challenges, risks & opportunities for the mining industry in the americas
DESCRIPTION
While optimistic about the longer term outlook, 2013 has been tough for investors and managers. Rising costs, lower prices, slower growth in China, etc. and non-technical risks such as changing government regulations, social license and NIMBY have hurt returns, investment and interest.TRANSCRIPT
World Mining and Energy Expo 14 August 2013 – Miami
CHALLENGES, RISKS, & OPPORTUNITIES
FOR THE MINING INDUSTRY
IN THE AMERICAS
Tim Alch V.P & Senior Minerals Business Analyst Behre Dolbear & Company (USA), Inc.
+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
• We advise clients to optimally plan, manage, and operate in the mining and
minerals processing of base and precious metals, coal, uranium, ferrous,
fertilizer, and industrial minerals, gemstones, construction materials, etc.
2
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
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
We have conducted extensive technical and financial due diligence on
copper-polymetallic base, precious metals, etc. projects in the Americas
Behre Dolbear was engaged by the Board of Governors of the Hong
Kong Stock Exchange to review Listing Rules for Mining Companies
In 2012, our Capital unit advised Hong Kong Exchanges & Clearing
Limited on its US$2.1B acquisition of the London Metal Exchange
We regularly write and review Independent Technical Expert reports
Our capabilities span managerial, technical and financial issues
• Additional information about Behre Dolbear is shown at the end herein
3
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Mining is a Long Term Business
With Many Risks
• Recent and current trends
• The significance of mining
• Country, political risks, et al.
• All resources are not golden
• Being prepared is always best
4
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Current Environment for Miners and
Investors
• Recent economic data less robust with conflicting global indicators
Waning growth in China reflects shifting priorities versus continued global urbanization and industrialization in populous developing countries
Regulatory, political, and resource nationalism risks rising
• Investors want returns on investments. Reserve replacement and production growth at any and all cost, is not enough
Major, large and small mining companies are writing down assets
Expansion plans, new projects are being curtailed indefinitely
Many Junior miners lack adequate development capital
• Margins are under pressure as are Boards and Executives
Commodity prices are off from recent highs
Costs are up, project overruns have become common
Optimizing operating properties, strengthening cash flow is goal
• A chorus of actions to cut operating costs, sell marginal assets, and reduce capital expenditure commitments is being heard
5
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Metals and Mining Equities Reflect Recent
Weaker Prices, Profits, and Growth
Since 4Q2011, investors show less interest in Global and North American
mining equities and favor broad general market indices
6
ACWI = iShares MSCI ACWI ETF (worldwide equity index)
BWMING = Bloomberg LP worldwide mining index
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1/1/2010 1/1/2011 1/1/2012 1/1/2013
S&P 500 vs. TSX Global Mining ETF
TSX Global Mining Index ETF S&P500 ETF
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1/1/2010 1/1/2011 1/1/2012 1/1/2013
World Mining Index
BWMING Index ACWI
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Metal Prices Are Down Since Last Year
2006
Avg
Prices
2007
Avg
Prices
2008
Avg
Prices
2009
Avg
Prices
2010
Avg
Prices
2011
Avg
Prices
2012
Avg
Prices
Prices
as of
July 26,
2013
July 26,
2013
vs.
