quantitative risk analysis for mining life cycle management. april 24.pdf · qualitative range...

CSCExcellence In Risk Management April 2005

Quantitative Risk Analysis for Mining Life

Cycle Management.

CIM Conference – Risk WorkshopToronto

April 24, 2005

C. Coulthard, B.A.

D. S. Evans Ph.D., P. Geol.

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

CSC Project Management Services

20 Fourth Street NE, Calgary. T2E 3R5

(403) 233-7994 [email protected]


Presentation Agenda

(2) Introduction to Risk Management

• Risk Management

• Risk Identification and Quantification

(1) Mining Issues and Problems

• Mining Activities – Life Cycle

• Key Uncertainties

(3) Risk Analysis and the Risk Management Process

• Quantitative Risk Management Tools

(4) Specific Application Examples

• Portfolio Management

• Mine Development

(5) Summary


Life Cycle Activity: Business Focus

Strategic Planning Stakeholder Value / GovernanceSelection of Business / Areas

Portfolio Management Balance of PortfolioRationalization of Assets

Prospect Definition Rationalization of Assets

Start Up / Ramp Up Production On Stream

Development Project Execution

Expansion Project Optimization and Planning

Production Volumes, Rates, OPEX, Product Slate and Quality

Abandonment Long Term Liabilities, Closure

Mining Issues and Problems - Mining Life Cycle Activities


Mining Issues and Problems – Key Uncertainties

Life Cycle Activity: Business Focus Key Uncertainties

Strategic Planning Market conditionsPolitical & Social Risk

Stakeholder Value / GovernanceSelection of Business / Areas


Market conditionsPolitical & Social RiskGeological Potential

Prospect Definition Rationalization of Assets Resource Quality / QuantityEstimate of Potential Value

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

and Regulatory Issues

Development Project Execution Capital Cost, Schedule

Technology


Capital Cost, Schedule

Technology, Interference


Ore grade, Plant operability, Operating

team performance, Regulatory Issues

Abandonment Long Term Liabilities, Closure Cumulative Impact of Operating

Decisions, Environmental and

Social Issues


Presentation Agenda


• Risk Management










(5) Summary


Traditional

Project

Risk

Management

Time

Cost Quality

+ =

Optimized

Value

Fit for

Purpose

Continuous

ImprovementBreakthrough

Thinking

“Pick any Two”

Project Management Mantras

=+

Risk Management is used to maximize the Project value by testing

strategies to find the optimum.


Three Techniques are available that address different levels of

Risk ManagementQualitative Range Estimating Quantitative Analysis

Identify key project risks Optimize project configuration and shareholder value.

Calculate Appropriate Contingency Targets

Objective






Large Group – Consensus Based Broad Expert Group with judgment based assessment.

Small group Consensus based or individual interviews (Template driven).

Assessment








Considers all strategic options, execution plans and external risks.

Considers the project execution plan and assumptions.

Considers the fixed execution

plan, assumptions and some

external risks.

Scope










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

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



external risks.

Modeling














external risks.

No Correlation Conditioning Variables to capture underlying risks & correlation, determined by project team.

Tool-Driven based on distribution, determined by risk analyst

Correlation














external risks.

No Correlation Conditioning Variables to capture underlying risks & correlation, determined by project team.

Tool-Driven based on distribution, determined by risk analyst

Project Team, Constructors, and

EPCM Contractors.

Project Team, Owners, Stakeholders, Constructors & EPCM Contractors.

Project Team, Constructors, and EPCM Contractors

Audience


Outcome Uncertainty (Cost, Schedule or Economic)

Risk Variable Correlations

Integrated Modeling (Cost & Schedule)

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

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

Strategic and Tactical Alternatives Review

External / Event Driven Risk Impacts

Outside the Box Risks (Project Assumptions)

Properly conducted risk analysis builds on the early tools used for

qualitative analysis (KT, SWOT) and range estimation to include all the

risk and opportunity impacts on a project or decision.

