Plenary 7 - David Smith - When Mine Projects Go Wrong

PwC London School Of Mines 2016
When Mines Go Wrong

David JF Smith
Mining Director, DMT Consulting Ltd.
October 2014
When Mining Projects Go Wrong

Outline of this presentation
Set the context
Look at some of the common technical issues that we see as
consultants
Capex estimates
Operational issues
Who is DMT?
Questions and Answers
PwC London School of Mines 2016

2014 | SellingPlan GE Geotechnik & Spezialtiefbau | Folie 2
Slide 2
www.dmt.de
When Mining Projects Go Wrong Context

Whats the context
Market is ripe for acquisitions of advanced stage and development
projects
Despite 2016 Q1 upward movements commodity prices continue to be

extremely unpredictable and volatile
Exploration spending is at a near all-time low

Project equity and debt finance is scarce & relatively expensive
The industry is rubbish at delivering projects on schedule and on budget
Investors and lenders have become highly sceptical and reluctant to
invest in early stage projects
As a result all development projects are being much more heavily

scrutinised
Slide 3
www.dmt.de

Context
Why?
Well I think we may all have come
across a guy like this
But there are quite a few more

reasons.........
I want a complete Feasibility

Study, and I want it from an
optimistic point of view.

Slide 4
www.dmt.de

Context
Heres just a few:
Not understanding the deposit/resource
Completion of construction & commercial production later than promised
Pre-production capital expenditure often exceeded => delays, maybe
resulting an additional raising of debt and finance & bond or repayment
defaults
Production ramp-up is slower than projected

Failure to achieve full production expectations any combination of less production tonnes, less grade, less recovery => less product tonnes,
less revenue
Mine operating and processing operating costs higher than expected =>
cash costs higher than promised
All meaning that return to investors may be way down on

expectations
Slide 5
www.dmt.de

Key Technical Issues at Study stage
Understanding your deposit
Project assessment
Credibility of studies
Level of engineering
Productivity
Mine design & head grade
Metallurgy
Capital Costs
People

Slide 6
www.dmt.de

Understanding your Deposit
Quality of the base data
Insufficient or poor exploration data
Basic fieldwork
Insufficient, sampling, analysis and interrogation
of the exploration data
Inappropriate density measurements bulk vs.

specific density
Understanding of geological controls of the

mineralisation dot to dot modelling
Desk top modelling & over-reliance on computer

algorithms GIGO is absolutely true for
resource modelling

Slide 7
www.dmt.de

Understanding your Deposit
Grade smearing
Mineralisation controls - grade not constrained
Excessive interpolation between Points of Observation
May also create false continuity of mineralisation
Top-cutting of outliers
Nugget Effect sampling errors, sample size or real?
Use of Ordinary Kriging algorithms - manual makes top-cutting essential
Sensitivity of deposit to grade small percentage error on a low grade

deposit can make it uneconomic
Over-confidence in publically disclosed CP/QP Technical Reports

Slide 8
www.dmt.de

Project assessment
Scoping (PEA), Pre-feasibility and Feasibility study development
Logical decision-making route for development of a Project - growing trend to
miss out technical and economic assessment steps
Credibility of the studies who was the author? Basis of cost estimate quotes?
Level of accuracy of all estimates e.g. +/-15% applies to study overall tonnes,
grade, productivity, labour etc and not just costs
Level of engineering
Generally the more engineering the better but there is also too much
AACE guidelines Class 3 is generally considered necessary for FS but Class 3
means engineering definition maybe as low as 10% completion
Project optimisation - Immediate warning bell - investors and lenders beware!

Projects rarely, if ever, get cheaper so what's been miss out or taken out?
Good to do but must be based on some improved assumptions or concepts
If not then increases the risk of cost overrun
Slide 9
www.dmt.de

Project assessment
Metallurgical and processing
Flowsheet must be supported by adequate testwork
Representative samples of deposit - costly if the deposit is complex
Plant design e.g. mill size is based on adequate grindability testwork,
number of flotation cells, leaching time etc
Productivity
Matched to orebody size
Flexibility
Sufficient work places developments, stopes, benches, stripping
Dilution!!!
Sinking rate
Ramp up time
Slide 10
www.dmt.de

Project assessment
Cut-off grade
Must be appropriate to the deposit too high can cause continuity
problems/too low will likely affect economics
Reserves and studies generally based on break-even grade - but mines

tend to work on incremental cut-offs which are lower => lower head
grade in operations
Appropriate economic assumptions price, costs, recovery
My erstwhile boss favourite and No.1 topic dilution

Material that has to be mined or is mined with the mineral so affects
head grade and so economics
Consistently seen to be way low e.g. long hole stoping should be around
or even above 15% - if its 10% 12% that's a flag being waved
Directly linked to orebody characteristics, productivity and method

Slide 11
www.dmt.de

Capital Expenditure
Capex Cost Estimation
Extremely bad track record across all industries average cost overrun is
20% - 60% but mining is the worst
In 1988, Merton came up with cost overrun for mining projects as 1.99;
refineries 1.63; non-mining process plants 1.67. Not much has changed.
So why is this? There are some obvious reasons

Poor engineering/planning
Scope changes not always due to poor earlier engineering
Poor management/execution
Weather
Exchange rate fluctuations & inflation especially in periods of hot
industry activity
Poor technical due diligence
Slide 12
www.dmt.de
When Mining Projects Go Wrong Capital

Expenditure
But this doesn't explain it
all
Haubrich (2014) analysed

50 projects (2005 2013)
and
identified
that
overrun does not seem
to be associated with
financing; company size;
project size; mining or
process method; location;
commodity; green or
brown field. Similar result
to Merton in 1988
Source: Haubrich 2014
So what are the most

common causes?
Slide 13
www.dmt.de

Capital Expenditure
Haubrich found that the strongest associations with cost overrun are:
Industry or commodity heat reasons are fairly obvious and impact is widely
understood
Project team less over run if engineer & constructor is the same as FS
author also a fairly obvious relationship
Project economics marginal projects tend to result in larger overruns.