Avg
2012
Aluminum
($/lb) 1.16 1.21 0.83 0.83 0.99 1.09 0.93 0.79 -15%
Copper
($/lb) 3.05 3.25 1.62 2.34 3.42 3.99 3.61 3.10 -14%
Lead
($/lb) 0.58 1.18 0.56 0.78 0.97 1.09 0.94 0.93 -1%
Nickel
($/lb) 11.01 17.25 4.62 6.65 9.87 10.38 7.96 6.21 -22%
Zinc
($/lb) 1.48 1.50 0.52 0.75 0.98 0.99 0.89 0.82 -8%
Gold
($/ounce) 603.46 695.39 736.0 972.91 1,225 1,573 1,669 1,331 -20%
Silver
($/ounce) 11.55 13.38 9.31 14.64 20.10 35.12 31.15 20.02 -36%
7
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
1,000
2,000
3,000
4,000
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$ P
er T
on
ne N
ick
el
$ P
er T
on
ne
(Co
pp
er, L
ead
, Z
inc,
Alu
min
um
)
Nominal Industrial Metal Average Prices
1970 – 2012
Aluminum Copper Lead Zinc Nickel
The Recent Metals Price Spike Follow
a 30 Year Period of Capital Destruction
Data Source: USGS and LME
Capital
Destruction
Capital
Creation
Capital
Destruction ?
8
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Asia, Africa, LatAm Want a Better Quality of
Life; On Average Did Better Since 2002
9
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
More Consumers, More Money, and Minerals This Curve May Flatten Too
10
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
China’s Growing Urban Population
Continues at Scale Hard to Comprehend
11
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
World’s Largest Mass Migration Continues,
Next, the World’s Middle Class Rises
• In the next 20 years, another 320 million Chinese people will move to urban
areas and its middle class may double to 600+ million by 2020
• Similar changes are occurring elsewhere in Emerging Markets worldwide
• China’s changing priorities may soften its metals demand growth and GDP
12
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
China Consumes About Half the
World’s Metals, Energy, etc.
Source: UBS
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
As China’s GDP Growth Eases, Its Share of
Consumption May Level Off: At High Levels
Source: The Economist and UBS
14
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Gold Is Not an Industrial Metal Driven by Investor Sentiment, Price is Now ~$1,300
http://www.kitco.com/charts/historicalgold.html
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Recent Global Gold Investment Trend*
Source: GFMS, Thomson Reuters
* Global Gold Investment is the sum of implied net investment, physical bar investment, and all coins and medals
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
China’s Appetite for Gold is Rising –
Will This Trend Continue for Next 10 Years?
Source: Frank Holmes, CEO and President of US Global Investors' July 2013 article 'The Asian Giant Stampeding Into Gold'
17
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Today Gold Supply is From Mines
and Scrap
Source: GFMS, Thomson Reuters 18
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Gold as a Share of the Pool of
Global Financial Assets is Small
Source: CPM Group 19
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Gold Prices and Costs Rose;
Margins are Less at $1,350/oz
Source: BMO Research
20
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Not All Resources Are Golden Or Economic
• Markets are not static, nor are prices and cost of doing business, etc. There are many variables and a long period of time is involved
• If it sounds too good, it likely is. Inexperience, misleading statements, and questionable practices require knowing who, what you are dealing with
• There is no good substitute for an independent technical review by qualified experts about the geologic, business potential of the resource
• Investors want independent verification
21
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Today – Less Investor, Lender Interest
• A Risk-off attitude is plaguing mining equities
• Economic growth in China, EU, etc. is slower
• Investor outlook is more cautious with GFC, Euro Crisis, Cyprus, China slowing, etc.
