Valuation and Risks in Mining - rpacan.com · Dilution • Used to estimate production head grade. • Internal dilution –included in resources. • External dilution –added to

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www.rpacan.comwww.rpacan.comRock Solid Resources. Proven Advice. Rock Solid Resources. Proven Advice. www.rpacan.comRock Solid Resources. Proven Advice.

Valuation and Risks in Mining

David J. F. Smith, CEng.Managing Director, RPA (UK) Ltd.

Graham G. Clow, P.Eng.Chairman, RPA Inc.

Richard J. Lambert, P.Eng.President, RPA (USA) Ltd.

April 10, 2019

Toronto Denver London Vancouver Quebec City

www.rpacan.comRock Solid Resources. Proven Advice.

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Agenda

• Welcome – David Smith

• Mining Fundamentals – David Smith

• Risks and Red Flags – Graham Clow

• Valuation Methodologies and Dispute Processes – Rick Lambert

• Wrap-Up – David Smith

• Refreshments

16:30 - 16:40

16:40 - 17:00

17:00 - 17:25

17:25 - 17:50

17:50 - 18:00

18:00 - 19:00

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About RPA

• Advice to the mining industry for over 35 years

• The speciality firm of choice for resource and reserve work

• All stages:

• exploration and resource evaluation

• scoping, prefeasibility and feasibility studies

• financing, permitting, construction, operation, closure and rehabilitation.

• Clients are financial institutions, governments, major mining companies, exploration and development firms, law firms, individual investors, and private equity ventures

• Head office in Toronto

• Offices in Canada, United States and United Kingdom


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RPA Capabilities

• Mineral resource/reserve estimates and audits, compliant with worldwide reporting codes

• Mine design and optimization

• Metallurgical assessment and process review

• Estimation of project capital and operating costs, financial modeling and analysis

• Preliminary economic assessments, scoping, prefeasibility, and feasibility studies

• Valuation of mineral properties

• M&A due diligence reviews of mining and exploration projects

• Lender advisory services

• Expert witness services

• Design and management of exploration programs

• Reporting for public disclosure, including NI43-101 Technical Reports, Competent Persons Reports, and Mineral Expert Reports

• QA/QC audits and reporting

• Operations benchmarking, optimization programs and troubleshooting

• Strategic planning and advice for boards and senior management

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Mining Fundamentals




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• Surface – Open pit

• Underground

• Placer/Alluvial

• Solution Mining (U, K, Cu, NaCl, S, etc.)

• Other – industrial minerals, coal, deep sea

Types of Mines

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7

Mining Industry – Scene Setting

• Total global mining production – approximately 31,000 Mt per annum (Mtpa) + 21,000 Mtpa of waste = 52,000 Mtpa.

• 90% of global mining value comes from approximately 1,000 metal mines and 1,000 coal mines.

• Ratio of surface/underground mining – 60/40.

• 95% of all ore/rock excavated comes from surface mines and quarries

• Value of all extracted mineral was approximately US$1.7 trillion in 2018.

• Global coal production is approximately 6,000 Mt of hard (bituminous) coal and 500 Mt soft coal (lignite).

• Extracted value of coal is approximately US$730 billion (45%), metal and gems US$600 billion (35%), remaining US$350 million comes from industrial minerals (e.g. potash, barite) and cement.

• China is not just the global leader in consumption – 2017 global mineral production of top six mined commodities: Coal (1st), Iron ore (3rd), Copper (3rd), Gold (1st), Zinc (1st) and Nickel (7th).

Source: S&P Global Market Intelligence


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Mining Life Cycle – Timeline

From: Lawrence Smith

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Mining Life Cycle – Components

ENVIRONMENT AND PERMITTING AT ALL STAGES

Develop

Project Acquisition

Exploration

Pre-Scoping

Advanced Exploration

Study & Definition

Scoping

Prefeasibility

Feasibility

Financing

Construction

Startup

Operation

Closure


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Exploration

• Mineral exploration is the search for deposits in the earth’s crust.

• No guarantee that a mine will be developed; fewer than 1 in 10,000 greenfield projects eventually become a mine.

• Use of maps, reports, satellite imagery, various types of surveys, and computers to assess large areas of land.

• If the results are encouraging, soil sampling, trenching, geophysical surveys, exploratory drilling and sampling, and assays are undertaken.

• For valuation terminology this would be an exploration property with no resources.

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Discovery

• Discovery occurs when a mineral deposit is located with potential for sufficient quantity, grade, and other characteristics to make it potentially viable.

• Definition is the subsequent delineation of the mineralization by a larger, more intensive drilling and assaying program.

• The discovery phase typically also involves engineering work including metallurgical testing to determine the potential for recovery of the mineral and an initial economic evaluation of the potential project.

• For valuation terminology this would be an advanced exploration property or, an exploration property with resources.


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What is a Mineral Resource?

