Due Dilligence_Oil Shale_Colorado 2014_Sabanov

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© SRK Consulting (UK) Ltd 2014. All rights reserved.

Presenter:

Location:

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Technical Due Diligence on

Oil Shale Mining Projects

Dr Sergei Sabanov

Golden, Colorado School of Mines, 15/10/2014

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Table of Contents

• WHAT IS DUE DILIGENCE

• TECHNICAL VALUATIONS

• RESOURCES AND RESERVES ESTIMATION

• DUE DILIGENCE ISSUES, CAUSES AND IMPACTS

• KEY FEATURES OF QUALITY TECHNICAL STUDIES

• CONCLUSION

34th Oil Shale Symposium, Colorado School of Mines, 15/10/2014

Dr Sergei Sabanov [email protected]

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WHAT IS DUE DILIGENCE?

Definition of Due Diligence :

‘An investigation or audit of a potential

investment. Due diligence serves to confirm all

material facts in regards to a sale’

Technical Due Diligence – concerned with the

technical and operational aspects of a mine or

project

Legal Due Diligence – concerned with the legal

aspects of a project eg company status, licence

validity, security of tenure, permitting, liabilities,

obligations etc

Technical Due Diligence is the focus of this talk

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WHAT IS TECHNICAL DUE DILIGENCE NECESSARY FOR?

• Support Project Finance – when banks lend

money the credit committee needs to assess the

technical risk, will I lose my shirt ?

• A pre-cursor to a listing document – before a CPR

is prepared a consultant will review the assets

• Mergers – need to determine what are the assets

you are merging with, must assess risk, value?

• Acquisitions – it is a good purchase, how much

should be paid for it?

• Investments – should we purchase shares?

You could be on thin ice!

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PROJECT FUNDING OPTIONS

All of these require some kind of technical due diligence

Source: Ernst & Young, Mining Journal, Global Mining Finance Guide 2014

There are

many ways

projects get

funding

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WHAT DOES TECHNICAL DUE DILIGENCE PROCESS INVOLVE ?

• Collation of information about the project /

operation / group of assets

• Visit to the project site by a team: mining

engineer, geologist, process engineer, E+S

specialist plus other experts as required

• Review of the information – what is available

and what does it tell us?

• Analysis - what are the impacts / effects, what is

going on?

• Conclusions – what do we think? Eg marginal

asset, poor technical work, unknowns

• Recommendations – how to fix key issues,

adjusted production profiles, capital and

operating costs, lead times

Effective TDD is a process resulting in some practical advice

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TECHNICAL FOUNDATIONS – ASSET TYPES SUBJECT TO DUE DILIGENCE

• Exploration Property • Oil content may or may not be identified

• No Mineral Resource

• Advanced Exploration Property • Considerable exploration undertaken

• Specific targets identified that warrant

further detailed investigation by drilling,

trenching or other detailed geological

sampling

• May or may not have a Mineral resource

Estimate.

• Sufficient work on at least one prospect to

provide good geological understanding

and encourage further work to elevate to

Mineral Resource Category

Similar approach, different assets

• Pre-Development Property • Mineral Resources identified and their extent

(possibly incomplete)

• Decision to proceed with development has not

been made

• Early Assessment stage

• Also includes Resources with a plan not to

develop and those on ‘Care & Maintenance’

• Development Property • Decision has been made to proceed with

construction and/or production but not

commissioned or operating at design levels

• Operating Mines • Mineral Properties, particularly mines and

process plants that have been commissioned

and in production

MINERAL ASSET DEVELOPMENT STAGES

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TECHNICAL FOUNDATIONS

• Classification of Mineral Resources

• Study objectives

• Site specific technical Information

• Degree of engineering completed (%)

• Design basis and Cost estimation

methodology

• Cost estimation accuracy (Capital and

Operating)

• Cashflow analysis & valuation

• Level of contingency

All disciplines must be considered

KEY FEATURES OF TECHNICAL STUDIES

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This is a key issue

ENVIRONMENTAL AND SOCIAL

• The International Finance Corporation

(“IFC”) Performance Standards on Social

and Environmental Sustainability (2006;

updated January 2012).

• The Equator Principles (“EPs”) is a risk

management framework adopted by

financial institutions.

National legislation and international standards require that an environmental and social impact

assessment (“ESIA”) is undertaken for a mining project, during the planning of the project.

Complemented by an environmental and social management plan (“ESMP”). The ESIA and ESMP are

often used to set legally binding conditions of environmental approval.

Implementation of ESMP/s requires an environmental and social management system (“ESMS”).

