Geotechnical and Business Issues and Risks when Evaluating Mineral Prospects

Prospectors and Developers Association of Canada PDAC Convention 2014

Geotechnical and Business Issues When Evaluating Resources in the Current Market Environment

at Baker & McKenzie LLP’s Seminar

How to Reduce Risk in International Resource Projects

Tim Alch V.P & Senior Minerals Business Analyst

Behre Dolbear & Co. +1.845.480.1434

BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS

Behre Dolbear

• Our expertise, integrity, and adherence to highest ethical and professional

standards has earned the respect of the industries we have served since

1911 creating value for clients with independent advice

• Our reputation stems from our global approach, best-in-field consultants’

experience, expertise and matchless integrity supporting reliable and truly

independent recommendations

• We have 12 offices in 8 countries and completed 210+ projects in 55+

countries in each of the last 5 years using our global network of 125+

professionals that includes work experience throughout the Americas

• Our group of experts provides a reservoir of proven expertise and

experience in all disciplines related to the mining and minerals processing

of base, precious and ferrous metals, coal, uranium, fertilizer and industrial

minerals, gemstones, cement, dimension stone, sand, and gravel

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Behre Dolbear

• Our clients include mining, banking, investment, legal, accounting firms, and

state-owned mineral producers, government agencies, non-traditional

providers of mining finance, multi-lateral-export credit agencies, sovereign

wealth funds, private capital pools, family offices, trading companies, and

strategic mineral consumers that sponsor mineral development

Our capabilities span managerial, technical and financial issues

We conduct technical and financial due diligence around the world

Behre Dolbear was engaged by the Board of Governors of the Hong

Kong Stock Exchange to review Listing Rules for Mining Companies

We regularly write and review Independent Technical Expert reports

• Additional information about Behre Dolbear is shown at the end herein and

at our website www.dolbear.com and is available upon request.

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http://www.dolbear.com/


Success Is Driven Not Only By Geology

Study these and many project issues with discerning, trained eye:

• Property Information and Stable Regulatory Environment

• Geology and Resources

• Mining

• Mineral Processing and Metallurgy

• Infrastructure

• Products, Markets, and Sales

• Environmental and Permitting

• Financial Issues

• Development Costs and Schedule

• Political and Social Considerations

• Market

• Project Economics – Opex and Capex

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Finding and Evaluating A Resource Is

Costly and Risky, with No Guarantees

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Exploration is Very Risky and Expensive,

From Discovery to Start Up Can Be ~17 Years

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Source: Stephen Enders from Eurasian Minerals at SME

Current Trends in Mining Finance Conference April 2013


Areas of Investigation for Mining Projects

Potential Areas of Investigation

for Proposed Mining Projects

PROPERTY INFORMATION

Location, topography and climate

Land ownership and royalties

Property history

Current status

GEOLOGY AND RESOURCES

Geological description

Mineralogy

Drilling, sampling and assaying

Evaluation techniques

Mineral resource estimate

MINING

Ore reserve estimate

Mining method and plans

Mining equipment

Material handing

Material handling equipment

Historical and forecast production

Consumables

Mining capital estimates

Mining operating cost estimates

PROCESSING

Ore sampling and testwork

Processing method

Other required processes

Process equipment

Historical and forecast production

Consumables

Processing capital estimates

Processing operating cost estimates

INFRASTRUCTURE

Industrial infrastructure facilities

Social infrastructure facilities

Utilities, power, water

Infrastructure capital estimates

Infrastructure operating cost estimates

MANAGEMENT AND LABOR

Management organization requirements

Labor requirements

PRODUCTS, MARKETS AND SALES

Products

Markets

Prices

Sales

ENVIRONMENTAL AND PERMITTING

Permit list

Environmental impact

Compliance costs

Compliance cost timing

Reclamation expenses

FINANCIAL ISSUES

Taxes

Royalties

Fees

Licenses

DEVELOPMENT COSTS AND SCHEDULE

Development cost estimate

Development schedule

Development methodology

POLITICAL & SOCIAL CONSIDERATIONS

Economic benefits and costs

Government considerations

Other issues

PROJECT ECONOMICS

Economic parameters

Discount rate determination

Cash flows

Investor returns

Debt analysis

Sensitivities

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Our Role as Independent Experts