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CIM Definition – Mineral Resource

• A Mineral Resource is a concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade or quality and quantity that there are reasonable prospects for eventual economic extraction.

• The location, quantity, grade or quality, continuity and other geological characteristics of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge, including sampling.

• It is the only real asset a mining company owns.

• Mineral Resources are expressed in terms of tonnes of mineralized material and grade (metal content).


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Categories of Mineral Resources

• Measured Mineral Resource:

• Confidence sufficient to allow the appropriate application of technical and economic parameters.

• Based on detailed and reliable exploration, sampling and testing information.

• Variation from the estimate would not significantly affect potential economic viability.

• Indicated Mineral Resource:

• Confidence sufficient to allow the appropriate application of technical and economic parameters.

• Based on detailed and reliable exploration and testing information.

• Sufficient quality to support a Preliminary Feasibility Study.

• Inferred Mineral Resource:

• Based on geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity.

• Insufficient confidence to allow meaningful application of technical and economic parameters or to enable an evaluation of economic viability.

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15

Definition Standards – CIM (2014)

INFERRED

Consideration of mining, processing, metallurgical, economic, marketing,

legal, environmental, infrastructure, social and governmental factors

MEASURED

PROBABLE

PROVEN

INDICATED

MINERALRESOURCES

MINERALRESERVES

Increasinglevel of

geologicalknowledge

andconfidence

Exploration

Results

(the “Modifying Factors”)


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Resource Database

9


17

Geologic Interpretation / Wireframing Process


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Geostatistical Block Model

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What is a Mineral Reserve?


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CIM Definition Standards (2014) – Mineral Reserve

Mineral Reserve – the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

Mineral Reserves are inclusive of diluting material that will be mined in conjunction with the Mineral Reserves and delivered to the treatment plant or equivalent facility.

Two Categories:

Probable Mineral Reserve – the economically mineable part of an Indicated, and in some circumstances a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

Proven Mineral Reserve – the economically mineable part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study (highest confidence level).

In valuations the Mineral Reserve is generally the starting point for a DCF and all or a portion of the remaining Mineral Resource is valued and added to the cash flow.

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Four Key Requirements for a Mineral Reserve

1. A Mineral Resource.

2. The legal right to mine.

3. A mining and processing method.

4. An economic evaluation demonstrating it can be mined at a “profit”.


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Legal Right to Mine

• Leases, Patented, and Unpatented claims

• Environment, Permitting, and, Social License to Operate

• Are required permits in place?

• A property doesn’t need to have final approvals of all permits if the permits are likely.

• Whether a project has a Social License to Operate is very much a judgement call and one that is often the center of considerable controversy.

For valuation purposes the permits need not be in place, however the valuator has to be confident that there is a reasonable prospect of obtaining them.

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Project Studies and Their Evolution

• Scoping

WHAT COULD IT BE?

• Prefeasibility

WHAT SHOULD IT BE?

• Feasibility

WHAT WILL IT BE?

• Execution Plan

HOW ARE WE GOING TO DO IT?


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Scoping Study/Preliminary Economic Assessment

FIRST LEVEL ECONOMIC STUDY +/- 30%Objective• Determine project development plan, identify areas for detailed study and trade-offs

FULL STUDY BY INDEPENDENT ENGINEERING GROUPPhysicals• Resource estimate, mine design, metallurgy, capex/opex, environmental costs, project schedule, cash flow

SIX MONTHS TO ONE YEARTimeline

$200K TO SEVERAL MILLIONCost

FIRST LIFE OF MINE COST ESTIMATEEnvironment• Tailings and water management plan• Permitting schedule, ESIA• Closure issues and costs

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Prefeasibility Study

SECOND LEVEL ECONOMIC STUDY +/- 20% TO 25%Objective• Better definition

FULL STUDY BY INDEPENDENT ENGINEERING GROUPPhysicals• Reserve estimate, mine design, metallurgy, capex/opex, environmental costs, project schedule, cash flow• Conclusion of trade-off studies

ONE TO THREE YEARSTimeline

0.2% to 1.5% of Capex; $1MILLION TO $5 MILLIONCost

BETTER DEFINTION LIFE OF MINE COST ESTIMATEEnvironment• Tailings and water management plan• Permitting schedule, ESIA• Closure issues and costs


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Feasibility Study

DETAILED ECONOMIC STUDY +12% / -10%Objective• Production Decision• Can be called “Definitive” or “Bankable”

FULL STUDY BY INDEPENDENT ENGINEERING GROUPPhysicals• Reserve estimate, mine design, metallurgy, capex/opex, environmental costs, project schedule, cash flow• All aspects of the development, operation, and closure of the mine

TWO TO FIVE YEARSTimeline

1.0% TO 3.5% of Capex; $3 MILLION to +$100 MILLIONCost

MITIGATION PLANS AND COSTSEnvironment• IBA’s with local people• Permitting, ESIA• Closure issues and costs• Equator Principles and IFC