The IFC Performance Standards are complemented by the World

Bank Group Environmental, Health and Safety (“EHS”) Guidelines

(April 2007), comprising a series of General EHS Guidelines and

Industry Sector EHS Guidelines.

The EPs require that the mining projects (Category A projects)

undertake an ESIA, produce an ESIA report, develop an ESMP,

establish and maintain an ESMS and undertake effective

stakeholder engagement. Address compliance with host country

legislation and observe the relevant IFC Performance Standards

and the World Bank Group EHS guidelines.

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• Many banks and financial institutions (78 so far) in 35

countries have adopted the EP’s. This covers 70% of

international project finance debt in emerging

economies.

• Environmental liabilities of borrower can affect lenders

by (i) reducing borrowers ability to pay (ii) reducing

value of security (iii) raising potential for direct liability.

• Lenders will try to protect themselves by carrying out

thorough due diligence prior to entering into a loan

agreement.

• Due diligence may include an assessment covering,

for example, whether land is contaminated, whether

hazardous materials are stored on site, waste

disposal at the site, whether necessary environmental

permits are in place and whether any legal

proceedings have been made or are pending.

For many banks this is the key issue

FINANCING VIEWPOINT

ENVIRONMENTAL AND SOCIAL

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RESOURCES AND RESERVES ESTIMATION

1. Mining

2. Beneficiation/Processing

3. Economic

4. Marketing

5. Legal

6. Environmental

7. Social and Governmental

1. Dilution, mining losses and extraction ratios, grade adjustment factors, Geotechnical and hydrogeological, Minimum mining width, interbedded waste, mineralised thickness, stripping ratio, grade/stratigraphic continuity

2. Bulk sample and sizing selection for plant design, representative of planned plant feed, grade variability, Product recoveries, Material hardness (Bond work index), Bulk density, Presence and distribution of deleterious elements (sulphur, etc.), Sales specifications, Plant capacity versus production rate, Stockpiling requirements/capacity. Can all of the deposit be processed using proposed processing technology?

3. Links production schedule to costs and revenues, Should use realistic, long-term price, Used to demonstrate economic viability, Traditionally uses discounted cash flow methods (NPV, IRR, etc.), Sensitivity analysis on inputs should be understood. Verify cut-off grade: average, marginal, operational; strip ratio limits; is UG development justified?

4. Saleable product; Availability of market for the product; Capacity affect production rate? Is there a market for the product? Is the production rate constrained by market capacity?

5. Mining legislation, Other land users (native title, etc.) Does the client have uncontested title for the mineral deposit? Is the licence likely to be granted / extended?

6. May restrict mine or infrastructure footprint, Stakeholder engagement/ESIA. Is mining restricted on any portion of the deposit? Will the community support the project?

7. Licensing and permitting; Government energy policy. Is there any doubt that the government may not grant the necessary permits?



MODIFYING FACTORS

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RESERVES ESTIMATION

1. Factor 17%

2. Factor 18%

3. Factor 20%



Geotechnical Unit Value

Overall slope angle (Deg) 45

Mining Dilution thickness (cm) 10

Mining recovery (%) 95

Processing Recovery (%) 85

Operating Mining costs (US$/trock) 3

Incremental Mining Cost (US$/10m) 0.05

G&A (US$/tROM) 3

Oil Price (US$/bbl) 100

OPTIMISATION PARAMETERS

Example of parameters

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RESERVES ESTIMATION

• Validation of capacity & Production schedule What equipment is required?

If in operation, are the forecast efficiencies/productivities consistent with historical achievements?

Are the projected productivities consistent with benchmarks?

Are inferred resources used in the production schedule? What % used in each year? Is this reasonable?

• Verification of opex forecasts. How will opex change as workload changes?

• Verification of capex forecast OP – sustaining equipment required for changes in

Strip ratio / changes in pit depth / haul length

UG – development

Replacement

• Any material constraints Manpower?

Seasonal access?

Maintenance practice?

• Risks & opportunities: What issues could have a material impact and what

would need to be done to manage them?

Are there any assumptions / judgements or areas of uncertainty which should be highlighted?



MINING PRODUCTION

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RESERVES ESTIMATION



New slope length distance

Slope length distance

Volume difference

20deg slice

Overburden

Slope angle M Slope angle S

Oil shale

Modified slope (M)

• NPV can be increased by minimising

the stripping ratio in early years.

• The reduction in capital expenditure

early in the mine life has been shown

to improve project economics.