Whether we are advising mining companies, investors, lenders, or government stakeholders, all benefit from qualified expertise to:

• Evaluate the inherent risks

• Act as resident skeptic

• Hear our view about project risk(s):

High Risk: A factor poses an immediate danger of a failure, if uncorrected, may have a material effect (>15%) on the project cash flow and performance and could lead to project failure

Moderate Risk: A factor, if uncorrected, could have a significant effect (10%) on the project cash flow and performance unless mitigated by some corrective action

Low Risk: A factor, if uncorrected, may have little or no effect on project cash flow and performance

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When To Call An Expert

• There is a reason Wall Street terms Mining a

‘deep cyclical’ – As valuations in 2013 made clear

• If mining were that simple, there would be more

successful and profit making firms, operations

• Typically experts are called on to the scene when:

A property, project, transaction is off course

Lenders and investors are out of patience

Company and owners are out of money

Despair has set in

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Three Levels of Engineering Studies

Seeing Into the Future is Hard

• Not exhaustive, rather indicative checklists

• Each require trained, qualified experts’ review:

Conceptual/Scoping Study

Pre-feasibility Study

Feasibility Study

• Feasibility or Definitive Study – in very broad terms

Is the document upon which a mine is approved by the Board of

a mining company developing the mine

If financing is required, this is the document evaluated by

financial institutions in their decision-making process

Is document to which a completed and commissioned mine plan

is compared to determine its commercial status

• Caveat Emptor – If it sounds too good to be true – Get a 2nd opinion

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Characteristics of Scoping, Pre-Feasibility,

and Feasibility Studies (1)

CATEGORY – Illustrative not exhaustive CONCEPTUAL

STUDY/SCOPING STUDY PRE-FEASIBILITY STUDY FEASIBILITY STUDY

INTRODUCTION

Location, Topography, and Climate

Site location map

Ownership and Royalties

Claims list

Claims map

Current Status and History

Historical chronology

Information on past production, if any

•Yes

•No

No

No

No

•Yes

•No

Yes

No

No

•Yes

•Yes

Yes

Yes

Yes

GEOLOGY AND RESOURCES

Geological Description

Geological map

Geological cross-sections

Drilling, Sampling, and Assaying

Parameters

Drill hole location map

Sampling/assaying flow diagram and assessment

Assay check assessment and graph

Mineral Resource Estimate

Resource methodology determination and approach

Geologic model limits

Lithology/tonnage factors/code

Cumulative frequency of samples verses grade

Variograms

Resource Estimate

Yes

No

Yes

Yes

No

No

Yes

Yes

No

No

No

Industry Standards (NI 43-

101, JORC, etc.)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes


101, JORC, etc.)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes


101, JORC, etc.)

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STUDY/SCOPING STUDY

PRE-FEASIBILITY

STUDY FEASIBILITY STUDY

MINING

Ore Reserve Estimate

Reserve and resource calculation parameters

Cutoff grade equations

Reserve and resource estimate

Mining Method and Plans

Mining parameters

Hydrology/geotechnical parameters

Mining equipment list

Consumables list

Material handling systems

Material handling equipment

Personnel list

Surface mining

Final pit and dump outlines

Incremental pit and dump outlines

Underground mining

General mine development

Mining approach (stoping, cut and fill, etc.)