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Types of Studies – Capital Cost Estimation

Capital Cost Estimate Classes from AACE International *

Estimate Class

Maturity Level of

Project Definition

Deliverables

Expected Accuracy Range [A] End UsageTypical Purpose

OfEstimate

Typical Level Of Study Or

Project PhaseLow High

Class 5 0% to 2% -20% to -50% +30% to +100%Conceptual

planningInitial / Scoping

Class 4 1% to 15% -15% to -30% +20% to +50%Screening

optionsPreliminary or Prefeasibility

Class 3 10% to 40% -10% to -20% +10% to +30%Funding

authorizationFeasibility

Class 2 30% to 75% -5% to -15% +5% to +20% Project controlExecution/

Detailed Design

Class 1 65% to 100% -3% to -10% +3% to +15%Fixed price bidcheck estimate

Detailed Design

* AACE: Association for the Advancement of Cost Engineering - Recommended Practice No. 47R-11

[a] The state of technology, availability of applicable reference cost data and many other risks affect the range markedly. The +/- values represent typical percentage variation of actual costs from the cost estimate after application of contingency (typically at a 50% level of confidence) for given scope.


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Modifying Factors for Mineral ReservesMine Design – Dilution / Extraction / Cut-Off Grade

Mineral Processing Recovery

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Dilution

• Used to estimate production head grade.

• Internal dilution – included in resources.

• External dilution – added to resources to determine reserves – planned and unplanned.

• Low dilution, i.e., 5% range very rare.

• High dilution, i.e., +25% not a good sign.

• “Normal” conditions expect 12% to 20% for underground, 5% to 10% for open pits.

• Larger impact when ore grade is higher than surrounding rock.

• Additional dilution each time ore is re-handled.


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Conversion to Reserves – Dilution and Mine Extraction

16


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Extraction (Mining Recovery)

• Generally you will not get it all.

• Drift and fill – high 90’s% extraction.

• Blasthole stopes – 90%, some stope ends will be lost, or stopes will be lost to fill or pillar failures.

• Room and pillar – less than 80%, depends on rock strength and depth.


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Cut-Off Grades

• Types

• Break-even vs incremental.

• Open pit discard.

• Resource vs Reserve.

• Inputs

• Metal prices.

• Metallurgical recovery.

• Smelter terms and payability.

• Royalties.

• Operating costs.

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Terminology


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Open Pit

• Bulk mining, economies of scale.

• Generally lower grade than underground.

• Large equipment =

• Higher Production Rates,

• Higher Costs per Hour; but,

• Lower Costs per m3.

• Startup capital may be lower than underground, depending on pre-stripping.

• Unit costs US$1.20 to US$4.00 per tonne of material moved.

• Stripping ratio:

• 2 to 4:1 for lower grade – most large pits.

• 10 to 15:1 for high grades.

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Open Pit


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Open Pit Terminology

BENCH

BERM

PIT SLOPE

RAMP

19


37

Strip Ratio

ORE

SURFACE

WASTE

2:1

3:1

4:1


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Escondida, Chile

20


39

Bingham Canyon, Utah


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Open Pit Equipment

21


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Open Pit Equipment


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Haul Trucks

Open Pit Equipment

22


43

Underground Mining Methods


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Underground Mining

• Higher unit costs, therefore, requires higher value material.

• Physical constraints – deep, steeply dipping, narrow.

• Higher infrastructure capital – shafts, underground accesses.

• Cost ranges:

• US$5.00 to US$10.00 per tonne ore for room and pillar or caving.

• US$100.00 to US$150.00 per tonne ore for narrow vein cut and fill.

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• Block Cave – El Teniente, Henderson

• Induced Cave – New Afton

• Room and Pillar – Nanisivik, Doe Run, Boulby (Potash)

• Longhole – Sudbury, Kidd, LaRonde

• Cut and Fill – 777, Dome, Red Lake

• Shrinkage – Dome, Red Lake

Increase

in

Cost

Increase

in

Prod


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• Within each of these methods there are many choices, alternatives, refinements.

• Manual vs mechanized.

• Manual = generally very small mines where skills are available.

• For each method – consider production tonnage range, extraction, dilution.

• Ground support requirements.

• Mine regulations for the location.

• Flexibility and adaptability.

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47

Block Caving


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Block Caving

25


49

Sublevel Caving


50

Sublevel Caving

26


51

Sublevel Stoping


52

Sublevel Stoping

27


53

Shrinkage Stoping


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Room & Pillar

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55

Cut and Fill


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Cut and Fill

29


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Longwall Mining – Coal


58

Underground Mine Equipment

• Sized to fit method and underground openings.

• Truck size generally 20 t to 50 t, much smaller than open pit.

30


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• Drilling and bolting.


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• Coal mining.

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6161

Mineral Processing

• Separation of the valuable material (ore) from the invaluable material (gangue or waste) based on physical properties of the material.