NPV MAXIMISING

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COMMON DUE DILIGENCE ISSUES, CAUSES AND IMPACTS (1 of 2)

• Non compliance with International Reporting

Codes.

• Insufficient Drilling for development of Mineral

Resources.

• Mineral Resources are often presented as Ore

Reserves.

• The modifying factors used in Ore Reserves are

not sufficiently justified. Dilution is under

estimated – planned grade is too high

• Deposits can be structurally and geochemically

complex and hence have issues with

geotechnical, processing and environmental

engineering.

Key aim of due diligence is to assess the quality of technical work

Root cause:

Poor quality of

underlying technical

work

Impacts:

Poor Project

performance

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COMMON ISSUES AND IMPACTS (2 of 2)

• Insufficient Long Term Mine Planning and examples

of ‘hand to mouth’ style operations.

• Underinvestment in quality technical work

• Technical specialists lack knowledge of best

international practices.

• Large investments in infrastructure and projects

without adequate supporting technical work.

• Safety culture requires improvement.

• Environmental Concerns are restricted to obtaining

and complying with relevant permits only. No

proactive environmental management or monitoring.

• No or insufficient Closure provisions

Many operations are not well run

Root cause:

Poor quality of underlying

technical work

Ineffective management

Impacts:

Poor Project performance

Increased risk

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FAILING OPERATIONS - THE SAME OLD STORIES

Issue:

Planned grade is not

being achieved

(not enough oil is

recovered in the plant

to pay the bills)

Too many operations don’t have a good plan

Why?

• Poor plan, unrealistic ?

• There is no plan

• Plan not followed

• Too much dilution caused by

poor grade control, blasting

practices, ‘tonnes’ culture, poor

reconciliation, don’t know why

• Oil not there in first place – poor

geological model not validated

Root causes:

• Operations

• Poor quality of

underlying

technical work

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THE INGREDIENTS OF PROJECT FAILURE

Poor due diligence can compound poor technical work

Underlying Technical

Studies are poor –

standards not

followed, hours not put

in, inexperienced or

under qualified staff

Technical Due

diligence exercise is

not completed or

carried out by

inexperienced or under

qualified staff who

don’t follow standards,

hours not put in

• Risks too high

• Many unknowns

• Targets not

reached

• Delays

• Cost overruns

• Losses

• Project finance

issues

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IMPORTANCE OF INDEPENDENCE: WHAT CAN BE DONE ?

• Be careful how you engage consultants, contractors and advisors to deal with

project development and acquisitions.

• Conflict of Interest

• Fees are linked to the deal going ahead

• The likelihood of future consulting, supply services or construction contracts

• Companies or individuals who have an interest or shares in the project

• An Independent Consultant will provide due diligence feedback that the

Finance Institution does want to hear but the Company may not.

• Identify gaps in the Project Study or Development prior to seeking finance.

Warren Buffet Quote

“Every large deal should have a consultant working on the deal who

only gets paid or gets a bonus if the deal doesn’t go through”

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KEY FEATURES OF QUALITY TECHNICAL STUDIES

A quality technical study has the following attributes:

• The study is prepared by independent, qualified specialists,

following the standards and reporting codes, putting in the

hours

• Site specific technical work must be completed

commensurate with project status or type

• The study has considered all the infrastructure required for

the project

• Environmental and social issues are usually more important

than the technical work – these issues commonly delay or

cause suspension of Projects, in most cases satisfying local

rules is not enough

• Public consultation commenced early in the Project life

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KEY FEATURES OF QUALITY TECHNICAL DUE DILIGENCE

A quality due diligence study is carried out by

independent, qualified specialists, following the

standards and reporting codes, putting in the hours –

just like the technical studies

Beware of the following shortcuts:

• ‘I can do it all, you don’t need that specialist in X and

Y and Z’

• ‘You don’t need us to visit site’

• ‘it will only take a week’

• ‘We don’t need all that background data’

• ‘The answers are simple’

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CONCLUSION

Key Considerations

• Strategic planning can be multi-disciplinary with conflicting objectives

• Majority of projects are not properly optimised for the key study objectives

• Strategic planning is a dynamic process, objectives and policies change throughout

the project life cycle

• The available mine planning software allows for quick evaluation of strategic planning

scenarios

• Technical due diligence analyses the risks & opportunities to ensure that risks are

suitably quantified and mitigation plans put in place where necessary. A thorough due

diligence will also advise the client if projections are unlikely to be achieved. This

approach can be applied for oil shale mining projects producing oil, electricity, thermal

energy and chemical products to demonstrate financial viability different scenarios.

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