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CSC Excellence In Risk Management April 2005

Quantitative Risk Analysis for Mining LifeCycle Management.

CIM Conference Risk WorkshopToronto

April 24, 2005

C. Coulthard, B.A. D. S. Evans Ph.D., P. Geol.

I. Henderson M.Sc., P. Eng.

CSC Project Management Services

20 Fourth Street NE, Calgary. T2E 3R5(403) 233-7994 [email protected]

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Presentation Agenda

(2) Introduction to Risk Management

Risk Management Risk Identification and Quantification

(1) Mining Issues and Problems Mining Activities Life Cycle Key Uncertainties

(3) Risk Analysis and the Risk Management Process Quantitative Risk Management Tools

(4) Specific Application Examples Portfolio Management

Mine Development

(5) Summary

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Life Cycle Activity: Business FocusStrategic Planning Stakeholder Value / Governance

Selection of Business / Areas

Portfolio Management Balance of Portfolio Rationalization of Assets

Prospect Definition Rationalization of Assets

Start Up / Ramp Up Production On Stream

Development Project Execution

Expansion Project Optimization and Planning

Production Volumes, Rates, OPEX, Product Slate and Quality

Abandonment Long Term Liabilities, Closure

Mining Issues and Problems - Mining Life Cycle Activities

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Mining Issues and Problems Key Uncertainties

Life Cycle Activity: Business Focus Key UncertaintiesStrategic Planning Market conditions

Political & Social RiskStakeholder Value / GovernanceSelection of Business / Areas


Market conditions Political & Social RiskGeological Potential

Prospect Definition Rationalization of Assets Resource Quality / Quantity Estimate of Potential Value

Start Up / Ramp Up Production On Stream Quality of Execution, Technology and Regulatory Issues

Development Project Execution Capital Cost, ScheduleTechnology


Capital Cost, ScheduleTechnology, Interference


Ore grade, Plant operability, Operating team performance, Regulatory Issues

Abandonment Long Term Liabilities, Closure Cumulative Impact of Operating Decisions, Environmental and

Social Issues

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Presentation Agenda

(2) Introduction to Risk Management

Risk Management Risk Identification and Quantification




Mine Development

(5) Summary

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Traditional

Project

Risk

Management

Time

Cost Quality

+ =

Optimized

Value

Fit forPurpose

ContinuousImprovement

BreakthroughThinking

Pick any Two

Project Management Mantras

=+

Risk Management is used to maximize the Project value by testing strategies to find the optimum.

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Three Techniques are available that address different levels of Risk Management

Qualitative Range Estimating Quantitative Analysis

Identify key project risks Optimize project configuration and shareholder value.

Calculate AppropriateContingency Targets

Objective

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Large Group Consensus Based Broad Expert Group with

judgment based assessment.

Small group Consensus based

or individual interviews(Template driven).

Assessment

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Large Group Consensus Based Broad Expert Group with judgment

based assessment.

Small group Consensus based or

individual interviews (Templatedriven).

Considers all strategic options,execution plans and external

risks.

Considers the project execution plan and assumptions.

Considers the fixed execution plan, assumptions and someexternal risks.

Scope

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based assessment.



Considers all strategic options,execution plans and external risks.


No Modeling Custom Integrated modeling highlighting cross impacts from project areas.

Tool-Driven Modeling focusing on one aspect of project (Cost,Schedule or Economics).


Modeling

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based assessment.





No Modeling Custom Integrated modelinghighlighting cross impacts from

project areas.

Tool-Driven Modeling focusingon one aspect of project (Cost,Schedule or Economics).


No Correlation Conditioning Variables to captureunderlying risks & correlation,

determined by project team.

Tool-Driven based on distribution, determined by risk

analyst

Correlation

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based assessment.





No Modeling Custom Integrated modelinghighlighting cross impacts from

project areas.

Tool-Driven Modeling focusingon one aspect of project (Cost,Schedule or Economics).


No Correlation Conditioning Variables to captureunderlying risks & correlation,

determined by project team.

Tool-Driven based ondistribution, determined by risk

analyst

Project Team, Constructors, and EPCM Contractors.

Project Team, Owners,Stakeholders, Constructors &

EPCM Contractors.

Project Team, Constructors, and EPCM Contractors

Audience

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Outcome Uncertainty(Cost, Schedule or Economic)

Risk Variable Correlations

Integrated Modeling(Cost & Schedule)

Full Cycle Analysis(Production / Revenue / Finance / Returns)

Underlying Risk Drivers(Corporate / Economic / Regulatory / Political Environment)

Strategic and Tactical Alternatives Review

External / Event Driven Risk Impacts

Outside the Box Risks(Project Assumptions)

Properly conducted risk analysis builds on the early tools used forqualitative analysis (KT, SWOT) and range estimation to include all the

risk and opportunity impacts on a project or decision.Qualitative

AnalysisRange

EstimationQuantitative

Analysis C om pr e h

e n s i v e Ri s k E n

v e l o p e f or

d e c i s i onm

ak i n

g

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Five Levels of Risk Management Maturity*

Level 1: Ad Hoc

Level 2: Initial

Level 3: Repeatable

Level 4: Managed

Level 5:Comprehensive

* Modified from PMI Risk Management Group, 2002

Success depends on the competencies and heroics of individuals

Risk awareness, but no precedents, structures or drive in place for consistent application.

