A company will fund a prospecting and exploration if, and only if, they believe there is or will be a market for the commodity that they are seeking. As they begin to invest more time and money into the exploration of the deposit, they will concurrently be evaluating the three categories of factors described in the last lesson. If, at some point, they believe that the project is not worth pursuing, they will most likely stop all work on the project and turn their attention to something else. If, at the conclusion of the exploration program and their “back-of-the-envelope” evaluation, they believe that the project has merit, then they will move to conduct a feasibility study. This is the subject of this lesson.
A company will fund a prospecting and exploration if, and only if, they believe there is or will be a market for the commodity that they are seeking. As they begin to invest more time and money into the exploration of the deposit, they will concurrently be evaluating the three categories of factors described in the last lesson. If at some point, they believe that the project is not worth pursuing, they will most likely stop all work on the project and turn their attention to something else. If at the conclusion of the exploration program, and their “back-of-the-envelope” evaluation, they believe that the project has merit, then they will move to conduct a feasibility study. This is the subject of this lesson.
Practicing engineers and university professors use a variety of adjectives to describe the studies that are conducted and often do so without complete agreement. Common terms include conceptual (±40%), prefeasibility (±25%), feasibility (±10-20%), or definitive (±5% ) studies. The range of terms is meant to convey the cost to perform the study along with the accuracy, (shown parenthetically) of the study. Thus, a conceptual study may cost little to do, but only yield results that are ±40%, whereas the definitive or engineering study in which systems are designed and equipment is selected, will yield highly accurate results. Of course, the latter is laborious and expensive to conduct.
The back-of the-envelope considerations described in Lesson 4.1 would qualify as a conceptual or scoping study. I don’t want you to become overly concerned with the words, and accordingly, I suggest you remember it as follows.
The prefeasibility and feasibility studies have a similar goal, which is to estimate the financial merit of the project. Financial merit is quantified by metrics such as return on investment and the number of years until the operation becomes profitable, among other metrics. These studies will be used to make the go/no-go decision on the project. If the money to finance the project is to be raised publicly on the stock exchanges, then the prefeasibility or feasibility study must be made publicly available. The format for the published study is prescribed by law. So, what is the difference between the two studies? Some engineers or companies simply prefer to use one term instead of the other. Perhaps, the meaningful difference between the two terms is the amount of detail.
A certain amount of detail is prescribed by the legal standards for reporting publicly on projects in which investment is being solicited, and that constitutes the minimum level of detail. Often companies will want to invest more time and money into studying the feasibility of the project. The minimum level may be considered a prefeasibility study, and a more detailed examination of the feasibility may be considered a feasibility study.
With this understanding behind us, let’s get on with the subject of this lesson – feasibility studies.
The nature of feasibility studies has been prescribed by-laws for projects that will seek investments through public listings, e.g., stock exchanges. Most mining projects obtain at least partial funding through public investment, and as such the way we conduct and report on feasibility in a very similar fashion. Let’s take a look at the requirements, which have only come into being over the past few decades.
Since the earliest days of mineral prospecting and development, there has been no shortage of hucksters and shysters attempting to sell worthless mineral deposits. In the old days, the practice of “salting a claim”, i.e., deliberating adding gold or silver to the sample given to the assay office, separated many a person from their hard-earned money. Over the years, the methods to defraud investors became more sophisticated, the size of the investments became orders of magnitude higher, and when fraud occurred, it was likely to affect not just one or two hapless people, but large numbers. In the late 20th century (1990s), there were a couple of huge scams successfully perpetrated, and these caused great losses around the globe to institutional as well as individual investors. Further, it shook the public’s confidence in mining and made it very difficult for mining companies to raise capital.
The major mining countries, including the United States, Canada, and Australia, developed more rigorous standards for public disclosure of scientific and technical information that will be used to solicit investors. In a nutshell, the standards are attempting to ensure:
There are no significant differences among the standards used by the different countries, although you must ensure that your report meets the standard of the country in which you are going to list your investment opportunity. For example, if you are going to list on the New York Stock exchange, you must satisfy the U.S. Securities and Exchange Commission’s (SEC) rules, or to list on the Toronto Stock Exchange must comply with the Canadian Securities Administrators (CSA) rules.
We are going to use the Canadian standard because it provides a comprehensive approach that can be easily adapted to the U.S. (SEC), Australian (JORC), or other standards. Even if the intent is not to seek public investment, this standard provides a fine template for reporting on a feasibility study.
The Canadian Securities Administrators (CSA) developed and released this legal standard, which is referred to as NI 43-101, in 2001. This standard was built on various codes and policies that had been around for many years, as were the standards developed in Australia and the U.S. The standard provides definitions for qualified persons, feasibility studies, and mineral resource categories. We’ve talked about the last two here in class, but not the first. I’ll leave that reading to you. Please visit this link to the CIM Definition Standards for Mineral Resources and Mineral Reserves [2].
