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Modernize Methods for Evaluation of Mining Projects; is it t ... (6 replies)

Alan Carter
12 months ago
Alan Carter 12 months ago

Should we improve the way we evaluate mining projects or continue doing it as we did already 20 years ago?

A recently attended a one day class about the importance of feasibility studies when evaluating a mining project. Hoping to know the opinions and comments of the different speakers (experts on the different stages of a Feasibility Study) about how the current market downturn was affecting the mining industry, and what new advances in evaluation processes where on their way in order to deal with this problem in the future.

The following questions were in my mind while walking (early in the morning) to the theater (well, actually my first thought was to get a coffee):

  • Is traditional project evaluation processes, based on expected values, still the best way of evaluating a mining project – which normally have a life of mine in the order of tens of years?
  • Is it possible to deal with future market uncertainty when preparing a feasibility study of a mining project- or do we just need to accept that it is impossible to do it and have to resign to hoping for the best?
  • Have we realized that we may be doing something wrong by providing one number as answer, instead of a range of values – with probabilities?
  • Wouldn't it be our responsibility, as experts, to provide our clients a complete information about the future performance of their mining projects – which includes uncertainty?
  • Would our clients – mining industry – like to have a range of values with probabilities as an answer instead of just one number, which may be true, but for sure most of the time will be false?
  • Should I just not care about this because our clients traditionally do not care about uncertainty?

In general it was a very nice and educative course in which all the presenters provided the traditional steps used in preparing a feasibility study, focused on their expertise, but none of them actually talked much about the inherent uncertainty in the different processes involving a feasibility study. It seemed as if we were not in a market downturn and everything was going very well, as predicted a couple of years ago, which was not true.

I then asked the question of why there was not an expert in the course talking about the effect (and ways of managing) of uncertainty, i.e., risk and potential, within a feasibility study – isn't a prediction of the future performance of the mining project, which for sure will be full of uncertain events?

The reaction was interesting and the answers as well. For example, someone told me that basically we experts in feasibility studies do not focus (learn?) about risk and uncertainty because our clients are not interested on it or because they simply do not request this type of analysis. But, is it not our responsibility, as experts, to tell our clients about the risks and opportunities that their project could face in the future? I believe this would be the type of transparency our clients would expect from us, the experts.

Another interesting observation someone told me was, why to bother about analyzing the risk of the future of a project if the managers, or we, may not be working for that project (?) in 5 or 6 years. This was something that goes against what the industry tries to promote about sustainability, is it not a sustainable mining project the one that cares for current resources without destroying the opportunities for future generations? Anyhow, it was also nice to hear from the public some comments about that may be we (I include myself) are doing something wrong and should be looking for other alternatives to complement current ones – which is true and correct because current techniques work well, but they cannot deal with uncertainty.

After the panel debate, I wondered if I was seen as the guy who always ask silly questions about uncertainty, i.e., risk and opportunity, but it didn't, and does not, worry me because a debate panel is for asking questions, and because I believe that even though it is a topic that no one (apparently) wants to discuss, we need to start doing it now because the future will always bring uncertainty, and we need to start asking the right questions and seek the solutions, to avoid big loses (because no one can predict the future with 100% certainty) while learning along the way.

I was thinking to may be apologize to the panel or the public for touching this “taboo topic (?)”, but I will not do it because I really believe that new things always appear and happens when questions (good or silly ones) are asked. Hopefully very soon we will start hearing about solutions to the problem of dealing with uncertainty in mining projects instead of getting scared or offended when hearing the word. As a matter of fact, there are new techniques that can help and assist in this task, but as one panelist highlighted, they are still new and not well understood – which I agreed with and which means we need to start putting hands on it now and not tomorrow when another downturn hits the industry.

Maya Rothman
12 months ago
Maya Rothman 12 months ago

Four points I would make in regard to project evaluation in the current market. 

  1. Substantial effort needs to be made in changing the way we look at a project to make it economic (mining method, productivity, capital, operating cost) in the current environment, yet alone worry about the subsequent step of evaluating uncertainty
  2. Focusing on getting quality inputs for operating and capital costs is important - the base inputs have to be reliable or any subsequent financial modeling will be erroneous
  3. Costs (and time) for project approvals are having a material impact on projects. Impacts on capital costs and overall project value can be material (and create uncertainty around capital costs on a deferred basis)
  4. Probably most important of all, and impacting the most in regard to project value, are the uncertainties around forex and sales price assumptions, and in particular the long term price assumptions. From what I have seen, the "hockey stick" effect is still well and alive (near to mid term low price ramping quickly to high long term price) - this effect means that if you can defer your project/s with first production to hit the market at long term price you present the project in its best possible light.
Bill Fraser
12 months ago
Bill Fraser 12 months ago

I do not know what short course you attended, or who the “experts” were, but I can assure you that a properly completed mineral property feasibility study does indeed include a risk analysis, in various forms. Every phase of the feasibility study includes a risk analysis of every element of the study and this is reflected in the Monte Carlo simulation of the risk sensitivity in the economic analysis and will present a range of profitability. In addition, a properly executed project will include a Project Risk Appraisal and Adjustment of the Capital Cost, when the design, procurement and construction phase is studied by the team considering the project execution. This analysis is rarely completed by those in the mining industry, but is consistent with those large investment projects in the petroleum and petrochemical industries. In my opinion this is the primary reason for so many major mine cost “blow outs” in recent years.

