MINING AFRICA LONDON 30 NOVEMBER 2009 WHY MINING INVESTORS NEED ENGINEERS.

MINING AFRICALONDON

30 NOVEMBER 2009

WHY MINING INVESTORS NEED ENGINEERS

OBJECTIVE

The objective of this presentation is not, within 20 minutes, to examine in detail the reasons why projects fail to meet the targets promised in the feasibility study.......

.....but to leave you with an appreciation of the role engineers play in the early analysis of a mining project, and the impact this has on its successful development

I will first discuss a the life-cycle of a project and the importance of minimising risk through a phased development of a mine.

I will then present two examples of projects that failed to meet their promised targets, and one that looks as though it may do so. I will then relate these to a phased development flow sheet

PROJECT PHASES

All project pass through five distinct phases

ConceptualPre-feasibilityFeasibilityConstructionOperation

Of these the most important is the pre-feasibility stage, because this is where we do all the trade-offs, separate the wheat from the chaff and select one option to take into the expensive feasibility study.

TOTAL PROJECT LIFE CYCLETOTAL PROJECT LIFE CYCLE

PLANPLAN OPERATIONALOPERATIONALPHASE 1ConceptPHASE 1Concept

PHASE 2 Pre Feasibility


PHASE 4ConstructPHASE 4Construct

PHASE 5Operate

PHASE 5Operate

TIMETIME

PHASE 3FeasibilityPHASE 3

Feasibility

If we look at the first four in more detail we find that the outputs of each phase are increasingly accurate capital estimates and the cost of moving to the next phase

PHASE 1PHASE 1

Conceptual studyConceptual study

Concept study output:

Order of Magnitude Estimate (OME) +/-30%

Cost of Pre-feasibility study +/-90%




Pre-feasibility study output

Preliminary Cost Estimate (PCE) +/-15% - 25%

Cost of Feasibility study +/-90%




Feasibility study output

Control Budget Cost Estimate (CBE)

+/- 5% to 10% accuracy

This is the final pre-decision cost estimate





Pre -feasibility study and Trade –off studies

40% Engineering


40% Engineering

PHASE 2PHASE 2

Feasibility study

80% Engineering

Feasibility study

80% Engineering

PHASE 3PHASE 3

PHASE 4PHASE 4

Construction

Budget control

Design Changes; Scope Changes

Construction

Budget control


The purpose of this phased approach is to reduce risks

PHASE 1PHASE 1Conceptual studyConceptual study








40% Engineering


40% Engineering







Feasibility study

80% Engineering

Feasibility study

80% Engineering









PHASE 2PHASE 2

PHASE 3PHASE 3

PHASE 4PHASE 4

Construction

Budget control


Construction

Budget control


RISK 2 Cost of StudiesRISK 2 Cost of Studies

RISK 3 Cost of CBERISK 3 Cost of CBE

RISK 4 constructionRISK 4 construction

RISK 1 KICK OFFRISK 1 KICK OFF

The first risk is obviously the decision to initiate the project.........Followed by the cost of the various studies.....And finally the cost of construction, and it is here that things can go horribly wrong.

.

We should also note the difference between

• A Point Estimate• An Interval Estimate

A Point Estimate has a fixed degree of accuracy. If an estimate has an accuracy of say 15%, this means that the estimate could be E or E plus 15%

An Interval Estimate has a degree of accuracy over a given range, i.e., say +/-15% This means that it could be E, or anywhere between E + 15% and E – 15%

The accuracy of an estimated depends on the amount of engineering completed

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

PERC

ENTA

GE E

RROR

LEV

EL

PERCENTAGE ENGINEERING COMPLETED

ERROR LEVELS

Anything less than 10% of the engineering will guarantee a sizable error, but completing 100% of the engineering will not produce a 100% accurate estimate, because there will always be changes. The idea, however, is to reduce these changes to a minimum.

As we move through the phases, so does the opportunity to add value decrease, and the cost of making changes increases






PHASE 5Operate

PHASE 5Operate

TIMETIME

ConstructiveOpportunityConstructiveOpportunity

OPPORTUNITY

OPPORTUNITY

COST

COST

DestructiveInterventionDestructiveIntervention


Feasibility

The opportunity to add value to a project by optimising the design, production profile and supporting infrastructure is a period of constructive opportunity.

