Mining Rehabilitation

Investing Against Uncertainty

Jaco van der Merwe & Sarah Dyke

Palisade Risk Conference 2015, Johannesburg

1 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Contents
Introduction 3

Aim of this presentation 4

Disclaimer 6

Mining Rehab Overview 8

Case Study 11

Conclusion 26

2 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Introduction
Who are we?

Actuarial & Insurance Mining & Environmental

Aim of
This Talk
Aim of This Talk
What is this all about?

1. Application of expert analytical modelling skills to a niche area of business

2. Mining rehab straddles two of our core fields

1. Mining & environmental science
2. Actuarial & insurance modelling

3. From our own experience, the financial modelling of mining rehabilitation

funding risk is not often well done

4. How does @Risk present an attractive solution?

5. Explore the power of @Risk and how it can be used to develop a solution

5 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Disclaimer
Disclaimer
There are always T&Cs!

• This not meant to be a highly technical presentation.

• It is based on a hypothetical business case. The real-world scenarios have

been simplified & sanitised for the purpose of today’s discussion.

• Its intended to be illustrative, practical & thought provoking.

• It is aligned with what we see in the industry, but will not reflect all
companies attitudes and levels of sophistication.

• Of course, as always: we accept no responsibility or liability for any

use of information contain in these slides!

7 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Mining Rehab:
A brief overview
Mining Rehabilitation
A Brief Overview

Open Pit Mine Strip Mine

Mining Rehabilitation 101:

 Required for all mines
 Requires input from the Government,
Company
 Various technical, scientific, engineering
studies, valuation input and management
required
 Constantly changing
 4 structural aspects to the quantification of
cost estimates for each element of C&R
1) quantity of activity (which may be subject
to variance)
2) cost rate per unit quantity of the closure
activity
3) technical allowances and inputs (at least
annually)
4) Contingency planning
9 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Mining Rehabilitation
A Brief Overview

Process & outputs: The “Risk Ball”

• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz

10 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Modelling Solution
Case Study:

DigDug Mine
Case Study: DigDug Mine
Background

Background
• A well run mining company is looking at starting a new mine in the PMG
(Platinum Metals Group)
• The owners and management are astute businessmen and have applied
their minds to all aspects of the project plan and business case
• One item of concern, though:
Legal requirement for Mining Rehabilitation
 MPRDA (Mining Petroleum Resources Development Act)
 Especially since: rich biodiversity, many stakeholders (community &
settlements)

12 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Background

Background
• Cost & risk associated with the rehabilitation is complex and highly
variable. If done wrong, the financial implications can be catastrophic.
• If done right, the operation promises to be highly lucrative

Key problem statements:

• How do we fund for the rehabilitation requirements, such that:
− We reduce risk of funding shortfall to an acceptable level
− We facilitate proper & responsible environmental care and
sustainability
− We avoid the risk of overfunding and the inefficient use of capital
− We remain regulatory compliant at all times?

13 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
 Case Study: DigDug Mine
Background
The plan of action…
• They start by drawing a plan for the life of the mine

Project Planned Mine

Commences Closure Completion

2015 2045 2055

Concurrent Planned Post Closure

Rehabilitation Rehabilitation

• Even with planning there is still uncertainty…

Concurrent
Completion
Rehabilitation
Cost? 2055 Will we get
there?
Case Study: DigDug Mine
Background

Bring in the experts…

• They call on the expertise of the Deloitte SME’s

DigDug Rehabilitation Analysis

Cost Profile
Cost # Cost Type Estimated costs per year
Lower Bound Average Upper Bound
1 Concurrent:
17 180 575 149 1 500 000
2 Planned closure: Fixed 8 000 000 (80 000 000 over a ten year period)

3 Immediate: A function of the ongoing activities & extraneous risks

Joe Soap
Manager
Deloitte

15 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling the risk

Replicate the world in a model…

• A number of key assumptions to be made, for example

Inflows Outflows
Cost Profile: Immediate Closure
120%

100%

80%

60%

40%

Fund 20%

0%
2015 2020 2025 2030 2035 2040 2045 2050 2055
Pre planned closure Post planned closure
16 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling the risk
Bringing it all together

Concurrent
C
Post o
Liabilities
Closure r
Immediate Likelihood r
Closure e
Severity
l
Cash a
t
i
Fund Equity
o
n
Bond

Risk(various) RiskCumulD RiskCormatt

17 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
 Case Study: DigDug Mine
Modelling the risk