Qualitative

Analysis

Range

Estimation

Quantitative

Analysis

Co

mp

rehen

sive R

isk E

nv

elop

e for d

ecision

ma

kin

g


Five Levels of Risk Management Maturity*

Level 1:

Ad Hoc

Level 2:

Initial

Level 3:

Repeatable

Level 4:

Managed

Level 5:

Comprehensive

* Modified from PMI Risk Management Group, 2002

Success depends on the competencies and heroics of individuals

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

(Qualitative, KT Analysis SWOT)

Risk Management has been implemented into routine business processes.

(Risk Register, Range Estimating, Real Options)

Risk Management Standard and defined processes used

across the organization(Quantitative Risk Analysis)

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


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

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

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

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

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

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

Quantitative Risk Analysis is a rigorous and comprehensive

process that:


A rigorous process is applied consistently to evaluate all projects

1Frame

TheProblem

2Develop

AnalysisBasis

3Evaluate

TheRisks

4Interpret

TheResults

Risk

Management

Recycle to Focus on

Most Important Risks

DevelopAlternativeStrategies.

Identify allImportant Sources ofUncertainty.

Model how underlyinguncertaintiesinteract to influence outcomeson the Project.

Identify the Experts in eachof the uncertainvariables.

Assess the impact and theprobability ofoccurrence foreach uncertainvariable.

Calculate the uncertainty inthe key resultmeasures.

Quantify therisk & return for each scenario.

Analyze anddocument theresults.

Identifypreemptiveactions.

Developcontingencyplans.

Recommendedactions.

5


Cold Eyes Review

Team Involvement

Project Team Involvement

Operations Team Involvement

Risk Contractor

Involvement

Risk Management Process

An effective Risk Management plan must re-evaluate the risks on the project

and their impacts throughout the project life cycle. Each phase of the risk

analysis involves a different focus and a different mix of disciplines.

Strategic

Planning

Project

Definition

Project

Financing

Mid-

Construction

Project

Start Up

Year 1

Full

Operations

Project

Execution

Corporate Planning

Involvement

StrategicTactical


Presentation Agenda


• Risk Management










(5) Summary


ProbabilityDistributions

Tornado DiagramsStep Diagrams

Interview Issues Model and Test Options

Scheduled, Formal ReviewsUpdated Model Results

(Probabilities, Tornados, Steps)

Management Risk Reporting

Base Design

& Operating Plans

Contingency Plans

Risk

Monitoring System

Project Targets Immediate Risk

Control Measures

Risk Analysis

Risk Analysis is the centerpiece of a Risk Management Process

There are four key outputs from a comprehensive Risk Analysis


The probability distribution illustrates the full

range of project uncertainty and is used to set the

project targets at appropriate confidence levels.

*Expected

Value

10/90 Range

CAPEX, Schedule, OPEX, etc.

90%

50%

10%

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

a single Monte Carlo trial. The expected

value represents the average value of all

the trials.

2. The slope of the 10/90 range represents

the uncertainty, the flatter the curve, the

more uncertainty.

3. The curve below the expected value

indicates upside opportunity, the

portion above shows the downside risk.

Pro

ba

bil

ity

Project Targets

P80 (?) Confidence Level

Upside

Opportunity

Downside

Risk


*

Project Production (or NPV, ROCE, ROR)

90%

50%

10%

Pro

ba

bil

ity

Upside

Opportunity

Downside

Risk

Probability distributions illustrate opportunity and risk trade-

offs, and can be used to select the best project option.

Option B

Expected

Value

Option A

Project Targets

Option B has slightly more risk

with a much greater upside

opportunity.


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

EV = 20-Dec-07

Days

The tornado diagram identifies and ranks the key project

risks and is a tool that helps the project team to focus on the

most important drivers.

