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Technical Due Diligence in Mining
Andrew J Vigar
26F, 414-424 Jaffe Rd, Wan Chai, Hong Kong SAR | Phone: +852 8198 8451|
www.miningassociates.com
GLOBAL MINERALS ADVISERS
March 2013
M&M HK 2013 Page 2 of 42
Independent Report needed ?
Stock Exchange investors require specialist advice in mining
Keep the market informed
Capital raisings for development
Capital raisings for exploration
Fraud and misleading promotions forced exchanges to regulate
Internally, e.g. to assist in valuing of assets
Need to be completed by a respected consulting firm
M&M HK 2013 Page 3 of 42
Review previous audit material.
Site based audit:
- Collect and review site data
- Selected audit of key data
- Answers to prepared questions
- Interviews with Mine Staff
Evaluate and compare data.
Complete report draft for company review of factual content.
Methodology
M&M HK 2013 Page 4 of 42
Agreed Scope
Purpose of the report.
Extent of responsibility of the Specialist.
Clearly understood and agreed by both parties in writing.
Scope and budget reflect the purpose.
Team of suitable standard and approved.
Variations agreed at the time in writing.
M&M HK 2013 Page 5 of 42
Attitude
Determine the purpose for which the resource estimates have been made.
- Estimates made for short-term planning in a long established mine are often conservative.
- Estimates in a feasibility study for a green-fields operation are often optimistic.
A touch of cynicism is recommended as a survival instinct during the Due Diligence process.
M&M HK 2013 Page 6 of 42
Technical Due Diligence Topics Geological Setting
Mineralisation Styles, Ore Types and Controls
Resource Estimates
Mine Design, Production Schedule & Reserves
Metallurgical Testwork
Capital and Operating Costs
Cash Flow Projections, NPV and IRR
Social and Environmental
Government and Right to Operate
M&M HK 2013 Page 7 of 42
Mine Site Review
Staffing & technical support
Deposit geology
Exploration programs
Estimated deposit estimation
Reserve conversion & estimates
Grade & blend control
Plant performance
Reconciliation & closure
M&M HK 2013 Page 8 of 42
Check List
- Checklist of technical issues to be addressed.
- Agreed between the Financier and Specialist as part of the initial project brief.
- Forwarded to the Miner well in advance of the site visit.
- Miner has time to prepare the technical supporting information for examination.
- Give examples of the required data and format.
M&M HK 2013 Page 9 of 42
Background
- Project history, location
- Regional & deposit geology
- Deposit style, similar deposits local & world-wide
- Likely ore controls, Genesis concepts
M&M HK 2013 Page 10 of 42
Example of Site Plans
Powerline
Waterway
Cable way
Bauxite outcrop
Mining Right boundary
Segment boundary
Existing pit
Planned pit
Existing waste dump
Planned waste dump
Office or workshop
Blending, crushing,loading area
Blast area
Roadway
LEGEND
0 0.5 1km
SCALE
GUIZHOU No1 MINE
Magazine
Crusher
Cableway to Plant
Blending Area
Dazhushan
Wanikeng
Moshipo
Doufution
Yinchangpo
Jiujialu
Jinlangsi
Zhubatui
Trejiango
Shenjiagou
Wulongsi
Bauxite depositswell outside existingMining Right
Bauxite depositswell outside existingMining Right
M&M HK 2013 Page 11 of 42
Project Staff
- Levels, management, documentation, overlap
- Live models, rock boards/specimens, academic back-up
- Experience, contacts, depth, enthusiasm, thinking
M&M HK 2013 Page 12 of 42
Procedures & Records
- Documentation, execution, QA & ISO, audit trail
- Grids, surface samples, drill collars & down-hole
- Notebooks, maps, date/time, location, persons
- Exposure, lithology, structure, oxidation, alteration, mineralisation, structure.