18 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
 Case Study: DigDug Mine
Modelling Results

Average Asset Return

500
Buildup of fund overview. Liquidity
100.00% 16.00% 300

Millions

Millions
15.00%
90.00%
14.00%
250
13.00% 400
80.00% 200
12.00%
70.00% 11.00% 150
300
10.00%

Average return on assets

Asset Allocation

60.00%
100

Amount
9.00%

Amount Rands
50.00% 8.00%
50
200
7.00%
40.00%
6.00% 0

30.00% 5.00%
100 -50
4.00%
20.00% 3.00% -100
2.00%
10.00% -
1.00%
-150
0.00% 0.00%
-200
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055

(100) 2015 2020 2025 2030 2035 2040 2045 2050 2055
Year 2015 2020 2025 2030 2035 2040 2045 2050 2055
Bond Equtiy Cash
Year
Time Area of concern Median 99.5% 75% 25% 0.5%
Surplus 1 Surplus 2 Liability Fund Contribution 1 Fund Contribution 2

16.00% Average Asset Return

14.00%

12.00%

10.00%
Return

8.00%

6.00%

4.00%

2.00%

0.00%
2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055
Year
Upper 98th Upper 75th Lower 25th Lower 2th Mean Meadian

19 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
 Case Study: DigDug Mine
Modelling Results

Average Asset Return

100.00% 11.00%

90.00% 10.00%

80.00% 9.00%
8.00%
70.00%
7.00%

Average return on assets

60.00%
Asset Allocation

6.00%
50.00%
5.00%
40.00%
4.00%
30.00%
3.00%
20.00% 2.00%
10.00% 1.00%
0.00% 0.00%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
Year
Bond Equtiy Cash Mean Upper 98th Lower 2th

20 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results

Buildup of fund overview.

500
Millions

400

300
Amount Rands

200

100

(100)
2015 2020 2025 2030 2035 2040 2045 2050 2055
Time
Surplus 1 Surplus 2 Liability Fund Contribution 1 Fund Contribution 2

21 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results

Liquidity
300
Millions

250

200

150

100
Amount

50

-50

-100

-150

-200
2015 2020 2025 2030 2035 2040 2045 2050 2055
Year
Area of concern Median 99.5% 75% 25% 0.5%

22 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results

23 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results

16.00% Average Asset Return

14.00%

12.00%

10.00%
Return

8.00%

6.00%

4.00%

2.00%

0.00%
2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055
Year
Upper 98th Upper 75th Lower 25th Lower 2th Mean Meadian
24 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results
Results
Taking it a step further
Efficient Frontier

Efficient
points Risk appetite
threshold
Efficient
points
Average Surplus

Minimum
required return

0 100 200 300 400 500 600 700 800 900 1000
Std Dev (Increasing risk by asset allocation) Millions

25 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Conclusion
Conclusion: DigDug Mine
Modelling Results

So, what was the right answer?

- It all depends!
- Also considered funding vehicle decision (Trust, Account, Insurance, etc…)

-> Address w.r.t. key problem statements:

How do we fund for the rehabilitation requirements, such that:
• We reduce risk of funding shortfall to an acceptable level
• We facilitate proper & responsible environmental care and
sustainability
• We avoid the risk of overfunding and the inefficient use of capital
• We remain regulatory compliant at all times?s

27 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Conclusion
The Benefits of @Risk

How did @Risk help?

 Familiarity: remain in familiar analytical environment; Microsoft Excel
 Speed: runs fast, quick to build, set-up & populate
 Cost: more affordable than most other modelling solutions
 Complexity: easier to deal with more complex scenarios (correlations,
compound distributions)
 Flexibility: able to alter results easily by changing the parameters or
updating the structures… can even do this in real time
 Visualisation: able to visualise Monte Carlo simulation elegantly
 Ultimately: got client to think about risks, instead of worrying about
modelling

28 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
Questions
Team members

Director Industry Specialist

Jaco van der Merwe Sarah Dyke

Director FASSA FFA Environmental Industry Advisor
Actuarial & Insurance Solutions Venmyn Advisory & Valuation
sadyke@deloitte.co.za
javandermerwe@deloitte.co.za
Mobile +27 76 424 8221
Mobile +27 82 682 3270
Direct +27 11 517 4165
Direct +11 209 8163

Analyst

Kgositsile Moeng
Junior Actuarial Analyst
Actuarial & Insurance Solutions
Any Questions?

29 Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited
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