As you read through it, take special note of what constitutes a qualified person. Also, note the use of the term modifying factors to describe both the steps to convert a resource to a reserve and the factors that can affect how much of the resource can be converted to a reserve. Finally, you will no doubt be interested in their definition of a pre-feasibility versus a feasibility study. Although it is not part of the standard, the Canadian Institute of Mining (CIM) has prepared and made publicly available a series of best practice documents on the estimation of mineral resources and reserves. Best practice documents are always worth consulting. You may learn something new that you were unaware of, even as a practicing professional. Further, if you deviate from practices that are considered industry-standard practices, you expose yourself to sanctions, lawsuits, and so on. Please visit this Best Practices - Estimation of Mineral Resources and Mineral Reserves [3] document. I suggest that you download it along with the previous document, and save it for future use. At this time, please quickly scan this document to familiarize yourself with the kind of information that it contains so that in the future you will be able to refer to it when you need more detailed guidance.
The “heart and soul” of the standard is known as Form 43-101 F1 [4]. This form essentially specifies the table of contents for the report, and in so doing, is specifying all of the topics that must be addressed in the report. Detailed instructions are given for each of the topical areas. As before, I recommend that you read through this document and save it for future use.
Let’s close out this lesson by looking at some examples. These reports have to be made publicly available to investors and their agents, and in many cases, they are available electronically as well as in hard copy. Thus, you can access dozens of these reports freely on the web by doing a search for “NI 43-101”. The quality of these reports will vary. They must meet the minimum requirement of the standard, and some do so – just barely, and are of dubious quality! Some contain a lot more detail than others, i.e., some are definitely preliminary-feasibility studies, whereas others are feasibility studies. There may be times that a company has done more detailed study than it chooses to disclose in the report. That is fine, as long as the additional detail is not considered material. Basically, I am giving you notice that you will see a wide range of detail and quality in these reports that I will give you or that you may find on your own. The list below will give you a nice overview, as it contains different commodities. You’ll want to download and save these reports. You should flip through the pages to become familiar with the type of content; and from time-to-time, you should stop and read a particular section that catches your attention.
Let's imagine that we have completed our feasibility study, and the results indicate that this reserve could be made into a profitable mining operation. Given this, we’ll prepare the formal NI 43-101 report. The next step will be to seek financing for our project. If we are going to seek public investment, we’ll list the opportunity on one or more of the stock exchanges. Concurrently, we may be using the report to gain the interest of private equity groups. Regardless, the next step is to obtain financing.
Sometimes the entity that brought the project to this point has no interest in developing and operating a mine. The entity may be a few individuals backed by a venture capital group or may be a company. Regardless, they are interested in turning their hard work into a pile of cash! A large company may want to purchase their reserve to add it to their reserve base – something that they may not mine for several years. Or, a group that does want to work actively to open a new mine may purchase it. For the purposes of our educational journey, we’ll assume that a mining company conducted, or commissioned, the prospecting and exploration and put together the 43-101 report. As such, the company will want to develop and operate the mine.
The engineers on the team will be engaged in time-critical activities while the search for financing is underway. Time is of the essence! A significant amount of money will have been invested to bring the project to this point – perhaps a hundred thousand dollars for a very small project or millions of dollars for a larger one. What have they earned on this investment so far? Nothing, nada, zip! When will they begin to earn something on the investment? Not until they have a mined product to sell. When will that be? Well, for a stone quarry, it may be in as little as a couple of years. In larger projects, eight-to-ten years is not unusual, and in very large and complex projects, it may be closer to two decades! Think about this – sinking money into a project for years and not seeing a penny back!
I have a proposition for you: how about if each of you loans $1000 to me. In return, I will agree to pay you interest on your money, but I will not begin paying anything to you for 10 years. How many of you are going to jump into this investment opportunity that I am offering? How much interest would you need to be promised in order to seriously consider this investment? Oh, and by the way, if things don’t work out quite the way that I plan, I may not be able to pay you back in full, if at all! Welcome to the world of high risk project financing!
Ok, back to the team of engineers doing time-critical things. What are these things that will be happening while financing is being sought? Consider that the time required to bring the project online will include the time that it takes to:
Permits are required by several state and federal agencies. Not only is it expensive and time-consuming to prepare the application packages, but also some of the permits may require the completion of work that may take a year or two. For example, it may be necessary to sample local streams for one year and include the results in the permit application. Once the permits have been submitted, the review and approval process can be tortuous, as the different agencies review and comment on a particular permit. If there is public resistance to the project, public hearings may be required as part of the permit review process. It is important to plan for and sequence the work that you have to do to achieve a timely filing. For example, you don’t want to add an unnecessary delay because you forgot to hire a consultant to conduct an archeological study that is required in support of one of your permit applications!