Back to optimisation and in particular over-optimisation. => lower
economics means pressure to maximise FS economics sharpen your
pencils boys!

Slide 14
www.dmt.de
When Mining Projects Go Wrong At

Operational Stage
Geological reality doesn't match predictions
Grade reconciliation model not matching resource blockmodel

Dilution after incorrect grade modelling, the number one killer of
headgrade and a strong indicator of other potential problems:
e.g. mine design, wrong mining method, poor supervision and mine
planning
In appropriate Cut-off Grade

People
Global lack of experienced people available equally importantly in the
engineering firms
Depth of managerial expertise especially in junior companies

Construction people vs. operators
Slide 15
www.dmt.de

At Operational Stage
Equipment
Conditions not quite what
was expected!
Not correctly or properly

specified to suit the duty
and task sometimes
contractor driven
Use
of second
equipment
hand
Optimised capital spend

- Penny wise, pound
foolish
outcome
to
equipment procurement
Not properly maintained

Slide 16
www.dmt.de
When Mining Projects Go Wrong At

Operational Stage
Logistics
Of primary importance for bulk
commodities can be up to 80%
of operating cost
Vital consideration and costly in

remote or undeveloped locations
Often insufficiently considered,

engineered, engineered in studies
Sometimes buried in general cost

categories such as G & A

17
Slide
www.dmt.de

Concluding Remarks
Its not all doom and gloom
Industry operating costs have been reduced
Alternative financing sources have become available

To prove the lie - successful projects do exist out there
Good projects continue to be financed
Project success is not easy but it can be achieved it just takes good
technical advice, cash, effort and smart management

Slide 18
www.dmt.de
About DMT Consulting Ltd

International Consultant since 1947, used to be
IMC Group Consulting Ltd.
All stages of projects:
All mined commodities and mine types
Exploration and resource evaluations
Scoping, prefeasibility and feasibility studies
Financing, permitting, construction, operation and closure
Clients
are
financial
companies,
exploration
companies, legal firms,
investors
institutions,
mining
and
development
private and equity
Head office in Nottingham

Sister offices in Germany, Russia, India, Canada,
South Africa and Indonesia

Slide 19
www.dmt.de
UK: DMT Consulting Ltd

Nottingham / Main office
David Smith
Mining Director DMT Consulting Ltd.
david.smith@dmt-group.com
London Office
Susan Connolly,
Senior Geologist, Manager Business Development
susan.connolly@dmt-group.com
Nottingham office
London office
Pure Offices, Lake View Drive,

Sherwood Park, Nottingham NG15 0DT
01623 726 166
23 Grafton Street, Mayfair,

London W1S 4EY
020 7824 1925
www.dmt-group.com
www.dmt.de
www.dmt.de

Plenary 7 - David Smith - When Mine Projects Go Wrong

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PwC London School Of Mines 2016

When Mines Go Wrong

When Mining Projects Go Wrong

Questions and Answers

PwC London School of Mines 2016

When Mining Projects Go Wrong Context

Despite 2016 Q1 upward movements commodity prices continue to be

Exploration spending is at a near all-time low

As a result all development projects are being much more heavily

When Mining Projects Go Wrong

But there are quite a few more

I want a complete Feasibility

PwC London School of Mines 2016

When Mining Projects Go Wrong

Production ramp-up is slower than projected

All meaning that return to investors may be way down on

When Mining Projects Go Wrong

PwC London School of Mines 2016

When Mining Projects Go Wrong

Inappropriate density measurements bulk vs.

Understanding of geological controls of the

Desk top modelling & over-reliance on computer

PwC London School of Mines 2016

When Mining Projects Go Wrong

Sensitivity of deposit to grade small percentage error on a low grade

Over-confidence in publically disclosed CP/QP Technical Reports

PwC London School of Mines 2016

When Mining Projects Go Wrong

Project optimisation - Immediate warning bell - investors and lenders beware!

When Mining Projects Go Wrong

When Mining Projects Go Wrong

Reserves and studies generally based on break-even grade - but mines

Appropriate economic assumptions price, costs, recovery

My erstwhile boss favourite and No.1 topic dilution

Directly linked to orebody characteristics, productivity and method

When Mining Projects Go Wrong

So why is this? There are some obvious reasons

Poor technical due diligence

PwC London School of Mines 2016

2014 | SellingPlan GE Geotechnik & Spezialtiefbau | Folie 12

When Mining Projects Go Wrong Capital

Haubrich (2014) analysed

Source: Haubrich 2014

So what are the most

When Mining Projects Go Wrong

Project economics marginal projects tend to result in larger overruns.

PwC London School of Mines 2016

When Mining Projects Go Wrong At

Grade reconciliation model not matching resource blockmodel

In appropriate Cut-off Grade

Depth of managerial expertise especially in junior companies

When Mining Projects Go Wrong

Not correctly or properly

Optimised capital spend

Not properly maintained

When Mining Projects Go Wrong At

Vital consideration and costly in

Often insufficiently considered,

Sometimes buried in general cost

PwC London School of Mines 2016

When Mining Projects Go Wrong

Alternative financing sources have become available

PwC London School of Mines 2016

About DMT Consulting Ltd