• Metals prices and valuations are down
• Many ‘Juniors’ are short of capital
• Many Juniors’ existence is issue
• There is less speculative interest
• Cash and Cash Flow is King
22
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Sector Has Shifted From Growth Paradigm
to Cost and Capex Control
• Executives are cutting capex, refocusing on higher quality assets, suspending projects, and partnering on certain projects
• Alternative, non-traditional investors SOE, SWF may strategically, opportunistically fill the gap
• Private equity may capitalize on low valuations
• Strategic transactions may drive M&A
• Tough markets may continue in 2014
23
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Reasons to be Optimistic – Longer Term
• Urbanization and 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., energy fuels (coal, uranium), fertilizer minerals, technology/critical metals, 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 longer term may struggle to meet demand. Sporadic price spikes may/can occur
• Prices may stay above long term averages
24
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Caution Always Best: Mining is
Cyclical and Impacted by Many Risks
• What happened since 2002 is in the past – the
near term may/can be very different
• You can lose a fortune being optimistic about
the near term – some already have
• Behre Dolbear does not forecast metals prices
• We focus on geo-technical, operating, business,
and financial issues impacting exploration,
development and operations in mining
• We do conduct an annual Survey about Where
to and Not to Invest in the Mining Sector
25
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Behre Dolbear’s Country Risk Survey
Focuses on Political Risk, Not Geotechnical
• Since 1999, Behre Dolbear conducts an annual
survey of country risk for mining investments to
assist potential investors in 25 of the most
active mining markets around the world
• Countries that stifle mining with detrimental
political, economic, financial, and regulatory
policies should be challenged to make changes
that are more accommodative to its success
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Behre Dolbear’s Annual Ranking of
25 Countries for Mining Investment
• Our view is there is positive correlation between
the growth of a nation’s wealth and prosperity of
its mining and minerals processing industry
• Only when a country recognizes critical need to
adapt and restructure burdensome policies
– will it truly optimize its economic potential
• Our survey does not focus on geology and or
geo-technical risk
27
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Behre Dolbear’s Annual Ranking of
25 Countries for Mining Investment
• We evaluate these criteria as they pertain to the exploration, development, operation of and investment in mines, and rank each country by:
Economic system
Political system
Degree of social issues affecting mining
Permitting process and other delays
Degree of corruption
Stability of the currency
Tax regime
• All criteria are weighted equally on a 10-point scale, with 70 total possible points
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
The Americas Rank High in Our Survey
• Brazil, Chile, Colombia, Mexico, Peru, Canada, and
USA consistently rank high to operate in and for
investment
• Countries perceived to have the lowest political risk, all
other things being equal, are able to attract more of the
global mineral investment and realize a premium for
resources over countries where perceived instability
exists. Attracting capital investment is competitive
• Mining companies and investors, shareholders, and
project stakeholders require confidence they are in
stable agreements and able to accommodate variable
market conditions over extended periods of time
29
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Behre Dolbear’s 2013 Ranking of
25 Countries From Safest to Riskiest
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1. Australia
2. Canada
3. Chile
4. Brazil
5. Mexico
6. United States
7. Colombia
8. Botswana
9. Ghana
10.Peru
11.Namibia
12.Mozambique
13.Tanzania
14.Philippines
15.Argentina
16.China
17.India
18.Indonesia
19.Mongolia
20.Zambia
21.South Africa
22.Papa New Guinea
23.Kazakhstan
24.D. R. Congo
25.Russia
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
The Americas is a Favorite
Mining Investment Destination As shown in the International Council on Metals and Mining (ICMM) Oct 2012
article ‘Mining’s Contribution to Sustainable Development’ about Regional
Project Investments in 2011 (based on Raw Materials Advisory Group data)
31
Region
Investments
(US$ Billions)
Share
(%)
Lain America 192 28
North America 124 18
Oceania 113 17
Africa 99 15
Europe 75 11
Asia 73 11
Total 676 100
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Attracting Investment is Competitive
• Government officials at the local, state and federal levels should work with and know operators and investors respond to stakeholder expectations
• Changing taxes, royalties, etc. deters investors that require stability and consistency to earn a return and retain access to capital markets
• Investors can feel stymied by inconsistent, convoluted and changes in mining policy and terms and require trust with local stakeholders
• To increase investment consistent, efficient enforcement of law is best:
Certainty – Security of Title/Tenement
Confidence – Development Approvals
Confidence – Social and Environmental Issues
Confidence – Tax/Royalty Regime
Acceptable Level of Sovereign Risk
32
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Finding An Economic Resource
Is Expensive and Risky
33
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Exploration is Very Risky and Expensive,
From Discovery to Start Up is About 17 Years
34
Source: Stephen Enders from Eurasian Minerals at SME
Current Trends in Mining Finance Conference April 2013
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Balancing Expansion with Local
Development is Needed
• After discovery is development and mineral processing –
an energy intensive stage of the production chain – from
milling, grinding, processing to smelting and refining
• All jurisdictions face more than geotechnical challenges,
such as infrastructure, water, power, human, and financial
capital. A balanced approach is best and works
• In remote, less developed regions projects require proper
long term plans and cooperative support of stakeholders,
local communities, and all levels of government
• There are many examples of successful projects benefiting
local economies and communities and other stakeholders
35
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Investments Are Long Term
• To be successful projects and investors need to have
confidence that stable, consistent rule of law exists in
order to earn competitive returns and maintain access to
capital through cyclical and volatile market conditions
• Investment trends are competitive and reflect variable
economic trends as are the expectations and risks of
project owners, shareholders, lenders, investors, etc.
