Bankable feasibility studies for mining projects

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Dr aft

The “bankable feasibility study” is not a guarantee that a mining project will produce a planned outcome Further independent review is advisable, if not necessary, to test and validate strategic targets, directions and goals Quantitative risk analysis can not only play a key role in the making of quality decisions for project approval, but will also

provide grounded measures for project execution risk management

D S Evans, PhD, PGeol.

Sr Partner CSC Project Management Services

Calgary 403-233-7994, dave@cscproject.com

Bankable feasibility studies for mining projects

CSC

Dr aft

Statements, other than statements of historical fact, may constitute

forward-looking information and include, without limitation, timing and content of

upcoming feasibility studies and other economic or financial analyses;

anticipated availability and terms of future financing; future production,

operating and capital costs; and operating or financial performance.

be no assurance that such information will prove to be accurate , and actual

results and future events could differ materially from those anticipated in such information Important factors that could cause actual results to differ materially include: fluctuations in commodity prices and currency exchange rates; the need for co-operation of government agencies in the issuance of required permits and approvals; the possibility of delay in development work or in construction and uncertainty of meeting anticipated milestones; and other risks and uncertainties.

There are more risks to mining than just commodity price fluctuations… Limitation Statements define some uncertainties, but not all of them…

Dr aft

Corporate Performance

Exploration Performance

Development Performance

Mining Performance

Processing Performance

Marketing Performance

Location

Uncertainty

Mining Complexity

Social &

Environmental Uncertainty

Construction Uncertainty

Mining Uncertainty

Metallurgical Uncertainty

Market &

Commodity Pricing Uncertainty

Financial &

Economic Uncertainty

Geological Uncertainty

Science &

Technology Uncertainty

Mining is a risky business and each stage is impacted by uncertainties

Investor Uncertainty

Social &

Environmental Uncertainty

Social &

Environmental Uncertainty

Social &

Environmental Uncertainty

Social &

Environmental Uncertainty

Social & Environmental Uncertainty

Political Uncertainty

Poorly Defined and somewhat Controllable Risks

Direct Controllable Risks

Global Financial &

Economic Risks

CSC

“Risk Categories”

Dr aft

Definitions & Basis

• Typically, a bankable feasibility study is a comprehensive

forward analysis of a project’s economics (+/-15% precision) to

be used by financial institutions to assess the

credit-worthiness for project financing.

• The feasibility part is guided by a set of assumptions, a

strategy, development conditions and a planned outcome The outcome is uncertain and targets and objectives may not be achievable.

• The bankable part relates to the basis and conditions for a

future financial agreement to collateralize mining assets for a project loan, to set a premium and a repayment schedule, with appropriate risk/reward factors.

Dr aft

What do others say about mining

feasibility studies…

• “The mining industry has had a spotty record in the area of

estimating initial capital cost and operational performances, even though the standard of feasibility studies has improved in the last decade Third party reviews rarely have time and funds for due diligence”…taken from Shillabeer and Gypton, Mining Risk Management, 2003, Australian IMM Proceedings

• Project Evaluation 2007 contains an article entitled “The Use and Abuse of (Mining) Feasibility Studies” by Mackenzie and Cusworth who state that most feasibility examples are

unbalanced, or provide inaccurate views of one or both

technical and business aspects The authors subscribe to a project management framework (to include risk analysis) to

overcome strategic and execution failures that often occur

following feasibility studies

CSC

Dr aft

So what does +/- 15% really mean?

• A +/-15% estimate is somewhere between the definition of a Class 5 and Class 2 estimate Class has to do with both the content and quality of the estimate and the estimating

confidence (precision)

• Well, doesn’t contingency cover estimate shortfalls (+15%)?

to resolve cost uncertainty precision Current thinking is that contingency will be “used up” for some, but not all cost

categories Contingency does NOT make the estimate “more accurate”.

• Quantitative Risk Analysis is a process to assess and quantify the potential variances around project drivers When key

project drivers (i.e risks) become quantified, corrective

measures and actions can be taken, with confidence, in the making of quality decisions about precision and accuracy

Dr aft

• Normally, a feasibility study is prepared by a qualified

engineer or estimator It is a forward-looking document that

captures a precision level but not necessarily an acceptable* level of accuracy.

• So, what does “bankable feasibility” really mean in terms of

development and construction of a mining project?

• And how does risk analysis capture precision and accuracy

for better decision-making and executing a transparent,

accountable and defensible execution plan?

The bankable feasibility study as a comprehensive engineering

study, cost estimate and mining development plan

CSC

* As known or required by the project owner

Dr aft

The hierarchy of Capital Cost estimates

• Conceptual (Class 10 Estimate)

• Class 5 (also called DBM Estimate)

• Pre-Feasibility (Class 3 or 5, depending)

• Class 2 or 3 (+/-15% has now gained acceptance as a

bankable feasibility study)

• AFE Estimate, may be a Class 1 or Class 2 and is

designed to go for project sanction & EPC bids It should be the most accurate and the most precise estimate obtainable given circumstances and

conditions; and, is normally accompanied by a PEP.