Road Preparation Duration 3 6

Labour Productivity Delays -1.25 1.75

Plant Pad Preparation Duration 3 6

Labour Unrest Delays 0 2.3

Execution Organization Performance Best Worst

Regulatory Duration 11.3 16.5

Competing Project Environment Low Heated

Start-up & Commissioning Duration (Early Steam) 1.5 2.4

Terms of Reference - Duration 3 4

Regulatory Environment Relaxed Stringent

Terms of Reference - Application Date 1-Aug-02 1-Oct-02

Labour Availability Delays 0 1.4

OTSG Manufacture & Delivery Duration 12 16

Weather Delays 0 0.5

Long Lead Equipment Delays -1 2

Immediate Risk Control Measures

CS

CExcellence In Risk Management

Ap

ril 2005

15-A

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1-S

ep-0

7

15-S

ep-0

7

1-O

ct-07

15-O

ct-07

1-N

ov-0

7

15-N

ov

-07

01-D

ec-07

15-D

ec-07

01-J

an

-08

AFE Approval

+6

Engineering to 60%

+1

3

Preliminary Vendor Data

+7

Module Steel Fabrication

0

Module Pipe

Fabrication Duration

0

Rack/ Process

Module Assembly

-3

Last Process Area Module

On-site to Construction

Complete

0

Evaporator Units

0Vapour Compressors 0

Site Prep Duration

+1

Piling

-8

Commissioning Duration

+1

4

Start-up Duration

-3

Construction Duration

+3

1

Materials Delivery

+5

Weather Delay

+5

Labour Issues

+1

2

Long Leads

Complete to MC

+1

4

Design definition Changes

+5

Labour Productivity

+1

0

Reworks

+3

Sta

rt Date

Base=

03-S

ep-0

7

EV

= 2

0-D

ec-07

Th

e Step

Dia

gra

m d

emon

strates w

here th

e gro

wth

from

the

base estim

ate to

the E

xpected

Valu

e occu

rs, an

d id

entifies k

ey

facto

rs impactin

g th

e cost.

Imm

edia

te Risk

Con

trol M

easu

res


A complete risk register considers all sources of information

available for the project uncertainties.

Immediate Risk Control Measures

Project

Documentation

Qualitative

Analysis

Quantitative

Analysis

Risk Register


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

Unconstrained

Fix Filing Date (-120 days)

Early Application (-40 days)

No JV Delays (-60 days)

No Staffing Delays (-30 days)

The analysis can be used to evaluate impacts of schedule

risks, and test mitigation steps to show the potential for

schedule advancement. Incremental mitigation can be

applied to reach an acceptable target date.

Base

EV = 1-Nov-04

Mitigated

EV = 21-Feb-04

Contingency Plans


Pro

ba

bil

ity

Project NPV ($MM)

10%

30%

50%

70%

90%

2000-800 -400 0 400 800 1200 1600

Definition

EV = 528 $MM Project AFE

EV = 697 $MM

Mid-ConstructionEV = 669 $MM

Start Up

EV = 695 $MM

PlanningEV = 460 $MM

Use of risk analysis throughout the project life helps the

project team to focus on the most important risks for each

stage of development, resulting in a better defined project

(i.e. less risk).

Risk Monitoring System


Presentation Agenda


• Risk Management










(5) Summary


Mining Issues and Problems – Key Uncertainties

Life Cycle Activity: Business Focus Key Uncertainties









Technology





Ore grade, Plant operability, Operating

team performance, Regulatory Issues

Abandonment Long Term Liabilities, Closure Cumulative Impact of Operating

Decisions, Environmental and

Social Issues


Mining Issues and Problems

Activity: Business Focus Key Uncertainties






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

ensure that the right strategic decision is taken.


Strategy Table for Country Risk Analysis

Decisions

Strategy Country Commodities MiningExtraction

Processing Markets

Increasing

Reserves

Canada Polymetallic Open Pit Heap Leach In Country

CompetitiveNeed

Indonesia Precious

Metals

Underground Standard

Flotation &

Concentration

Regional

CompetitiveAdvantage

Russia Industrial

Minerals

InSitu Leach Solvex

Smelting&

Refining

In Country:

onsite

In Country:

offsite

Out Of

Country

International

Selected Strategy Options


Portfolio Management to select best mining project

Pre-

AcquisitionAcquisition

Project

Execution

CAPEX

OPEX

Revenue

ProjectNPV

Discount

Rate

Acquisition

Duration

Exploration/

AFE DurationMech.