• Stakeholders evaluate projects in a risk-adjusted
manner seeking to reduce risk exposure
• Planning for different, changing risks is difficult
36
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Top Ten Risks Facing the Mining and Metals
Industry Over Five Years – By E&Y
2008 2012
1. Skills shortage
2. Industry consolidation
3. Infrastructure access
4. Maintaining social license to operate
5. Climate change concerns
6. Rising costs (cost inflation)
7. Pipeline shrinkage
8. Resource nationalism
9. Access to secure energy
10. Increased regulation
1. Resource nationalism
2. Skills shortage
3. Infrastructure access
4. Cost inflation
5. Capital project execution
6. Maintaining social license to operate
7. Price and currency volatility
8. Capital management and access
9. Sharing the benefits – new
10. Fraud and corruption
37 Red = Remained in the Top Ten Over Five Years
Source: E&Y Business Risks Facing Mining and Metals 2012 - 2013
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Trained, Independent Eyes Are Best to
Evaluate Geo Technical Issues
• Simply, best projects are low cost, in stable regions and
likely today are expansions/extensions of existing mines
• Resources are concentrations, occurrences of minerals
in such form, quantity and of such grade or quality they
have reasonable prospects for economic extraction
• Qualified management and officials are essential to
realize project value as are understanding markets,
definitions, methods to describe a resource that can
vary by user and jurisdiction
BEWARE OF RULES OF THUMB
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
When to Call Independent Experts
• Resources are not a curse, they are essential
• Failure to properly manage is not good
• Expert advice early on is best, if you are an owner,
investor, and or an official evaluating policy
• All too often experts are called upon 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
39
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Miners, Geologists Are Trained to Find,
Explore – Core to the Business
Mining companies and management feel
obliged to find and develop new competitive,
low cost resources, i.e., their Life Blood,
to replace reserves – that are diminishing assets
MANAGEMENT & INVESTORS BEWARE!
Once a Fido = Dog, Always a Phydeaux
= A Higher Class Dog is Still A Dog!
Less capital is available today for exploration
40
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Goal is to Realize Value: How? When?