Any design and or scope changes made in the late stages of a feasibility study or during the construction phase negate all previous work in terms of both time and money, and are destructive interventions.

The key to a successful project lies in the first two phases, where engineers do all the basic work






PHASE 5Operate

PHASE 5Operate

TIMETIME


OPPORTUNITY

OPPORTUNITY

COST

COST



Feasibility

FRONTEND

LOADING

A SCHEMATIC FEASIBILITY FLOW-SHEET

YESYESGenerateAlternativeLOM Plans

GenerateAlternativeLOM Plans

YESYES

Prepare and optimiseConfirm resource/reserve conversion

Life of Mine Plan

Prepare and optimiseConfirm resource/reserve conversion

Life of Mine Plan

Discipline Inputs• Mine engineering• Rock Engineering• Ventilation• Refrigeration• Metallurgical engineering• Electrical engineering• Mechanical engineering• Civil engineering• Structural engineering• Environmental• Economic & Financial analysis• Marketing• Human Resources• Socio-Political aspects


Deliverables• Mine Design• Depletion Plan (Tonnage Profiles)• Production build-up• “Pipeline”-locked up value• Construction program• Working Costs• Tax & Royalties• Risk assessment• Cash Flows• Environmental Management Plan• Capital expenditure


NONO

Criteria• Positive net cash flows• Discounted Cash Flow Analysis• Funding requirements• Debt/Equity Structure• Environmental• Corporate business plan• Technically feasible


Full Risk AnalysisFull Risk Analysis

FatalFlaws??

FatalFlaws??

Confirmation of right to mineConfirmation of right to mine

Validation of Geological Data BaseValidation of Geological Data Base Geostatistical AnalysisGeostatistical Analysis

Geological Block ModelInitial desk-top studiesPreliminary financial analysis


ABORTABORT

YESYES

NONO

Preliminary mine designResource/reserve conversionInitial Risk Assessment

Preliminary mine designResource/reserve conversionInitial Risk Assessment

FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?

FINAL DELIVERABLE - Full Feasibility or StudyFINAL DELIVERABLE - Full Feasibility or Study

NONO

During this process we produce three classes of estimate..........

OMEPCECBE



YESYES

Prepare and optimise Life of Mine Plan






NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO

Preliminary mine designResource/Reserve conversionInitial Risk Assessment


FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?


NONO

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

These are some of the things we look for in a risk analysis..........

CRITICAL ENGINEERING ASPECTS

•Resource/Reserve conversion•Is the mine design practical?•Is the CBE based on a well-defined Scope of Work?•What is the potential for scope changes/•What percentage of the CBE is factorised?•Is the capital expenditure benchmarked?•What is the operating cost basis?

CASE STUDY 1

A PLATINUM MINEIN

SOUTHERN AFRICA

One day an announcement appeared telling us that, owing to geotechnical issues attributable to a shear zone above a decline, a mine had temporarily suspended operations

Rock engineering specialists are currently assessing the situation.

It was expected that the suspension will be for at least a week

A week later we found out that the suspension would be for a minimum of

six months.

The Annual Report subsequently attributed the subsidence to exceptionally high levels of rainfall which affected ground conditions specific to the affected area.

The same Report informed shareholders that a R250 million, two-phase project was required to resume both underground and open-pit mining

This would start in June 2009.

The first phase will last six-months

The second phase will last ten months.

During its five months of operation in 2009 the Mine produced 64,068 oz PGM and received R274 million in revenue, i.e., an average of R54.8 million per month

So, in the 21 lost months the mine stands to lose R1,634 million in revenue!

A rather expensive exercise.

Let us go back to our flow sheet...



YESYES







NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO



FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?


NONO

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

It would appear that the company failed to complete a specialised aspect of the geology, i.e., the

geotechnics



YESYES







NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO



FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?


NONO

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

GEOTECHNICAL MODEL

CASE STUDY 2

A COAL MINE FEEDING

A POWER STATION

The owners claim they had completed the following feasibility studies:

Feasibility studies:

•An NI43-101 compliant mineral resource

•Mineral resource modelling and mine planning

•Environmental studies

•Mine beneficiation plant design

•Design of common infrastructure

Risks identified in 2008 Annual Report

•Resource estimates

•Cash operating costs

•Tonnages and grades of coal

•Ground conditions

•Coal seam configuration

•Recovery rates

•Climatic conditions

A prudent engineer must ask: Why are there risk remaining if they have completed all the feasibility studies?