(Qualitative, KT Analysis SWOT )

Risk Management has been implemented into routine business processes.

(Risk Register, Range Estimating, Real Options)

Risk Management Standard and defined processes used across the organization

(Quantitative Risk Analysis)

Risk Management is used to base both individual decisions and strategic planning on quantified values

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Frames the decision problem and documents a consistent set of assumptions, limitations and constraints ...

Allows all strategies to be tested in an uncertain environment and compared in a quantified manner

Identifies all sources of uncertainty and assesses the probability of occurrence and impact on the results ...

Provides an effective communication tool so that the assumptions and uncertainties are clearly communicated to stakeholders

Uses conditioning variables to model the underlying uncertainties toensure the project/activity performs in a logical manner...

Assists in mitigation planning, implementation tactics, and identifies opportunities to enhance project/activity value.

Quantitative Risk Analysis is a rigorous and comprehensive

process that:

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A rigorous process is applied consistently to evaluate all projects

1Frame

TheProblem

2DevelopAnalysis

Basis3

EvaluateTheRisks

4Interpret

TheResults

RiskManagement

Recycle to Focus on Most Important Risks

DevelopAlternativeStrategies.

Identify allImportantSources ofUncertainty.

Model howunderlyinguncertaintiesinteract toinfluenceoutcomeson the Project.

Identify theExperts in eachof the uncertainvariables.

Assess theimpact and theprobability ofoccurrence foreach uncertainvariable.

Calculate theuncertainty inthe key resultmeasures.

Quantify therisk & returnfor each scenario.

Analyze anddocument the

results.

Identifypreemptiveactions.

Developcontingencyplans.

Recommendedactions.

5

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Cold Eyes ReviewTeam Involvement

Project Team

Involvement

Operations Team

Involvement

Risk ContractorInvolvement

Risk Management Process

An effective Risk Management plan must re-evaluate the risks on the project and their impacts throughout the project life cycle. Each phase of the risk analysis involves a different focus and a different mix of disciplines.

StrategicPlanning

ProjectDefinition

ProjectFinancing

Mid-Construction

ProjectStart Up

Year 1Full

Operations

ProjectExecution

Corporate

PlanningInvolvement

StrategicTactical

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Presentation Agenda

(2) Introduction to Risk Management Risk Management Risk Identification and Quantification




Mine Development

(5) Summary

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ProbabilityDistributions

Tornado DiagramsStep Diagrams

Interview Issues Model and Test Options

Scheduled, Formal ReviewsUpdated Model Results(Probabilities, Tornados, Steps)Management Risk Reporting

Base Design& Operating Plans

Contingency Plans

RiskMonitoring

System

Project Targets Immediate RiskControl Measures

Risk Analysis

Risk Analysis is the centerpiece of a Risk Management Process

There are four key outputs from a comprehensive Risk Analysis

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The probability distribution illustrates the full range of project uncertainty and is used to set the project targets at appropriate confidence levels.

*Expected

Value

10/90 Range

CAPEX, Schedule, OPEX, etc.

90%

50%

10%

Note:1. Each point on the curve is a result from

a single Monte Carlo trial. The expected value represents the average value of all

the trials.

2. The slope of the 10/90 range represents the uncertainty, the flatter the curve, the more uncertainty.

3. The curve below the expected value

indicates upside opportunity, the portion above shows the downside risk.

P r o b a b i l i t y

Project Targets

P80 (?) Confidence Level

UpsideOpportunity

DownsideRisk

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*

Project Production (or NPV, ROCE, ROR)

90%

50%

10%


UpsideOpportunity

DownsideRisk

Probability distributions illustrate opportunity and risk trade- offs, and can be used to select the best project option.

Option B

ExpectedValue

Option A

Project Targets

Option B has slightly more riskwith a much greater upside

opportunity.

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-60 -40 -20 0 20 40 60Start Date

EV = 20-Dec-07

Days

The tornado diagram identifies and ranks the key project risks and is a tool that helps the project team to focus on the

most important drivers.