Chart is Not Reality, Nor a Given. It is Theory
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Our Role as Independent Experts
Whether we are advising mining companies, investors, lenders, or government stakeholders, all benefit from our 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
42
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Economic Worthiness of a Property
Is Impacted By Many, Many Variables
Study these and many other items 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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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Three Levels of Engineering Studies
Used to Define Economic Worthiness
Conceptual Study/Scoping Study
Pre-feasibility Study
Feasibility Study
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Engineering Studies – Scoping Study
• aka Conceptual Study, Preliminary Economic Analysis
• First engineering study to compile all elements of a
project into one evaluation and apply economic tests
• Its accuracy is based on first principles, knowledge,
and experience and is generally +50% / -25%
• This is the least expensive engineering study and is
usually completed in 90 days or less
45
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Engineering Studies – Pre Feasibility Study
• aka PFS or Pre-Feasibility Study
• Accurate to +25% / -15%
• May take 6 to 18 months to complete
• Engineering evaluation applied to key elements, such as:
• The caliber of the resource estimate
• The mine design
• The process design
• Mineralogical analysis
• Metallurgical testing
• Soil and rock engineering tests
• Smelting/refining and marketing
• Environmental work – the EIA is completed during the PFS
• Cash flow analysis, sensitivity analyses, and economic tests
46
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Engineering Studies – Feasibility Study
• Feasibility Study or Definitive Study
• The document upon which mine is approved by the
Board of the mining company developing the mine
• If financing is required, this is the document evaluated
by financial institutions in their decision-making process
• The Feasibility Study is also the document to which the
completed and commissioned mine plan is compared to
determine its commercial status
47
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Definition – Feasibility Study
“A comprehensive study of a mineral deposit in which
all geological, engineering, legal, operating,
economic, social, environmental and other relevant
factors are considered in sufficient detail that it
could reasonably serve as the basis for a final
decision by a financial institution to finance the
development of the deposit for mineral production.”
- Canadian National Instrument 43-101
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Ten Types of Project Risk to Examine
• Geological
• Mining
• Metallurgical/processing
• Environmental and social issues
• Human resource issues
• Market
• Operating and capital costs
• Company
• Country
• Financial Institution
49
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
1. Geological
• Geological Risk
Reserves
Reserves
Reserves 50
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
In Best Case: Accepted Resource – Reserve
Classification System Can Be Used
Australia JORC Code
Canada CIM 2000 / NI 43-101
Europe PERC
South Africa SAMREC Code
United States SME / SEC Industry Guide 7
Russia A, B, C, D, E
China Traditional and New (1999)
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
2. Mining
• Mining Risks
Surface versus underground
Drilling/blasting
Rock hardness
Dilution
Mine plan
Cut-off grade
52
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
3. Metallurgical Processing
• Metallurgical/Processing Risk
Recovery method
Adequacy of testing
Representativeness of samples
Contractor/mill constructor
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Deeper Dive: Issues To Examine
• How much? What is head grade %
• What is the valuable mineral?
• What is the particle size of the mineral relative to all of the other minerals in the ore?
• What are the relative specific gravities of the valuable minerals and gangue?
• What is the overall competence or hardness of the rock containing the ore?
• Magnetism, radioactivity, electrostatic response
• Color, reflectivity, UV response, chemistry
54
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Where Is the Metal?
How Hard Will it be to Separate?
po, pyrrhotite; py, pyrite; cpy, chalcopyrite)
Au – Gold; BI – Bismuth
55
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Steps to Process Minerals
• Size Reduction: crushing and grinding
• Sizing: screening
• Classification: by gravity and size
• Separation or Concentration: use any one or a
combination of mineral processing steps
available to produce a concentrate
• Dewatering of Tailings or Concentrates: via
settling, filtration, and drying, for example
56
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Typical Gold Processing Circuit
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Mills Are Large and Costly
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
5. Human Resources
• Human Resource Issues
Management
Organization
Union contracts
Pension liabilities
Social issues/local peoples
MIS/IT systems
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
6. Market
• Market Risks
Who will buy product/marketability
Smelter availability
How many smelters?