As a matter of passing interest; if ground and climatic conditions have the same effect on this project as in our first case study, someone is in for a big surprise!

Risks identified in 2008 Annual Report

•Resource estimates

•Cash operating costs

•Tonnages and grades of coal

•Ground conditions

•Coal seam configuration

•Recovery rates

•Climatic conditions

Capital equipment and infrastructure costs related to the power station and the mine were estimated at approximately C$3.15 bn.

An Analysis published on SEDAR in October 2009 indicates that capital expended thus far totals C$39.7 million. This is presumably since listing in March 2006, i.e., an average of C$922,765 per month

In September 2009

Capital costs are estimated at approximately US$3 billion.

MD&A (October 2009): Capital expended is C$39.7 million.

Since March 2006, i.e., an average of C$922,765 per month

Operations are to start in early 2013. This would require a capital spending rate of US$75.8 million per month for 41 months, which, as any engineer will confirm, is a formidable task.

The start of commercial operations at the power station is planned for early 2013.

A capital spending rate of US$75.8 million per month for 41 months.

A formidable task.

Pertinent points from an MD & A

• Although the regional government has indicated its support for the Project, the Company has not secured mining licences.

• The government has not approved the revised Environmental Impact Assessments, occasioned by reducing the capacity of the power station and the re-location of the mining area

• The Company has signed a contract with an EPC contractor to construct the first power station

•The Company is currently conducting a tender process for the construction of the mine, beneficiation plant and the required infrastructure

The flow sheet again....



YESYES







NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO



FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?


NONO

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

They do not have a confirmed right to mine, they have not cleared the environmental hurdles, they have not validated the geology nor have they completed a geostatistical analysis



YESYES







NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO



FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?


NONO

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

Without these basis steps, what is the worth of all that follows?



YESYES







NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO



FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

CASE STUDY 3

ANOTHER PLATINUM MINE

This project started off in the normal way..................with boreholes that intersected a reef

Because the continuity of this reef horizon is a common factor, the tendency would be to accept this as fact.

So without much more ado, we could lay out and construct a mine

However, someone decided to run a seismic survey..........

........ and found a discontinuity!

This called for another borehole, which changed the whole picture

........and prevented some very embarrassing questions

Back to the flow-sheet



YESYES







NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO



FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?


NONO

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

So far, they have got it right!



YESYES







NONO




FatalFlaws??

FatalFlaws??





ABORTABORT

YESYES

NONO



FatalFlaws?Fatal

Flaws?

MeetCriteria?

MeetCriteria?


NONO

OME +/-30-40%

PCE +/-15 to 25%

CBE >10%

The financial crisis has left investors in the mining industry with an acute awareness of the dangers inherent in accepting feasibility studies at face value.

A lender would rarely accept a study prepared by a borrower or the borrower’s consultants as the basis for financing a project. At the very least, the knowledgeable lender, experienced in lending to mineral projects, will require that independent consultants and its own internal research departments review the study.

(Johnson & McCarthy. Parsons Behle & Latimer , 2001)

Feasibility Studies are formal, highly technical reports. They are compiled by specialists, and require interrogation by specialists.

Analysis of a feasibility study does not stop with confirmation of the resource, or elaborate financial models based on that resource.

It requires vigorous interrogation by engineers who have developed resources into producing mines, and who know all the pitfalls along the way.

Unless you get the basics right your project will fail!






PHASE 5Operate

PHASE 5Operate

TIMETIME


OPPORTUNITY

OPPORTUNITY

COST

COST



Feasibility

FRONTEND

LOADING

“We will make the geology fit the design”.

This is an actual quote from the CEO of a JSE and AIM listed mining company, whose Board has recently, and not surprisingly, relieved him of his post.

CONTACT DETAILS:Dr Lancelot [email protected]+27 (0)83 692 9230

mailto:[email protected]

MINING AFRICA LONDON 30 NOVEMBER 2009 WHY MINING INVESTORS NEED ENGINEERS.

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