M&M HK 2013 Page 13 of 42
Clear Procedures Aurukun Project Flow Chart
Field Program
Resource Estimation & Reporting
Preliminary Study
Project design in conjunction with Client Budgeting
Logistics Support for 5 day field program Liaison with local community Collection drill samples Road freight to Brisbane
Analysis Primary analysis 30 samples XRD clay analysis 20 samples Mineralogy formulas
PIMA trail all samples
Attrition trial Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA
Surve y clear access & mark drill holes
Drilling mobilization/demobilization drilling geology logging sample selection rehab. of drill holes
Analysis washing @ screening ICP multi - element scan storage for future use
PIMA all samples (if results of trial are good)
Attrition tests Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA (if results of trial are good)
Data Management iPAQ Handheld Computers Design of Data Collection forms Database setup Ongoing data management Website setup (interactive GIS)
Logistics Support for 30 day field program Liaison with local community Collection drill samples Road freight to Brisbane
Program Location of survey control & pits Reconnaissance geology Prepare base plans Collection bulk samples
Logistics
Geology Model Seam model based on geology Grades and tonnage's
Economic Model Seam model based on geology Overlay based on cut - off criteria Grades and tonnage's
Reporting Final report All data in digital interactive form Presentation
Reporting Preliminary report, results of trials, Presentation, Final Desi gn of Field Program
Bauxite Exploration Project Flow Chart
Field Program
Resource Estimation & Reporting
Preliminary Study
Project design in conjunction with Client Budgeting
Logistics Support for 5 day field program Liaison with local community Collection drill samples Road freight to Brisbane
Analysis Primary analysis 30 samples XRD clay analysis 20 samples Mineralogy formulas
PIMA trail all samples
Attrition trial Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA
Surve y clear access & mark drill holes
Drilling mobilization/demobilization drilling geology logging sample selection rehab. of drill holes
Analysis washing @ screening ICP multi - element scan storage for future use
PIMA all samples (if results of trial are good)
Attrition tests Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA (if results of trial are good)
Data Management iPAQ Handheld Computers Design of Data Collection forms Database setup Ongoing data management Website setup (interactive GIS)
Logistics Support for 30 day field program Liaison with local community Collection drill samples Road freight to Brisbane
Program Location of survey control & pits Reconnaissance geology Prepare base plans Collection bulk samples
Logistics
Geology Model Seam model based on geology Grades and tonnage's
Economic Model Seam model based on geology Overlay based on cut - off criteria Grades and tonnage's
Reporting Final report All data in digital interactive form Presentation
Reporting Preliminary report, results of trials, Presentation, Final Desi gn of Field Program
M&M HK 2013 Page 14 of 42
Drilling and Sampling 1
- Procedures, documentation, responsibility
- Planning, authorisation, team activity
- Drilling conditions, companies, sample/core handling
- Types, hole sizes, drill campaigns
- Sample storage, documentation, security
- Sample recovery, loss and voids
- Lithology, alteration, mineralisation
- Structure
M&M HK 2013 Page 15 of 42
Drilling and Sampling 2
- Weathering & oxidation, original vs post collection
- Tonnage factors, voids, core loss
- Metallurgical characterisation
- Geotechnical, RQD, fractures, point load, hardness
- Geophysics, down-hole, MagSus
- Sampling methods, data collection, validation, box marks
- Field records, thought & not just codes, team access
M&M HK 2013 Page 17 of 42
Database 1
- Field data to DB, methods, validation, authority
- Updates, audit trail, authority
- Types, access, KISS, back-ups, multiple locations, hard copy
- Map data
- Drill data
M&M HK 2013 Page 18 of 42
Database 2
- Sample data, sample security, prep., analysis methods, lab independence, duplicates & standards, data transfer
- Interpretations, knowledge capture, data is not knowledge
- Plans & sections
M&M HK 2013 Page 19 of 42
Data Verification