• Crushing/grinding – liberation of mineral particles.

• Concentration (also commonly called “beneficiation”):

• Gravity

• Flotation

• Leaching

• Magnetic

• Filtering/Drying.

• Tailings: Material not recovered in the concentrate/product – hopefully this is mostly the gangue.


62

Grinding – SAG Mill and Ball Mills

62

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Dry Concentrate

Ready for Shipment

Wet Concentrate from Flotation

Concentration – Flotation


64

Recovery

• Percentage of revenue generating material recovered by processing and shipped from the mine.

• Very dependent on mineral association.

• Gold: normally +90%, with Heap Leach lower at 60% to 80%.

• Silver: can vary widely, usually lower than gold.

• Copper: 87% to 90%.

• Zinc: +85%.

• Nickel: +80%.

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65

Metallurgical Studies and Process Design

• Laboratory studies for the development of a process flowsheet.

• Is the sampling representative of ore types?

• New focus on geo-metallurgy is an important step forward.

• Need mass and energy balance data from metallurgical testwork to support the unit operations selected for the processing facility and to estimate the operating and capital costs.

• Quantify production throughput, product recovery and design factors.

• Determine water and energy requirements.

• Identify product characteristics, quality and market value.

• Quantify waste treatment requirements.

• Determine physical and chemical characteristics of tailings.

• Quantify plant emission estimates.


Risks and Red Flags



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Overview

• Valuation of Different Types of Mineral Properties

• Areas of Risk

• Mineral Resources and Mineral Reserves

• The Life of Mine Plan

• Social and Environmental License to Operate

• Valuation of Non-Producing Properties

• Inferred Resources


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Common Considerations in Estimating Damages in Mining Disputes

• What is the asset and its profitability?

• Mineral Resources

• Mineral Reserves

• Exploration potential

• Capital investment

• Exploration

• Development and construction

• What is the lost opportunity?

• Operations

• Expansion/extension of mine life – the use of Inferred Resources

• Sale to a third party

• What are the risks of achieving that opportunity?

• Normal risks of any mining project

• Particular emphasis on environment and social risks

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Types of Mineral Properties

• Producing mineral properties

• Producing mines

• Development planned or under construction

• Mineral reserves ± mineral resources

• Non-producing mineral properties.

• Early stage exploration properties

• Drilling stage exploration properties

• Properties with identified mineral resources

• Prefeasibility or feasibility stage projects

• Marginal development properties

• Past producing mines


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What Are The Risk Areas?

• Since 1985 - RPA review identified 75 projects that failed to meet expectations in a material way.

35 Resources/Reserves – Grade Related

10 Mining Method

16 Processing

8 Capital Cost

7 Operating Cost

6 Social/Permitting/Government

5 Prices/Timing

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Mineral Resources and Mineral ReservesThe Only Real Asset


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Definition Standards – CIM (2014)

INFERRED

Consideration of mining, processing, metallurgical, economic, marketing,

legal, environmental, infrastructure, social and governmental factors

MEASURED

PROBABLE

PROVEN

INDICATED

MINERALRESOURCES

MINERALRESERVES

Increasinglevel of

geologicalknowledge

andconfidence

Exploration

Results

(the “Modifying Factors”)

37


73

1. Adopting new models without proper validation.

2. Ignoring key geological controls and smearing grades into barren lithologies or from high grade areas into low grade areas.

3. Using inappropriate cut-off grades.

4. Not using a minimum mining thickness.

5. Excluding unsampled intervals from composites.

6. Using unreasonable capping levels.

7. Not using pit shells to constrain open pit resources.

8. Classification criteria.

Risks – Resource Estimation


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Mineral Reserves are defined by a Feasibility Study or Pre-Feasibility Study.

• Comprehensive study of viability of a mineral project.

• Mining method and costs established.

• Processing and metallurgy and costs established.

• Measured and Indicated Resource estimated.

• Reasonable assumptions for engineering, legal, social and environmental factors.

• Includes financial analysis.

CIM Definition – Mineral Reserve

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Risks – Reserve Estimation

1. A poorly done Resource Model

2. Inappropriate mining method.

3. Unrealistic minimum mining width or smallest mining unit.

4. Underestimate dilution (overestimate selectivity).

5. Overestimate productivity and production rate.

6. Cut off grade too high (continuity).

7. Metallurgical test work lacking or inconclusive.

8. Cost Estimation


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The Basis of All Mine Operations and Studiesthe Life of Mine Plan

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Components of the Life of Mine Plan

• Mineral Resource Estimate

• Mine Design – dilution, extraction, cutoff grade

• Mineral Reserves

• Production Schedule

• Metallurgical Parameters

• Capital Costs – Preproduction and sustaining

• Operating Costs

• Metal Prices

• Downstream costs – smelting and refining, transport

• Net Revenue

• Taxes, Royalties, other costs

• Income

• All-in Sustaining Costs (AISC) and other measures


78

Physicals and the Production Schedule

• Mine Physicals

• Tonnes ore.