Road Preparation Duration 3 6Labour Productivity Delays -1.25 1.75Plant Pad Preparation Duration 3 6Labour Unrest Delays 0 2.3Execution Organization Performance Best Worst

Regulatory Duration 11.3 16.5Competing Project Environment Low HeatedStart-up & Commissioning Duration (Early Steam) 1.5 2.4Terms of Reference - Duration 3 4Regulatory Environment Relaxed StringentTerms of Reference - Application Date 1-Aug-02 1-Oct-02

Labour Availability Delays 0 1.4OTSG Manufacture & Delivery Duration 12 16Weather Delays 0 0.5Long Lead Equipment Delays -1 2

Immediate Risk Control Measures

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C S C Ex c el l en c eI n Ri s k M an a g em en t

1 5 -A u g- 0 7

1 - S e p- 0 7

1 5 - S e p- 0 7

1 - O c t - 0 7

1 5 - O c t - 0 7

1 - N o v- 0 7

1 5 - N o v- 0 7

0 1 -D e c - 0 7

1 5 -D e c - 0 7

0 1 - J an- 0 8

AFE Approval + 6

Engineering to 60% +1 3

Preliminary Vendor Data +7

Module Steel Fabrication 0

Module PipeFabrication Duration 0

Rack/ ProcessModule Assembly

- 3

Last Process Area ModuleOn-site to Construction

Complete

0

Evaporator Units 0

Vapour Compressors 0

Site Prep Duration +1

Piling - 8

Commissioning Duration +1 4

Start-up Duration - 3

Construction Duration + 3 1

Materials Delivery + 5

Weather Delay + 5

Labour Issues+1 2

L g L d +

S t ar t D

a t e

B a s e = 0 3 - S e p- 0 7

T h e S t e pD i a gr a m d e m o n s t r a t e s w h e r e t h e gr o w

b a s e e s t i m a t e t o t h e E x p e c t e d V a l u e o c c ur s , a n d id

f a c t or s i m p a c t i n g t h e c o s t .

I m m

e d i a t e R i s k C o n t r o l M

e a s ur e s

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A complete risk register considers all sources of information available for the project uncertainties.

Immediate Risk Control Measures

ProjectDocumentation

QualitativeAnalysis

QuantitativeAnalysis

Risk Register

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0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07

UnconstrainedFix Filing Date (-120 days)

Early Application (-40 days)

No JV Delays (-60 days)No Staffing Delays (-30 days)

The analysis can be used to evaluate impacts of schedule

risks, and test mitigation steps to show the potential for schedule advancement. Incremental mitigation can be

applied to reach an acceptable target date.

BaseEV = 1-Nov-04

MitigatedEV = 21-Feb-04

Contingency Plans

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Project NPV ($MM)

10%

30%

50%

70%

90%

2000-800 -400 0 400 800 1200 1600

DefinitionEV = 528 $MM Project AFE

EV = 697 $MM

Mid-ConstructionEV = 669 $MM

Start UpEV = 695 $MM

PlanningEV = 460 $MM

Use of risk analysis throughout the project life helps the

project team to focus on the most important risks for each stage of development, resulting in a better defined project

(i.e. less risk).

Risk Monitoring System

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Presentation Agenda





Mine Development(5) Summary

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Mining Issues and Problems Key Uncertainties

Life Cycle Activity: Business Focus Key UncertaintiesStrategic Planning Market conditions



Market conditions Political & Social Risk

Geological Potential Prospect Definition Rationalization of Assets Resource Quality / Quantity

Estimate of Potential Value






Ore grade, Plant operability, Operating team performance, Regulatory Issues

Abandonment Long Term Liabilities, Closure Cumulative Impact of Operating Decisions, Environmental and

Social Issues

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Mining Issues and Problems

Activity: Business Focus Key UncertaintiesStrategic Planning Market conditions



Market conditions Political & Social RiskGeological Potential

Prospect Definition Rationalization of Assets Resource Quality / Quantity Estimate of Potential Value

Early in the Project life cycle the analysis should be focused at a high level to level to

ensure that the right strategic decision is taken.

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Strategy Table for Country Risk Analysis

Decisions

Strategy Country Commodities Mining

Extraction

Processing Markets

Increasing Reserves

Canada Polymetallic Open Pit Heap Leach In Country

Competitive Need

Indonesia Precious Metals

Underground Standard Flotation &

Concentration

Regional

Competitive

Advantage

Russia Industrial

Minerals

InSitu Leach Solvex

Smelting

& Refining

In Country:onsite

In Country:offsite

Out Of

Country

International

Selected Strategy Options

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Portfolio Management to select best mining project