The problem which you have identified is one that is based on who you have for the “client”. If it is the mine promoter, or mining company whose future is very much dependent on the success of the development of the mine, of course they do not wish to reveal the “down-side” of the project. If the client is the investor, or the loan company, than they wish to know both the up-side and the down-side. That is why a Due Diligence study is imperative for the investment company to finance the project. So the “experts” that you were communicating with, were expressing those interests that deal with the mine promoter/developers, not the investors. 

Bob Mathias
12 months ago
Bob Mathias 12 months ago

I agree that all parties these days make some effort to quantify their respective risks be they owner, contractor or investor. However, the risk quantification methods they use reflect their bias. For example, line-item ranging for capex is a disaster for any industry; it always results in too optimistic an outcome; but it happens to align with the user's bias and perception, not reality. Few of the parties are using empirically validated methods (e.g., AACE RP 42R).

Alan Carter
12 months ago
Alan Carter 12 months ago

Bill, it is good to know that you have got experience with clients that actually care about uncertainty - when I mention uncertainty I refer to both the risks and opportunities. I have also seen some studies where most of the time have a sensitivity analysis as a way of showing the variability of the project value if some of the input variables changes within a range, and few of them have some simple Monte Carlo analysis done, but normally in a very simple way and as a way of warning.

In fact, dealing with uncertainty not only implies identifying the risk and opportunities that a project can face in the future but also to identify and put in place the strategies that will help mitigate risk (or take advantage of opportunities) if they happen in the future - this implies a more rigorous analysis than a simple MC simulation - actually it is a stochastic dynamic process and is not a trivial process.

For example, at the EPCM stage in a feasibility study the engineers need to know to what extend they need to build the respective infrastructure based on future demand and capacity. This is because once an infrastructure has been built it cannot be changed easily - so they need the mining engineers to tell them what demand and capacity will expect throughout the Life of Mine. The true is that we, the engineers, do not know with 100% certainty what capacity and demand will have in the future as it will depend of many factors, and specially prices which are uncertain. What is normally done in this cases is to do some sort of (static) risk matrix analysis and see what could happen and how much would it cost and these are the basis for contingencies - which in many cases are not realistic. In fact, I have seen projects no to go ahead because high CAPEX and high contingencies. There are techniques such as options and real options, that could assist on this, but still not well understood.

A nice and good paper to read about the topic of how real options analysis could assist in building structures under future demand uncertainty.

Bill Fraser
12 months ago
Bill Fraser 12 months ago

I do not disagree with the application “Valuing Real Options” (VRO) approach to help mitigate risk. In the case of the paper sited, it was for a Parking Garage. To properly compare this to a Mining/Concentrating/Infrastructure Complex, you would need to apply the VRO approach to the entire city development, of which the Parking Garage was only one small element. Years ago, when we were preparing feasibility studies for St. Joe Minerals, and for Exxon Minerals, we performed many trade off studies at the Level 2 or Prefeasibility Phase of each project, on all major elements of the project, and used probability based, DCF analysis in the trade-off studies. In my opinion, that is the proper time to apply any form of VRO or trade-off studies, not when it reaches the EPCM phase. What should be applied just before the project is turned over to the EPCM contractors is a Project Risk Appraisal and Adjustment of the Capital Cost. Notice also, I stated that in my first reply; “include a risk analysis, in various forms. Every phase of the feasibility study includes a risk analysis of every element of the study and this is reflected in the Monte Carlo simulation of the risk sensitivity in the economic analysis and will present a range of profitability.” I did not imply that it was a simple adding the analysis at the end of the process. I think that we are both saying that to mitigate the risk of the investment and maximize the NPV of the project, all options and variables must be included in the analysis; we are just approaching it in a different way. Thank you for raising the issue and your reply.

Alan Carter
12 months ago
Alan Carter 12 months ago

Indeed, I agree in that valuation based on RO should be done previous final decisions - as an example, some companies provided me the same feedback in that the application of RO analysis should be: at the desktop stage focusing on mine plan and design i.e., resources, reserves and base case mine plan and design; at the pre-feasibility focused on costs (including infrastructure) and operational strategies, refining mine plan and design, and at the feasibility study focused specially in metal prices.

Thanks for your comments and insights.