- Surface & underground type mapping
- Selected drill hole re-logs, sampling & assay if required
M&M HK 2013 Page 20 of 42
Geology Models
- Fact vs Interp, Maps & sections, 3D thought
- Lithology, alteration, mineralisation, structure, oxidation, Met
- Regional context but local detail
- Concept of key mineralisation controls and sequence
M&M HK 2013 Page 21 of 42
Resource & Reserves 1
- Procedures, documentation, responsibility
- Staff, mine/project experience
- Updates, audit trail, authority
- Data used, mixed types, data density & spatial variations, support
- Methods used, full documentation sufficient to reproduce
- Data projection, volume variance, smoothing, blanks
- Spatial changes in levels of data & knowledge
-
M&M HK 2013 Page 22 of 42
Resource & Reserves 2
- Based on coherent geology model
- Geological/structural controls honoured, domains, constraints
- Other factors, eg Metallurgical, blasting, waste types
- Mining & treatment methods and costs
- Validation, checks with other methods, global estimates
- Plans & sections showing raw data, geology models & estimates
M&M HK 2013 Page 23 of 42
Resource & Reserves 3
- Raw data vs estimates, against geology models, realistic
- Grade – tonnage variations, spatial variations, weathering
- Resource categories, why, support, makes sense
M&M HK 2013 Page 24 of 42
Grade Control & Reconciliation
- Similar issues to resource estimation
- vs production, vs other estimates, vs previous estimates
- Grade control vs resource estimates
- Trends, projections, changes in geology
M&M HK 2013 Page 26 of 42
Resource estimate is the key
The Resource base is often stated at a lower cut-off than the reserve.
The resource is largely fixed by the Feasibility Study stage, yet this has the largest impact.
There is considerable scope with the advanced computer techniques currently available to seriously distort the grade/tonnage profile of a deposit, just are there powerful techniques available to get it right.
M&M HK 2013 Page 27 of 42
International Systems
Australian JORC
Australian Valmin Code
Canadian NI43-101
SAMREC
CRIRSCO
UN UNFC
General agreement on Resources, Reserves and Competent Person
US SEC Guide7 – Reserves only
M&M HK 2013 Page 28 of 42
JORC Code Requires
Minimum for reporting Resources & Reserves
Transparency
Data and Assumptions
Missing or inadequate data
Resource has reasonable expectation of eventual economic exploitation
Conversion of Resource to Reserves
Personal responsibility - Competent Person
Has some Limitations
M&M HK 2013 Page 30 of 42
Estimation Issues
A poor understanding of the geological controls will always lead to a poor resource estimate.
Simple techniques such a polygonal estimation may highlight the strength of underlying geology knowledge.
The over-estimation of grade is worse for the project than under-estimation but both are bad in that neither truly reflect the actual cash-flows.
Have multiple methods been used and compared.
M&M HK 2013 Page 31 of 42
Cut-off Grade
Should be realistic and achievable
The sensitivity of the estimates to changes
- grade/tonnage curves
- plans and sections of changes
The Specialist will be required to comment whether the chosen mining method and costs reflect the chosen mining method.
M&M HK 2013 Page 32 of 42
Reserves with time
Variation of the resources and reserves with time
Major milestones of the project
Use a time-line chart
- major changes in all areas the project milieu
- not just the hard technical issues of the mine production team.
M&M HK 2013 Page 33 of 42
Ore Feed vs time
ROM Feed by Quarter with Tonnage by Category and Grade
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406
To
nn
es
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
Gra
de
%
Proved Reserve Probable Reserve
Other Measured & Indicated Resource Inferred Resource
Pre-Resource Mineralisation ROM Grade
M&M HK 2013 Page 34 of 42
Sensitivity and Risk
Look at the likely range of values of the reserves rather than just state a single figure.
The impact of variations to be tested, eg
- impact of high values are dealt with (eg top-cutting)
- grade tonnage curves
- using different geological domains
- changing the estimation methods
- optimization of production plans
M&M HK 2013 Page 35 of 42
Start-up risk
A quick cash injection at the start from higher grade or lower cost ore.
