll give a few examples that I have seen. You probably have even more from your own experience.

Commodity Fads

Uranium: years ago uranium prices spiked and Ur properties were hot everywhere. Prices have dropped but seem to be ramping up in late 2018.

Cobalt: see the price chart on the right to see how cobalt went into a craze and then out of it.

Nickel: years ago a spike in nickel prices caused a surge in nickel properties, whether it was sulphide nickel, laterite nickel, or other forms.

Iron Ore: in conjunction with the Chinese construction boom, iron ore properties were hot around the globe, in high cost or low cost jurisdictions, it didn’t matter where the property was. Iron is still being pursued but mega scale projects always overhang the market.

Diamonds: in conjunction with the first diamond discoveries in Canada in the 1990’s, diamond properties became hot, whether in the Canada or around the globe. If you couldn’t get a property in Canada’s NWT boom area, anywhere else globally was fine too.

China in general: a few years ago every base metal project was thought of as either a potential supplier to China or a potential acquisition for Chinese companies. As long as it could meet Chinese investor interest it was good.

Regional Exploration Fads

Picking up properties in hot areas became the fad and share prices would move upwards regardless of whether there was any favorable geology on the property. Who recalls the following?

Voisey Bay: with a mad staking rush around there, with nothing else really paying off in the long run.

Saskatchewan: the potash staking rush where almost every inch of the potash zone was staked with only a couple of companies eventually moving forward and only one going into production.

Indonesia: during Bre-X people could not acquire properties in Indonesia fast enough.

NWT: where the diamond property staking rush was crazy in the mid 1990’s.

Technology Fads

Even mining or processing technologies could get caught up in somewhat of a wave and become a fad for further study. Sometimes this is driven by suppliers or consultants. For the engineers out there, who can recall…

Paste Tailings: with numerous conferences and consultants promoting thickened or paste tailings technology as the panacea. This lead to numerous studies related to thickening, pumping, and disposal at each mine.

Block Caving: whereby in order to deliver high tonnages at low cost, bulk underground mining was being promoted. Everyone wanted their underground project to be a low cost caving style operation.

High Pressure Grinding Rolls (HPGR): where process consultants would highlight HPGR as the new replacement for conventional grinding mills. I’m not sure this technology has taken the industry by storm as they were hoping in the 1990’s.

IPCC: whereby inpit crushing and conveying systems were being promoted in many articles and global conferences as the solution to operating cost issues. I think implementation of IPCC technology isn’t as simple as envisioned and I’m not aware of many cases of its successful implementation.

Dot.com: in the early 2000’s many junior miners left exploration behind and transitioned to the dot.com boom, a fad that essentially went nowhere for most.

Conclusion

Have I missed anything?

What’s the next fad going to be? I don’t know but if you can predict it you can probably make a lot of 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. Otherwise I post notices on LinkedIn, so follow me at: https://www.linkedin.com/in/kenkuchling/.

Update: This blog was originally written in Feb 2016, but has been updated in Aug 2019.

As a reminder for all QP’s doing economic analysis for PEA’s, don’t forget that one needs to present the economic results on an after-tax basis.

Taxes can be complicated

When doing a tax calculation in your model, where can you find international tax information? PWC has a very useful tax-related website. The weblink below was sent to me by one of my industry colleagues and I thought it would be good to share it.

The PWC micro-site provides a host of tax and royalty information for selected countries. The page is located at https://www.ey.com/gl/en/services/tax/global-tax-guide-archive