• Tonnes waste/overburden.

• Grade(s).

• Development metres.

• Backfill requirements.

• Stockpiles

• Scheduling

• Based on reasonable productivities.

• Variability is a marker.

• Level of detail appropriate to study.

• Time periods.

• Breakdown into components.

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79

Head Grades – Actual Production vs PFS and FS Studies

Based on 70 Projects


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Cut-Off Grades – What Will Actually Be Milled?

• Types

• Break-even vs incremental.

• Open pit discard.

• Resource vs reserve

• Inputs

• Metal prices.

• Metallurgical recovery.

• Smelter terms and payability.

• Royalties.

• Operating costs.

• .

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Inappropriate COGs

1. Metal price and/or operating cost assumptions are unreasonable.

2. Cut-off(s) inconsistent with mining concept(s).

a) OP vs UG

b) Bulk mining vs narrow vein

3. Rough COG ranges.

a) 0.1 g/t Au to 0.5 g/t Au for open pits

b) >1 g/t Au for underground


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The Effect of Cut-Off Grade = 1.0 g/t

LEGEND:

Grey = Blocks Below Cut-Off

Red = Blocks Above Cut-Off

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83

3.0 g/t

LEGEND:




84

5.0 g/t

LEGEND:



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85

7.0 g/t

LEGEND:




86

Geomechanics

• Key factor to success of any mine.

• What is the ground like?

• Will affect development and mining cost:

• Rock bolts, cable bolts, shotcrete.

• Pit slope angles and strip ratio.

• Dilution and extraction.

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87

Slope Failure – Freeport Indonesia


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Dilution

• Mining method and production rate.

• Minimum width.

• Ground conditions.

• Equipment selection.

• Mining skills.

• Technical and supervisory skills.

• Grade Control and sampling.

• Assay turnaround.

• Most underestimated of all technical parameters.

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Dilution & Extraction

PlannedDilution

PlannedDilution

Drift

Drift

DesignedStope

MineralizationOutline

PlannedLoss

PlannedLoss


90

Dilution & Extraction

Drift

Drift

DesignedStope

MineralizationOutline

UnplannedDilution

UnplannedDilution

Actual Stope

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91

Minimum Mining Width

• Vein width vs. equipment requirements – dilution.

• Block size for resource model. Narrow vein with big blocks or bulk mining with small blocks.


92

Minimum Mining Width

47


93

5 x 5 m2.5 x 2.5 m Considerations include:

- Ability to locate individual blocks in BH pattern

- Excavate entire block cleanly – loading unit

- From a shot-rock pile that has moved

Selective Unit – Open Pit Mine


94

Metallurgical Studies and Process Design

• Laboratory studies for the development of a process flowsheet

• Is the sampling representative of ore types?

• New focus on geo-metallurgy is an important step forward

• Need mass and energy balance data from metallurgical testwork to support the unit operations selected for the processing facility and to estimate the operating and capital costs.

• Quantify production throughput, product recovery and design factors.

• Determine water and energy requirements.

• Identify product characteristics, quality and market value.

• Quantify waste treatment requirements.

• Determine physical and chemical characteristics of tailings.

• Quantify plant emission estimates.

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95

Metallurgical Testing – Common Stages

Vision

ProcessFeasibility

ProcessTesting

Piloting

Full ScaleProduction

Idea Generation

Bench-scale Testing

Mini-Plant Testing

Pilot Plant

Plant

< $100 k

~ $1 M

~ $10 M

~ $100 M

~ $1,000 M

“Power of 10”

DE

CR

EA

SIN

G R

ISK


96

Metal Prices for Planning and Forecasting

• There are no standards and little in the way of guidance.

• CIM Best Practices Committee recommends use of reasonable long-term metal prices.

• If commodity prices used differ from current, an explanation should be given, including the effect on the economics of the project if current prices were used.

• SEC prior requirement – 3 year trailing average.

• SEC revised 2019 – same criteria as CIM/CRIRSCO.

• General recommendation is to price with consensus, unless reports are available from companies such as CRU or Wood Mackenzie.

49


97

Capital and Operating Costs


98

Accuracy of Estimates

• Levels of studies will have general range of accuracy.

• How do we get to accuracy – through more and more engineering design and the use of detailed, current quotations for the estimate.

• The problem for many exploration and developing companies is that there is a cost to gaining estimate accuracy and a cost estimate has a shelf life.

• Benchmarking difficult because of project differences.

• Do not confuse accuracy with precision.

• Unless there is a scope change, project cost estimates rarely get lower with more detailed work.