Production Schedule

Historical production, if any

Annual ore and waste tonnage and grade

Mining Capital and Operating Cost Estimates

Mining operating cost estimates

Mining capital cost estimates

Assumed Values

No

Industry Standards

Yes, minimal engineering basis

No

No

No

No

No

No

No

Yes, simple outline

No

Yes, general outline

Yes, general approach

Yes

Yes, division of total

Yes, factored ±45%

Yes, factored ±45%

Test-Based Values

Yes

Industry Standards

Yes, some geotechnical data

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes, ±30%

Yes, from engineering

manuals ±30%

Test-Based Values

Yes

Industry Standards

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes, ±15%

Yes, from vendor quotes and

take-offs ±15%

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PROCESSING

Ore Sampling and Test Work

Test work data

Processing Methods and Plans

Processing methods

Processing parameters

Equipment list

Consumables list

Personnel list

Material balance

Flow diagram

Site plan

General arrangement drawings

Production Schedule

Historical production, if any

Annual production tonnage and grade

Off-site Processing Cost Estimates

Concentration charges

Smelting and refining charges

Other charges

Material handling and transport

Insurance and sales charges

Processing Capital and Operating Cost Estimates

Processing operating cost estimates

Processing capital cost estimates

No, assumed values

Yes, general approach

Yes, minimal engineering

No

No

No

No

No

Yes, simple block diagram

No

No

Yes

Yes, division of total

No

No

No

No

Yes, factored ±45%

Yes, factored ±45%

No, preliminary data

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes, preliminary estimate




No

Yes, ±30%


manuals ±30%

No, preliminary data

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes, quote

Yes, quote

Yes, quote

Yes, quote

Yes, quote

Yes, ±15%

Yes, from vendor quotes and

take-offs ±15%

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INFRASTRUCTURE

Industrial Infrastructure Facilities

Facilities list

Power and water parameters

Full site plan

Social Infrastructure Facilities

Facilities list

Housing

Schools

Hospitals

Other

Infrastructure Capital and Operating Cost Estimates

Consumables list

Personnel list

Infrastructure operating cost estimates

Infrastructure capital cost estimates

Yes, with minimum detail

Yes, preliminary

No

Yes, with minimum detail

No

No

No

No

No

No

Yes, factored ±45%

Yes, factored ±45%

Yes

Yes

Yes

Yes

Yes, preliminary

Yes, preliminary

Yes, preliminary

Yes, preliminary

Yes

Yes

Yes, ±30%


manuals ±30%

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes, ±15%

Yes, from vendor quotes &

take-offs ±15%

MANAGEMENT, LABOR & ADMINISTRATION

Personnel

Personnel lists

Training requirements

Personnel Capital & Operating Cost Estimates

Consumables list

Personnel operating cost estimates

Personnel capital cost

No

No

No

Yes, factored ±45%

Yes, factored ±45%

Yes

Yes

No

Yes, ±30%

Yes, ±30%

Yes

Yes

•Yes

Yes, ±15%

Yes, ±15%

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CATEGORY – Illustrative not exhaustive

CONCEPTUAL

STUDY/SCOPING STUDY

PRE-FEASIBILITY STUDY FEASIBILITY STUDY

MARKETS, PRODUCTS AND SALES

Markets, Products and Sales

Products

Volume

Prices

Sales organization

Sales Related Capital and Operating Cost Estimates

Personnel list

Consumables list

Sales related operating cost estimates

Sales related capital cost estimates

Yes, preliminary

Yes, preliminary

Yes, preliminary

No

No

No

Yes, factored ±45%

Yes, factored ±45%

Yes

Yes

Yes

Yes, preliminary

Yes

No

Yes, ±30%

Yes, ±30%

Yes

Yes

Yes

Yes, preliminary

Yes

No

Yes, ±15%

•Yes, ±15%

ENVIRONMENTAL AND PERMITTING

Environmental

Permit list

Environmental Impacts

Environmental Compliance Cost Estimates

Personnel list

Environmental related operating cost estimates

Environmental related capital cost estimates

No

Yes, preliminary

No

Yes, factored ±45%

Yes, factored ±45%

Yes

Yes

Yes

Yes, ±30%

Yes, ±30%

Yes

Yes

Yes

Yes, ±15%

Yes, ±15%

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DEVELOPMENT SCHEDULE AND COSTS