While the permitting process is underway, detailed engineering studies will be required to design the various systems, e.g., production, materials handling, power, mineral processing, and so on. These designs will then be used to develop specifications for major plant items, such as the mineral processing, equipment and so on. Bid packages will be prepared for surface facilities such as the mineral processing plant, loading facilities, water treatment, warehouses, shops, and so on. If it is an underground mine, the shaft or other access to the orebody will be bid as well. The construction of these facilities can take a few years. So, exactly when do you need each to be completed, and knowing that, when do you need to initiate the bidding for their construction? These are important questions. Given the cost of capital, you don’t want to make the expenditure prematurely; and at the same time, you are going to look rather foolish if mining is set to commence, but the load-out facilities, which are required to get your product off the property and on the way to your customers, have yet to be constructed!
Some equipment can be received within weeks of order, whereas others will be fabricated on-demand, and lead times of several months are common. Choosing the correct point in time to place orders is important.
Accessing the deposit for a surface mine takes less time than for an underground mine, although it can take several weeks to months and must be planned. Underground access can be far more complex. It may take a year to sink a shaft and to develop the spaces around the shaft bottom. And then, depending on the deposit and mining method, it can take weeks to a year or more to develop the workings necessary for mining.
I started this discussion with the question of what are the activities that will be undertaken concurrently with the effort to obtain financing. Clearly, many of the activities that I’ve just outlined will not be initiated until financing is in-hand. However, these activities will be in various stages of planning before financing is completed. Early on, it is crucial that an accurate and detailed project plan be prepared. All of the tasks that need to be performed will be represented on a network diagram known as a PERT diagram. Detailed timing charts, known as Gantt Charts, will be prepared to document the time relationships of the activities that must be completed when they need to be completed and started, and their duration. These diagrams will be used to determine the critical path and when mining can begin, to assess the effect of delays, and ultimately to monitor the progress of the project. Resource requirements will be documented and integrated into the project plan as well. The size and complexity of these projects necessitate the use of project management software, such as MS Project.
By the time financing has been secured, a good project plan will have been completed. Further, work will be well underway to prepare the permit applications; and it is likely that detailed engineering design and analysis will be underway.
The engineering design and analysis of the many systems will be the subject of courses such as MNG 404 Materials handling; MNG 411 Systems Analysis; MNG 422 Ventilation, MNG 431 Rock Mechanics; MNG 410 Underground Mining; and MNG 441 Surface Mining. You will learn more about project management techniques in the capstone design course, MNG 451, where you will conduct a 43-101 feasibility study.
The next logical step in our progression through this course is to talk about the unit and auxiliary operations. Most mining operations use the same small set of operations to execute the entire mining cycle, and as such, it is convenient to examine them prior to studying each mining method. We will do this in the next Module. Speaking of mining methods, there is one bit of unfinished business before we move on to the next module.
The selection of a mining method is part of the feasibility study. The choice of the method will affect how much of the resource can be recovered, and that, of course, affects the reserve that you can report. When you reviewed Form 43-101F, you saw a section devoted to the mining method, and this is the reason why. Keep in mind that we are not designing the mine at this stage, merely choosing a method based on the data and information we have available to us. In the next lesson, we will look at the set of mining methods and the factors that will influence our selection of a method.
Links
[1] https://creativecommons.org/licenses/by-nc-sa/4.0
[2] https://www.e-education.psu.edu/geog000/sites/www.e-education.psu.edu.geog000/files/Lesson_04/Files/CIM_DEFINITION_STANDARDS.pdf
[3] https://www.e-education.psu.edu/geog000/sites/www.e-education.psu.edu.geog000/files/Lesson_04/Files/Best%20Practices%20-%20Estimation%20of%20Mineral%20Resources%20%26%20Reserves.pdf
[4] https://www.e-education.psu.edu/geog000/sites/www.e-education.psu.edu.geog000/files/Lesson_04/Files/Form%2043-101F1.pdf
[5] https://www.e-education.psu.edu/geog000/sites/www.e-education.psu.edu.geog000/files/Lesson_04/Files/Coal%2043-101%20elk%20creek.pdf
[6] https://www.e-education.psu.edu/geog000/sites/www.e-education.psu.edu.geog000/files/Lesson_04/Files/Metal%2043-101%20gold%20nugget.pdf
[7] http://www.icpotash.com/_resources/pdf/Ochoa_43-101_30Dec2011.pdf
[8] https://www.e-education.psu.edu/geog000/sites/www.e-education.psu.edu.geog000/files/Lesson_04/Files/Metal%20NI%2043-101%20Rio%20Tinto%20Copper%20Project%20Spain.pdf
[9] https://www.e-education.psu.edu/geog000/sites/www.e-education.psu.edu.geog000/files/Lesson_04/Files/NI%2043-101%20Pitch%20Black.pdf