Small changes in the start-up period cash-flow can have a dramatic impact
Negative impacts from which it will never be able to recover
There are several recent major projects, which have stumbled at this first hurdle and thus completely removed their ability to ever repay the original debt.
M&M HK 2013 Page 36 of 42
Sensitivity plot
$ 0
$ 1 0 ,0 0 0 ,0 0 0
$ 2 0 ,0 0 0 ,0 0 0
$ 3 0 ,0 0 0 ,0 0 0
$ 4 0 ,0 0 0 ,0 0 0
$ 5 0 ,0 0 0 ,0 0 0
$ 6 0 ,0 0 0 ,0 0 0
lo w b a se h ig h
R e c o ve ry
G o ld P ric e
P ro c e s s c o s ts
C h a n g e D C F
In c lu d e in fe rre d
re s o u rc e
P re -p ro d u c t io n c a p ita l
R e d u c e d
e n viro n m e n ta l
c h a n g e in s ta rt -u p
P ro d u c t io n c a p ita l
5 y e a rs ta x fre e
M&M HK 2013 Page 37 of 42
Cash Flow Sensitivity with Time
Project Cash Flow Sensativity with Time
-$60.00
-$40.00
-$20.00
$0.00
$20.00
$40.00
$60.00
$80.00
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Years
Ne
t C
as
h F
low
$M
Best Case Worst Case
M&M HK 2013 Page 38 of 42
A range of likely outcomes
Distribution for NPV1 (10%dcf) after tax
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
Values in A$ Millions
PR
OB
AB
ILIT
Y
1 8.8
17.7
26.6
35.5
44.5
53.4
62.4
71.6
80.3
M&M HK 2013 Page 39 of 42
Risk is OK
The Financier is in the business of dealing with risk
The expression of a reserve in terms of an expected outcome with upper and lower limits is quite acceptable
The old practice of giving just one number will hide the risk factors
Risk is not bad, it just needs to be known
M&M HK 2013 Page 40 of 42
Risk Matrix
# Risk Event Likelihood Consequence Risk Comment and Possible Mitigation
1 Geology: Ore Body Interpretation
Possible Moderate High
Correlation of veins where there are no old underground workings, in particular California low grade open pit. Requires closer spaced drilling within open pit.
2
Lack of understanding of Geological Controls
Possible Moderate High
Understand the geological controls of the ore zone and its related mineralisation so that more accurate and precise modeling can be conducted. This can be done from detailed logging which will then feed into the resource estimate and ultimately mining targets and ground support regimes.
3 Mineralisation may not extend to depth
Likely Moderate High
Mineralisation may be restricted at depth with a sudden drop in intensity and grade once below the “boiling zone”. Caution needs to be exercised with projections at depth No RL limit is placed on the current resource estimates. MA would suggest a limit at 100m rl.
4 Grade Capping Possible Minor Moderate
Grade capping applied to informing sample composites is too high in some domains, resulting in over-influence of high grade samples on estimation. Review caps
5
Incorrect Resource estimate methodology distorts the grade tonnage curve
Possible Major Extreme
Incorrect estimation methodology according to the geology and statistics can distort the grade/tonnage curve and ultimate resource numbers, hence affecting all subsequent activities leading on to mine development.
Based on AS/NZS 4360:1999
M&M HK 2013 Page 41 of 42
Margins in Mining – Where are they
What is and is not included in C1 costs
The real cost of Capital and how to hide it
Overheads, R&D (incl. exploration) and core values
Why high commodity prices do not equal high margins
Value Waves
Examples
Production
Company
Ex
plo
rati
on
Co
mp
an
yE
xp
lora
tio
n C
om
pan
y
Exploration Discovery Pre
FeasibilityFeasibility Construction Production
Time
Deve
lopm
ent
Com
pan
y
Time
PEA
Exploration Discovery