Pre-Acquisition Acquisition

ProjectExecution

CAPEX

OPEX

Revenue

ProjectNPV

DiscountRate

AcquisitionDuration

Exploration/ AFE Duration

Mech.Duration

ExtraordinaryCosts

Acquisition/ Exploration

Costs

LocalBenefits

LabourProductivity

LabourCosts

Energy &Utility Costs

ChemicalCosts

FixedCosts

Variable

Costs

BulksMaterial& EquipmentCosts

CommodityPrice

FiscalTerms

Taxes &Royalties

Expropriate

FirstProduction

Smelting &Refining Costs

Closure

EnvironmentalPerformance

Infrastructure

Costs

PoliticalClimate

Socio-CulturalEnvironment

EnvironmentalPerformance

ClosureCost

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0%

10%

20%

30%40%

50%

60%

70%80%

90%

100%

-1500 -1000 -500 0 500 1000 1500


$MM NPV @ 12%

NPV Country Case Comparison

CanadaEV = $147 MM

IndonesiaEV = $48 MM

Portfolio Management

RussiaEV = -$415 MM

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-1000

-500

0

500

1000

2000 2005 2010 2015

Canada PayoutEV = 2011

Indonesia PayoutEV = 2014

Russia PayoutEV = Never

$ M M

Cumulative Cash Flow

Year


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-100 0 100 200 300 400

EV = $147 MM

$MM NPV @ 12%

The Tornado Diagram highlights the key drivers for the option and identifies areas to focus mitigation efforts to ensure success

NPV Canadian Case

Political ClimateDaily ProductionSocio-Cultural EnvironmentTaxes & RoyaltiesAu GradeCu Price

Environmental PerformanceAu PriceLabour CostsZn Recovery RateZn Grade

Chemical CostsRamp-up DurationLocal Benefits

Acquisition / Exploration Costs


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Mining Issues and Problems

Activity: Business Focus Key Uncertainties





During the Project Development phase the analysis should have more focus on the tactical level to ensure that the project is executed well.

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Materials/ EstimateVariance

TotalProject

CAPEX

$ 160 MM

Indirects

$ 20 MM

Mill

$ 60 MM

Mine

$ 60 MM

$ 40 MMLevel

Excavation

$ 5 MM

ShaftExcavation

$ 5 MM

Water

$ 5 MM

Roads

$ 10 MM

Miscellaneous

BidRate

EngineeringCost

Variance

OrganizationPerformance

CompetingProjects

LabourProductivity

$3 MM

Administration$ 15 MM

EPCM

ExchangeRate

$1.5 MM/yrSustaining

Capital

LocalBenefits

CostVariance

SubsurfaceEquipment

$ 15 MM

$20 MM

Infrastructure

UsedEquipment

LabourRate

ScopeVariance

Development capital cost for a mining project

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0%

10%20%

30%

40%

50%60%

70%

80%

90%100%

50 100 150 200 250 300


CAPEX ($MM)

The Cumulative Probability Distribution shows that $35 MM (16%) contingency is required for a 70% confidence limit. The slope

(uncertainty) in the curve approximates a Class V Estimate.

Expected ValueCAPEX = $175 MM

Development - CAPEX

Base Estimate$160 MM

P90 = $220 MM

P90 = $130 MM

Class V Estimate+25%/-25%

$35 MM

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-15 -10 -5 0 5 10 15 20

Mine Dev. Unit Cost VarianceMine Dev. Quantities VarianceCompeting Projects EnvironmentLevel Excavation Dev. Scope Variance

Infrastructure CostsExecution Organization PerformanceInfrastructure Construction DurationRegulatory Process DurationTailings Cost VarianceRoads Cost VarianceSubsurface Equipment CostsMine Construction DurationEPCM Cost Variance -BaseLeaseholder Negotiations DurationWater Cost Variance -Base

Total Capital Expenditure $MM

$175 MM

The range in in Capital Cost is largely due to uncertainty in Mine UnitCost Variance, Mine Quantities Variance and Level Development Scope

Variance.

Development - CAPEX

P i A d

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Presentation Agenda



(3) Risk Analysis and the Risk Management Process

Quantitative Risk Management Tools

(4) Specific Application Examples Portfolio Management Mine Development

(5) Summary

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Risk management is fundamental for accountability on corporate governance and on maximizing shareholder value. It begins with strategic definition and continues in a consistent manner throughout the project life cycle. The earlier risk management starts, the earlier you can avoid

or mitigate risks and capture opportunities.

Risk Management ensures that there are no surprises. Documentation of assumptions and all risks. Communication of risk analysis results and the plan for managing those risks (avoid, accept, manage). The focus of effortsis on the underlying project risks.

Range Estimating is not Risk Analysis. Fully accountable risk analysis considers the specific uncertainties of a project, and incorporates these underlying risks into the project value. Processes that provide

single-point outcomes or risk distributions based on the probability of fixed outcomes(decision trees, KT, range estimating) do not meet the definition of risk analysis.

Ignoring risks to a project is not an option ; important decisions will be made anyway, should they not be made with the best information available?

(Project Manager Today, October 2000)

Modern Day Applications of Risk Analysis to Mining Issues and Problems

Documents

CIM April 24