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99

Types of Studies – Capital Cost Estimation

Capital Cost Estimate Classes from AACE International *

Estimate Class

Maturity Level of

Project Definition

Deliverables

Expected Accuracy Range [A] End UsageTypical Purpose

OfEstimate

Typical Level Of Study Or

Project PhaseLow High

Class 5 0% to 2% -20% to -50% +30% to +100%Conceptual

planningInitial / Scoping

Class 4 1% to 15% -15% to -30% +20% to +50%Screening

optionsPreliminary or Prefeasibility

Class 3 10% to 40% -10% to -20% +10% to +30%Funding

authorizationFeasibility

Class 2 30% to 75% -5% to -15% +5% to +20% Project controlExecution/

Detailed Design

Class 1 65% to 100% -3% to -10% +3% to +15%Fixed price bidcheck estimate

Detailed Design

* AACE: Association for the Advancement of Cost Engineering - Recommended Practice No. 47R-11

[a] The state of technology, availability of applicable reference cost data and many other risks affect the range markedly. The +/- values represent typical percentage variation of actual costs from the cost estimate after application of contingency (typically at a 50% level of confidence) for given scope.


100

Capital Cost Overruns – Experience

-50%

0%

50%

100%

150%

200%

250%

300%

$10 $100 $1,000

Co

st

Ove

rru

n

Original Project Estimate ($M)

Capital Cost Overruns in Mine Construction

51


101

Capital Cost Overruns – By Project

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Act

ual

Cap

ital

Co

st

Co

mp

ared

to

Bu

dg

et


102

Capital Costs – Observations

• No difference between majors and juniors.

• No difference in location and logistics.

• No difference in project size.

• No difference in mining methods or processing.

52


103

Capital Costs – Common Elements in Overruns

• Historical experience shows it is not a new phenomenon.

• Extreme time and cost pressures on project proponents.

• Lack of funding to do proper testing, analysis, design, and planning.

• Lack of experience:

• Proponents

• Funders and Investors

• Engineers and Consultants.

• In high demand times, lack of skilled workers and construction managers.

• Cost and productivity estimation basis.

• Fixed number of manhours available from the “A” team.

• Estimation bases, i.e. labour cost and productivities not kept up to date.

• Engineering detail not adequate.


104

Changes in Study Estimates

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Oct-06PEA

Sep-07PFS

May-08FS

Sep-09UFS

Aug-10ACT

Init

ial

Cap

ital

Co

st (

Mill

ion

s)

Capital Cost Escalation - Mid Size OP Gold in W. Africa

$-

$50

$100

$150

$200

$250

Feb-06 PEA Aug-07 FS Dec-07 UFS Mar-09 ACT

Init

ial

Cap

ital

Co

sts

(Mill

ion

s)

Mid Size OP & UG Gold/Silver in Mexico

40% increase in CAPEX from PEA to Actual

25% increase in CAPEX from PEA to Actual

53


105

Operating Cost Benchmarking

• Determine where a company or asset lies within the broader universe of peers on various performance measures.

• Key considerations:

• Scale of operation – Annual metal production.

• Wood Mackenzie / industry cash cost curve.

0

100

200

300

A D B F E CProject

Ann

. P

rod.

(ko

zs)

$-

$400

$800

$1,200

C1 C

ost (US

$/oz)

Annual Production Cash Cost


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Benchmark – Cost Curve

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107

Disclosure of Studies– How Reliable Is It?

• There is a very wide range of quality and, therefore, accuracy in NI 43-101/CIM (Canada), JORC (Australia), SAMREC (South Africa), and Competent Persons Reports (UK) reporting.

• The rules do not set standards for methodology in preparing materials for disclosure.

• While there are standards for resource and reserve definitions, there are no standards for cost estimation or presentation.

• Disclosure under all codes is the responsibility of the Qualified/Competent Person, for which the standard is minimal – five years relevant experience.

• There is little “policing” of reports and QPs/CPs by the regulators.


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Social and Environmental License to Operate

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Social Challenges

• Social issues surrounding mining have proved difficult to predict and measure in advance and once impacted, difficult to resolve.

• Issues often are more about perceptions and lack of understanding.

• Issues can also get caught up in politics becoming lightning-rods for simmering issues not resolved.

• Ensuring better relationships, education, and local benefits, including ensuring more tax benefits remain in the affected areas, can help projects/mines and communities work better together and reduce conflict.


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Sustainability and Social Acceptance

• Key Principles of the Evolution of Economic Studies

• Community Engagement with Indigenous and Local People

• Equator Principles

• IFC Performance Standards

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111

International Drivers For Community Engagement


Valuation



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113

The Role of the Expert in Mining Disputes

Scope of Work

1) Validation of Mineral Resources and Mineral Reserves

2) Review of mine plans, validation of all physicals in the production plan

3) Review and validation of all capital and operating costs

4) Develop Life of Mine Plan and Cash Flow Model

5) Valuation of Mineral Resources and Exploration Properties outside of the mine plan

6) Work closely with other experts to determine overall valuation


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Three Approaches to Mineral Property Valuation

Valuation Approach

1) Market – Comparable Transactions, Sales Comparison

2) Cost – Land value, drilling costs, construction costs, development costs, or replacement cost

3) Income – Monetary returns based cash flow

Valuation in mining is similar to real estate except there are no two properties that are the same. In real estate, we compare location, land area, and building size. In mining, we compare based on commodity, geographical and geological setting, mineralization style, stage of exploration, property area, mineral resources, and political jurisdiction.