Contract (Good for both parties)
Hedging/forward sales
61
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
7. Operating and Capital Costs
• Operating and Capital Costs
Operating Costs
− Dramatic recent increases due to higher fuel
costs, higher wages, higher supply costs, and
delays in deliveries of supplies
Capital Costs
− Increases in steel and equipment costs have
affected all proposed operations and expansions
of existing operations
− “Blowouts” are now frequent
62
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
8. Company Risk
• Financial strength
• Mining experience
• Management experience
63
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
9. Country Risk
• Political stability
• Tax regime
• Attitude toward mining
• Nationalization/privatization history
• Foreign exchange controls/currency stability
64
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
10. Financial Institution
• Experience in country
• Presence in country
• Experience in industry
• Financing capability
65
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Highlighting Four Issues Impacting
Project Success Today
Four issues impacting the mining industry today
that operators, investors, regulators, and officials
need to understand and manage properly
• Social license and environmental issues
• Controlling operating and project costs
• Higher government take/resource nationalism
• Access to capital
66
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
1. Social License and Environmental Issues
• Social opposition to mining and environmental
issues are causing project delays and cost
increases at mining projects
• Striving to be compliant with regulations and
NGO agitation, etc. are contributing to higher
project costs and delays
• Gaining confidence of a local community is as
essential as it can be expensive for a mining
company to gain a Social License to operate
67
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
2. Cost Control is Essential
Recent trends became intolerable:
• Capex rose in recent years
• Capex lags metal prices
• Over runs are an issue
• Investments are at risk
• Projects being idled
• High grading ores
Per Unit of Annual Production (US$)
Gold $1,250 to $2,500 per oz of annual production
Copper $3.50 to $4.50 per lb of annual production
Elevated Indicative Capital Costs
68
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Building Mines – Capital Costs
• Capital costs are primarily dependent on
Location, political situation, skilled labor availability
Depth of ore zone and mining horizons
Shaft and or adit/ramp access
Plant size
− Equipment fleet size and material handling capacity
− Processing plant capacity to match mining rate
− Shaft size and hoisting capacity
Mining method
− Level of mechanization and automation
− Productivity per man shift
69
BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Different Geology; Different Economics
• Of the world’s gold production the bulk is from
sulphide ore rather than oxide ore
• Project and operating economics are different
• Representative indicative measures:
Sulphide Ore: Capex low grade $300 to
$700+ million; minimum 2 to 5m oz
Oxide Ore: Capex is scalable with Opex =1/5
of Sulphide; minimum scale can be small
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Many Issues Can Go Wrong When
Estimating Mine Operating Costs
• VAT/sales tax, not included and import duties neglected
• Improper cycle times and haulage distances used
• Fuel and electricity costs under estimated
• Ground control under estimated
• Mining sequence and methods
• Poor waste dump design
• Inadequate pre-stripping
• Poor haul road design
• Pit slopes
• Dilution
• Etc.
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Recent Examples of Capital Costs
Rising Above Plan (US$ Billions)
Project Original Current
Pueblo Viejo 2.5 3.5
Galore Creek 2 5+
Cerro Casale 2 6
Pascua Lama 3
8+
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
3. Increased Government Take Occurring
• Changing rules and Government ‘take’ at local,
state, and federal levels are today’s reality
• aka resource nationalism is an issue raising
project risk and investor uncertainty
• In normal mining cycles, a project will fail if
Government take exceeds 50%
• Over time investors, lenders, owners, and local
stakeholders bear the brunt
• Miners take all the risk
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
4. Access to Capital
• Currently, equity and debt difficult to obtain
• New sources of funding need to be found
• Private Equity, State Owned Enterprises, etc.
may play a larger role
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Recent Capital Markets Trends
• Metals markets in 2012 - 1H13; turbulent at best
• A long term perspective is needed in mining
• Banks, investors, operators are risk adverse
• Management, employees, partners, customers,
i.e., all stakeholders need to be realistic
• Uncertainty may continue into 2014
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
More Consolidation in Mining is Likely
• Alternative and strategic investors, private equity,
SWFs, and SOEs may opportunistically step in
• Valuations are less than greenfield investment
• Consolidation likely to form Super and Larger Majors
• SOEs, SWFs, e.g., Japan, Korea, India likely to
continue to acquire strategic metals and energy fuel
resources
• Strategic M&A may buoy asset and share prices
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Of the Top Ten Commodities by Global
Projects in 2011: Gold Was #1
• Investors, lenders, and speculators were attracted to precious
metals
• What will 2013/4 look like?