Duration

Extraordinary

Costs

Acquisition/

Exploration

Costs

Local

BenefitsLabour

Productivity

Labour

Costs

Energy &

Utility Costs

Chemical

Costs

Fixed

Costs

Variable

Costs

BulksMaterial

& Equipment

Costs

Commodity

PriceFiscal

Terms

Taxes &

Royalties

Expropriate

First

Production

Smelting &

Refining Costs

Closure

Environmental

Performance

Infrastructure

Costs

Political

Climate

Socio-Cultural

Environment

Environmental

Performance

Closure

Cost


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-1500 -1000 -500 0 500 1000 1500

Pro

ba

bil

ity

$MM NPV @ 12%

NPV Country Case Comparison

CanadaEV = $147 MM

IndonesiaEV = $48 MM

Portfolio Management

RussiaEV = -$415 MM


-1000

-500

0

500

1000

2000 2005 2010 2015

Canada Payout

EV = 2011

Indonesia PayoutEV = 2014

Russia Payout

EV = Never

$M

M

Cumulative Cash Flow

Year



-100 0 100 200 300 400

EV = $147 MM

$MM NPV @ 12%

The Tornado Diagram highlights the key drivers for the option

and identifies areas to focus mitigation efforts to ensure success

NPV Canadian Case

Political Climate

Daily Production

Socio-Cultural Environment

Taxes & Royalties

Au Grade

Cu Price

Environmental Performance

Au Price

Labour Costs

Zn Recovery Rate

Zn Grade

Chemical Costs

Ramp-up Duration

Local Benefits

Acquisition / Exploration Costs



Mining Issues and Problems

Activity: Business Focus Key Uncertainties




Technology




During the Project Development phase the analysis should have more focus on the

tactical level to ensure that the project is executed well.


Materials/

Estimate

Variance

Total

Project

CAPEX

$ 160 MM

Indirects

$ 20 MM

Mill

$ 60 MM

Mine

$ 60 MM

$ 40 MM

LevelExcavation

$ 5 MM

ShaftExcavation

$ 5 MM

Water

$ 5 MM

Roads

$ 10 MM

Miscellaneous

Bid

Rate

Engineering

Cost

Variance

Organization

Performance

Competing

Projects

Labour

Productivity

$3 MM

Administration$ 15 MM

EPCM

Exchange

Rate

$1.5 MM/yr

SustainingCapital

Local

BenefitsCost

Variance

SubsurfaceEquipment

$ 15 MM

$20 MM

Infrastructure

Used

Equipment

Labour

Rate

Scope

Variance

Development – capital cost for a mining project


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

50 100 150 200 250 300

Pro

ba

bil

ity

CAPEX ($MM)

The Cumulative Probability Distribution shows that $35 MM (16%)

contingency is required for a 70% confidence limit. The slope

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

Expected Value

CAPEX = $175 MM

Development - CAPEX

Base Estimate

$160 MM

P90 = $220 MM

P90 = $130 MM

Class V Estimate

+25%/-25%

$35 MM


-15 -10 -5 0 5 10 15 20

Mine Dev. Unit Cost Variance

Mine Dev. Quantities Variance

Competing Projects Environment

Level Excavation Dev. Scope Variance

Infrastructure Costs

Execution Organization Performance

Infrastructure Construction Duration

Regulatory Process Duration

Tailings Cost Variance

Roads Cost Variance

Subsurface Equipment Costs

Mine Construction Duration

EPCM Cost Variance -Base

Leaseholder Negotiations Duration

Water Cost Variance -Base

Total Capital Expenditure $MM

$175 MM

The range in in Capital Cost is largely due to uncertainty in Mine Unit

Cost Variance, Mine Quantities Variance and Level Development Scope

Variance.

Development - CAPEX


Presentation Agenda


• Risk Management










(5) Summary


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

or mitigate risks and capture opportunities.

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

• Range Estimating is not Risk Analysis.Fully accountable risk analysis considers the specific uncertainties of a project, and incorporates these underlying risks into the project value. Processes that provide single-point outcomes or risk distributions based on the probability of fixed outcomes (decision trees, KT, range estimating) do not meet the definition of risk analysis.

• “Ignoring risks to a project is not an option; important decisions will be made anyway, should they not be made with the best information available?”(Project Manager Today, October 2000)

Modern Day Applications of Risk Analysis

to Mining Issues and Problems

quantitative risk analysis for mining life cycle management. april 24.pdf · qualitative range...

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