When using the Market Approach, it’s important to distinguish between valuation of a mineral property and valuation of a company (and the company’s stock price).

Comparable transactions are typically within two years of the valuation date and we typically like to see a minimum of six comparables, so may need to go back further in time.

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115

Methods Vary With Stage of Project

Stage Number of Properties Value

Early Site Exploration Many Low

Exploration Drilling

Detailed Investigation

Feasibility Study

Operation/Production Few High

Closure


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Valuation Approach for Different Types of Mineral Properties

Valuation Approach

Valuation Method

Development Properties

Marginal Development

Properties

Exploration Properties

IncomeDiscounted Cash Flow

Yes Maybe No

Real Options Yes Yes No

CostAppraised Value No Yes Yes

Geoscience Factor

No Maybe Yes

Market

Comparable Transactions

Yes Yes Yes

Option Agreement Terms

Yes Yes Yes

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What Actually Happens?

1) Technical information can become difficult for arbitrators to process. For example it may be difficult to decide between the DCF analyses presented and so a valuation based on a Market or Cost Approach may be requested rather than deciding the valuation based on an Income Approach only.

2) Arbitrators sometimes split the award and decide to use the most persuasive argument to support the decision but may be swayed by a few of the better arguments from the opposing side to offset the valuation.

3) In Gold Reserve, the arbitrators allowed the DCF analysis based on the Feasibility Study but only after the mine plan was reworked to exclude the layback into the adjoining property which wasn’t controlled by Gold Reserve.

4) When arbitrators have other issues that affect the decision (community and social), the decision can resort to the valuation based on the Cost Approach. Give them back what they have spent.


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Common Issues in Arbitration

Issues

1) Valuation of Exploration Properties, Inferred Mineral Resources, and use of Mineral Resources in DCF

2) Prices, Grades, Cut-off grades

3) Costs too low

4) Schedule too aggressive

5) DCF not appropriate

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Comparability

Opposition RPA Response

There are no comparables to this property.

There are no similar sized deposits in the area.

No two deposits are the same. Similar to real estate when we have a £5M home in a neighbourhood of £500k homes. They will compare based on square metres, hectares, and upgrades.

In mining we can compare with properties of the same commodity in the same geological environment or similar jurisdiction.

We value based on the amount of the contained commodity, the stage of the project, and try to find similar types of deposits.


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Exploration Properties


Exploration properties have no value. No resource has been defined and no value can be assigned.

Transactions on exploration properties take place frequently and $/ha is a reasonable valuation metric.

Valuation codes like CIMVal, Valmin, or Samval all allow for valuation of exploration properties.

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Inferred Mineral Resources


Inferred Mineral Resources have no value.

To be Mineral Reserves, they must be either Measured or Indicated Mineral Resources.

By definition, Mineral Resources have prospects for economic extraction and thereby have value.

Transactions on resource properties take place frequently and $/oz is a reasonable valuation metric for the market approach.

Valuation codes all allow for valuation of Inferred Mineral Resources using the income approach and a discounted cash flow as long as Mineral

Reserves are mined first and the valuation recognizes higher risk for Inferred Mineral Resources.

MINERAL RESERVES

Proven


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Valuation of Inferred Resources

Examples of Transactions on Inferred Resources

Property Country Date Equity Tonnes Au Ag Cu Co Zn Pb Transaction ValueEarned (g/t) (g/t) (%) (%) (%) (%) (100% Basis)

(US$)Malmych Russia 14-Jun-18 51% 1,661,000,000 0.169 0.34 88,923,000

Key Anacon Canada 27-Dec-17 100% 1,870,000 84.00 0.16 6.93 2.63 1,570,000White Range Australia 13-Oct-17 100% 29,200,000 0.18 0.82 0.03 41,440,900

DeLamar USA 19-Sep-17 100% 117,934,000 0.410 24.24 10,248,800Akorade Ghana 24-Sep-17 100% 275,000 8.600 9,254,300

KSP Canada 04-Aug-17 49% 317,485 3.400 13.30 2,746,250Mel Canada 15-May-17 100% 5,380,000 6.45 1.85 2,008,200

Iron Butte USA 25-Apr-17 100% 27,721,378 0.617 1,090,000Gabbs USA 30-Aug-16 100% 57,199,200 0.560 0.23 2,502,500

Kossanto Mali 22-Aug-16 65% 6,718,000 1.140 6,153,850Robertson USA 21-Jun-16 100% 173,930,374 0.496 16,456,500