Source: Intierra
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
In 2011 China M&A Focused on Gold
Source: Ernst and Young
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
In 2012 Coal, Gold, Copper M&A Was High
21.4
17.9
14.2 13.4
7.3
5.3 4.0 3.9 3.6
2.3
10.6
0
5
10
15
20
25
$ B
illio
ns
2012 M&A Activity by Target Commodity
Source: Ernst and Young
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Recent China Acquisition Trend By Region –
USA and Canada = Small Share
By Value 1st Half 2012
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Mining in the Americas Has an
Excellent Future
• Mining has a long history in the Americas
• Geology, location, and labor are excellent
• Economic benefits from mining are real
including royalties, taxes, employment, etc.
• Best to continue providing stable business
friendly policies, invest in infrastructure,
safety, education, and training, as needed
• The market this past year changed considerably
which officials should be mindful of
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Prepare for the Best and Worst
Check and Double Check
• While mining has a favorable outlook, it is
competitive and capital intensive with the
recent 10 years largely impacted by China
• Projects in the first cost quartile will be funded
• Partner with skilled, business managers
• Moderate country risks of doing business
• Expect continued volatility and cycles
• Investors do carefully weigh costs of doing
business and political country risk
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
The Behre Dolbear Group
• 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
• Our group of experts provides a reservoir of proven expertise and experience in all disciplines related to the mining of base, precious and ferrous metals, coal, uranium, fertilizer and industrial minerals, gemstones, construction materials including cement, dimension stone, sand, and gravel
• Behre Dolbear Group consists of a five operating divisions, each offering a range of highly specialized and complementary services. They are:
Technical Consulting
Engineering Services
Behre Dolbear Capital (Financial advisory)
Management Consulting
Environmental Services
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
The Behre Dolbear Group
• To meet client requirements, we select, integrate and manage our highly qualified and experienced specialists drawn from the appropriate division.
Each are selected for their 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.
If other skills and experience are required, our flexibility and depth of resource allows us to deliver them swiftly and efficiently
• We have 12 offices in 8 countries, completed 210+ jobs in 55+ countries in each of the last 5 years using our global network of 125+ professionals
Tim Alch
V.P. & Senior Minerals Business Analyst Behre Dolbear & Company (USA), Inc.
100 Park Avenue, New York, New York 10017 +1.845.480.1434 [email protected]
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
The Behre Dolbear Group
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Appendix
Characteristics of 3 levels of engineering studies –
Not exhaustive, rather indicative checklists that
require trained, qualified experts’ review:
Conceptual/Scoping Study
Pre-feasibility Study
Feasibility Study
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A1 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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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A2 (continued)
CATEGORY 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
Industry Standards (NI 43-
101, JORC, etc.)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Industry Standards (NI 43-
101, JORC, etc.)
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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A3 (continued)
CATEGORY CONCEPTUAL
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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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A4 (continued)
CATEGORY CONCEPTUAL
STUDY/SCOPING STUDY PRE-FEASIBILITY STUDY FEASIBILITY STUDY
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
Yes, preliminary estimate
Yes, preliminary estimate
Yes, preliminary estimate
No
Yes, ±30%
Yes, from engineering
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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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A5 (continued)
CATEGORY CONCEPTUAL
STUDY/SCOPING STUDY PRE-FEASIBILITY STUDY FEASIBILITY STUDY
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%
Yes, from engineering
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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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A6 (continued)
CATEGORY
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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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A7 (continued)
CATEGORY CONCEPTUAL
STUDY/SCOPING STUDY PRE-FEASIBILITY STUDY FEASIBILITY STUDY
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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BEHRE DOLBEAR founded 1911 MINERALS INDUSTRY ADVISORS
Characteristics of Scoping, Pre-Feasibility,
and Feasibility Studies – A8 (continued)
CATEGORY CONCEPTUAL
STUDY/SCOPING STUDY PRE-FEASIBILITY STUDY FEASIBILITY STUDY
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
94