Development Schedule

Development methodology

Development schedule

Development Costs

Personnel list

Development related operating cost estimates

Development related capital cost estimates

•Yes, preliminary

Yes, preliminary

No

No

No

•Yes

Yes

Yes

Yes, ±30%

Yes, ±30%

•Yes

Yes

Yes

Yes, ±15%

Yes, from vendor quotes &

take-offs ±15%

PROJECT ECONOMICS

Financial Issues

Taxes

Royalties

Fees

Licenses

Economic Issues

Economic parameters

Discount rate determination

Cash flows

Investor returns

Debt analysis

1.Sensitivities

Yes, preliminary

Yes, preliminary

Yes, preliminary

Yes, preliminary

Yes, preliminary

Yes, preliminary

Yes, preliminary

Yes, preliminary

No

No

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes, preliminary

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

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SUMMARY AND RECOMMENDATIONS

Operational Parameters

Title and ownership

Geology

Ore reserves

Mining and processing rates

Development period and mine life

Metal/mineral recoveries

Sales

Operating cost estimates

Capital cost estimates

Financial Parameters

Cash Flows

NPV, IRR, and ROI

Mostly assumed and factored

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Some engineering basis

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Some engineering basis

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

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Mining is a Long Term Proposition –

Adapting to Uncertainty is Hard

• Changing taxes, royalties, rules, regulations etc.

deters investors and delays action

• Projects and investors need to have stable rule of

law to earn competitive returns and maintain access

to capital thru cyclical and volatile market conditions

• Investment trends are competitive & reflect variable

economic trends as are expectations and risks of

project owners, shareholders, lenders & investors

• Stakeholders evaluate projects in a risk-adjusted

manner seeking to reduce risk exposure

• Planning for different, changing risks is difficult 18


Mining Involves Many Risks,

Different Goals and Horizons

• Geologists optimistically look for lode

• Developers look for funds and mine

• Bankers, Investors look for returns

• Local people want jobs and stake

• Governments want participation

• There are many others involved

• Bottom line: There are many risks

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Current Environment is Challenging

Focused on Optimization and Lower Costs

• 2013 was plagued with less robust growth and weaker prices

China’s GDP is less than 8%; transitioning, shifting priorities

Commodity prices are off from recent highs

• Regulatory, political and resource nationalism risks are rising

• Investor focus is on returns, Growth at any, all cost, is not enough

Mining companies have been writing down assets

Expansion plans, new projects have been curtailed

Many Junior miners lack sufficient capital

• Margins are under pressure, as are Boards and Executives

• Strengthening cash flow, Optimizing operations, Cutting costs,

Sales of marginal assets, Reduced capex are goals

• Selective, opportunistic M&A and investments can occur with

Private Equity, SWFs, SOEs taking greater interest in mining

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Reasons To Be Optimistic – Longer Term

• Urbanization, industrialization in China, Asia, India, South America, Middle East, Africa, etc. continues to drive industrial metals and energy demand

• Security and stability of supply are a concern in China, Korea, Japan, Middle East, etc. and of some industrial companies e.g., technology or critical metals, fertilizer minerals, energy fuels (coal, uranium) etc.

• Constraining new supply are: Declining ore grades and spending; Higher costs; Fewer large deposits; Larger ‘takes’ by Governments; Changing political winds; etc.

• Metals supply may struggle to meet demand in longer term. Sporadic price spikes may/can/do occur

• Prices may stay above long term averages

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Behre Dolbear

• We perform technical, operating, financial issues and valuations studies advising clients in the mining, banking, investment, financial, legal and accounting sectors and government agencies around the world

• Behre Dolbear offers a range of highly specialized and complementary services

Technical Consulting

Engineering Services

Valuation and Financial advisory

Management Consulting

Environmental Services

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Behre Dolbear

• To meet client requirements, we select, integrate and manage our highly qualified and experienced specialists

Each are selected for particular skill-set and ability to provide the highest levels of insight, advice and recommendation

They have experience in many transactions involving brown and green field projects requiring lender due diligence and project monitoring as well as management advisory roles

If other skills and experience are needed, our flexibility and depth of talent allows us to deliver them swiftly and efficiently

Tim Alch

V.P. & Senior Minerals Business Analyst Behre Dolbear & Co.

+1.845.480.1434 [email protected]

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mailto:[email protected]


Behre Dolbear - A Worldwide Resource

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