Marshall Lake Canada 05-May-16 31% 1,283,516 0.171 66.68 0.93 3.06 5,152,000Komarovskoye Kazakhstan 04-Apr-16 70% 28,000,000 1.500 143,472,000

Unkur Russia 01-Mar-16 60% 20,480,500 77.96 0.85 18,298,250Watershed Canada 12-Jan-16 50% 4,300,000 1.220 7,158,300

Eloise Australia 17-Dec-15 70% 2,060,000 0.330 1.42 5,297,700El Toparco Nicaragua 30-Nov-15 75% 2,716,176 3.900 2,312,500Karlawinda Australia 26-Oct-15 100% 18,000,000 1.100 4,456,400

Palmer USA 28-Jul-15 49% 8,125,000 0.320 31.70 1.41 5.25 44,898,000Akoase Ghana 01-Jun-15 100% 20,600,000 1.200 8,016,000

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Valuation of Inferred Resources

• In 1996, Barrick paid US$1.0 billion for Arequipa Resources and developed the Pierina Mine on the basis of nine diamond drill holes – no Mineral Resources.

• In 2010, Osisko Resources purchased Brett Resources for US$372 million based on a scoping study with only Inferred resources. No mine developed as yet.


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Not Compliant With Recognized Codes


Confidence in the estimate of Inferred Mineral Resources is not sufficient to allow the results of the application of technical and economic parameters to be used for detailed planning in Pre-Feasibility or Feasibility Studies.

Use of Mineral Resources in an economic analysis with Mineral Reserves is not allowed in JORC or CIM/NI 43-101.

While JORC and CIM/NI 43-101 don’t allow for the inclusion of Inferred Mineral Resources in a Prefeasibility or Feasibility study, they can be included in economic analysis in a Scoping Study or Preliminary Economic Assessment with the proper cautionary language.

More importantly, for valuation purposes, both CIMVal and Valmin allow for inclusion of Inferred Mineral Resources. CIMVal states: “Inferred Mineral Resources should be used in the Income Approach with great care, and should not be used if the Inferred Mineral Resources account for all or are a dominant part of total Mineral Resources”.

Inferred Mineral Resources should only be used in the Income Approach if Mineral Reserves are present and if, in general, mined ahead of the Inferred Mineral Resources, and recognized greater uncertainly by some means.

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Prices, Grades, Cut-off


Price too high, no contracts, would have incurred penalties.

RPA uses consensus metal pricing from the banks. Quantum expert develops support for price. Most metals and many minerals are commodities and as such are traded in open markets. Penalties are known based on benchmarking contracts.

Grades too high, didn’t account for dilution,

Grades need to account for dilution where it is applicable. The best response is an operating property with good reconciliation.

Cut-off grade too low.

This is a simple and easy win. If the cut-off grade is too low then we have included lower margin material in the analysis. If we increase cut-off grade, it will increase profitability.

Typically the opposition likes to include cut-off grade because the concept causes confusion with the arbitrators and the burden is on the Claimant to makes the case as clear as possible.


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Costs


Operation costs too low.Need to validate operating costs and benchmark with similar operations.

Capital costs too low. Capital costs need to be confirmed and benchmarked.

Didn’t allow for enough contingency. Contingency needs to be checked.

History says capital projects overrun by +20%.

Difficult to defend.Capital cost reliability is related to amount of engineering completed and the level of estimate.

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Schedule


Schedule too aggressive

Many engineering firms don’t allow for schedule delay as the schedule is developed for an ideal situation.

Schedule delay of a few months typically doesn’t have a big effect on the valuation.

Didn’t allow for permitting delaysPermitting is typically an issue and delays can be real, but again a few months doesn’t usually have an impact on the overall valuation.

Didn’t account for government delays

Delays in review and not meeting regulatory dates for decisions. Classic claim that is usually the basis for the case. If the government hadn’t delayed their decisions, the project would have been constructed on time.


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DCF


DCF not appropriate and shouldn’t include Inferred Mineral Resources.

For properties with at least a Scoping Study, DCF is appropriate and supported by the valuation codes.

DCF should include Inferred Mineral Resources as long as the Inferred is mined after the Mineral Reserves.

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Overview

• Mining Basics.

• Where Things Go Wrong.

• Valuation Methods.

• Valuation Issues.

• Questions?


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Presenters


David JF Smith, CEng, MD RPA UK, Principal Mining EngineerTel: +44 203 440 5777Email: [email protected]

Graham Clow, P.Eng., Chairman, RPAPrincipal Mining EngineerTel: +1 416 642 1470Email: [email protected]

Richard Lambert, P.Eng, President, RPA USA Principal Mining EngineerTel: +1 416 642 1475Email: [email protected]

,

Documents

Valuation and Risks in Mining - rpacan.com · Dilution • Used to estimate production head grade. • Internal dilution –included in resources. • External dilution –added to