Dr aft

Precision and accuracy are separate variables in the Cost Estimate

•Precision is the ability to reproduce a result;

•Accuracy is a confidence in the absolute result or outcome.

Dr aft

The Definition of Estimate Classes

• The Study or Class 5 estimate is prepared in conjunction with the Design

Basis Memorandum phase of the project At this point all critical design alternatives have been examined and the preliminary project execution

plan has been established This type of estimate is defined as “an estimate, including contingency, that has a probability of overrun by more than 10%,

1 time in 3”.

• The AFE or Class 2 estimate is prepared in conjunction with the Basic

Engineering phase of a project At this point, all key design documents

such as P&ID’s, layouts and electrical single lines have been established The project execution plan, construction plan, and schedule have also

been established This type of estimate is defined as where “the final cost

of the project will be within plus or minus 10% of the estimated value, 80%

of the time”.

The definition of estimate classes describes the expected range of

uncertainty around an estimate (in assessment and simulation this is

the slope of the probability distribution)

P90-P10 = 80%

P67.7 crosses at 10% over estimate

CSC

Quantitative risk analysis calculates the probability distribution of a cost outcome

This distribution can be used to :

1 Determine the contingency required for any confidence level (probability).

2 Compare the estimate uncertainty (slope) with other estimate class definitions.

Slope of Class V Estimate

Slope of Class 2 Estimate

40 $MM Contingency Required for P50 Confidence

Dr aft

A example of risk analysis applied

to a mining capital cost estimate

CSC

Dr aft

Materials/

Estimate Variance

Total Project CAPEX

$ 3,799k

Shaft Excavation

Engineering Cost Variance

($ 1,602k/yr)

Sustaining Capital

Local Benefits Cost

Variance

Subsurface Equipment

$ 11,621k

$ 17,570k

Infrastructure

Used Equipment

Labour Rate

Scope Variance

• Expected Value is P55 or about a 55% chance of happening

• P10 & P90 are each about a 10% chance of happening and define the

range of this outcome which is a measure of the accuracy of the estimate

Dr aft

Total CAPEX

0 10

The Base Capital Cost estimate is $ 172 MM The expected Total Capital Cost

is $ 181 MM In this case there is only a 39% chance that the project will

achieve the CAPEX Base Case estimate with contingency

EV = 181 $MM

Mill CAPEX EV = 61 $MM Mine CAPEX EV = 67 $MM Total CAPEX EV = 181 $MM

Dr aft

-15 -10 -5 0 5 10 15 20

Infrastructure Construction Duration - Months 7 12

EPCM Cost Variance -Base - 9.6 + 6.7MM 15.5% 0.12 0.14

Community Negotiations & Agreements Duration - Months 11 25

Total Capital Expenditure $MM

Expected increases to Construction Costs add $ 23 MM to the

Base CAPEX Estimate Schedule Impacts add $ 7 MM.

Doomed from the Beginning

A Botched Job

Flirting with Disaster

A Pretty Good Chance

CSC

In absolute terms, there

is about a one in four chance of getting the

“right” strategy paired with the “right”

execution plan for the

“planned outcome”…

Flawed

the idea is to get it approximately right rather than perfectly wrong

A planned outcome requires a sound strategy and a sound execution plan

Dr aft

Bankable Feasibility Studies for Mining Projects….things to remember.

• Accuracy and precision are different Accurate estimates are precise, but

precise estimates are not necessarily accurate

• Beware of the Halo Effect: the tendency to believe and place faith that

your strategy and execution plan are sound, grounded, etc.;

• The Delusion of Absolute Performance: any given formula cannot ensure

high organizational performance, etc.;

• The Delusion of Lasting Success: enduring success is not sustainable;

• Recognize the Role of Uncertainty: adjust your thinking to accommodate uncertainty (risk & opportunity!) and make better decisions;

• See your Project through Probabilities: approach problems as

interlocking internal and external probabilities;

• Separate Inputs from Outcomes: actions and outcomes are imperfectly

linked It is easy to infer that bad outcomes must mean somebody made mistakes, or a good outcome must mean somebody made good decisions (or got lucky!);

• There are more things that can go wrong rather than right in execution:

determine the project drivers, assess & quantify risk and develop a risk

Dr aft

A Final Note….

• We often hear the phrase “We have to get cost certainty or

else……) We are rarely told what the “or else” is, but it sounds pretty awful In these circumstances, CSC takes the position that owners, their consultants and contractors to look for the value proposition in their development and construction

projects Should your project go over budget, or goes long, make sure that the project achieves value in the completed

cost When the project delivers value that respects or justifies the cost, then it is a good project.

Dr aft

Specifics:

• Supports Owner Organizations in major project development.

• Group formed in 1982, over 350 project assignments in 7 countries.

• Extensive and varied background in Project Planning and Management.

Specialties:

• Risk & Decision Analysis for a wide range of capital Projects.

• Strategic & Mitigation Planning for projects using risk models.

• Facilitation of Project Management, Business Planning, Environmental &

Safety Planning & Management and Team Building.

• Project Management Education Workshops.

CSC

Excellence In Risk Management