Bankable feasibility studies for mining projects

The “bankable feasibility study” is not a guarantee that a mining project will produce a
planned outcome. Further independent review is advisable, if not necessary, to test
and validate strategic targets, directions and goals. Quantitative risk analysis can not
only play a key role in the making of quality decisions for project approval, but will
also provide grounded measures for project execution risk management.

D. S. Evans, PhD, PGeol.

Sr. Partner
CSC Project Management Services
Calgary

403-233-7994, dave@cscproject.com

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 There are more risks to mining than just commodity price fluctuations….
Limitation Statements define some uncertainties, but not all of them…..

Statements, other than statements of historical fact, may constitute forward-

looking information and include, without limitation, timing and content of
upcoming feasibility studies and other economic or financial analyses;
anticipated availability and terms of future financing; future production,
operating and capital costs; and operating or financial performance.

-OR-

Forward-looking information involves various risks and uncertainties. There can

be no assurance that such information will prove to be accurate, and actual
results and future events could differ materially from those anticipated in such
information. Important factors that could cause actual results to differ materially
include: fluctuations in commodity prices and currency exchange rates; the
need for co-operation of government agencies in the issuance of required
permits and approvals; the possibility of delay in development work or in
construction and uncertainty of meeting anticipated milestones; and other risks
and uncertainties.

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 Mining is a risky business and each stage is impacted by uncertainties

Political
Political
Uncertainty
Uncertainty
Financial &
Economic
Investor Science & Uncertainty
Investor
Uncertainty Technology
Uncertainty
Uncertainty Mining
Complexity

Geological
Uncertainty Market &
Construction Mining Metallurgical Commodity
Uncertainty Uncertainty Uncertainty Pricing
Location Uncertainty
Uncertainty

Exploration Development Mining Processing Marketing Corporate

Performance Performance Performance Performance Performance Performance

Social & Social & Social & Social & Social & Social &
Environmental Environmental Environmental Environmental Environmental Environmental
Uncertainty Uncertainty Uncertainty Uncertainty Uncertainty Uncertainty

Pervasive, Poorly Defined

Largely and somewhat
Direct
Controllable
Global Financial & “Risk Categories”
Uncontrollable Controllable Economic Risks
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 Definitions & Basis

• Typically, a bankable feasibility study is a comprehensive

forward analysis of a project’s economics (+/-15% precision) to
be used by financial institutions to assess the credit-
worthiness for project financing.
• The feasibility part is guided by a set of assumptions, a
strategy, development conditions and a planned outcome. The
outcome is uncertain and targets and objectives may not be
achievable.
• The bankable part relates to the basis and conditions for a
future financial agreement to collateralize mining assets for a
project loan, to set a premium and a repayment schedule, with
appropriate risk/reward factors.
 What do others say about mining
feasibility studies…

• “The mining industry has had a spotty record in the area of

estimating initial capital cost and operational performances,
even though the standard of feasibility studies has improved in
the last decade. Third party reviews rarely have time and funds
for due diligence”…taken from Shillabeer and Gypton, Mining
Risk Management, 2003, Australian IMM Proceedings
• Project Evaluation 2007 contains an article entitled “The Use
and Abuse of (Mining) Feasibility Studies” by Mackenzie and
Cusworth who state that most feasibility examples are
unbalanced, or provide inaccurate views of one or both
technical and business aspects. The authors subscribe to a
project management framework (to include risk analysis) to
overcome strategic and execution failures that often occur
following feasibility studies

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 So what does +/- 15% really mean?

• A +/-15% estimate is somewhere between the definition of a

Class 5 and Class 2 estimate. Class has to do with both the
content and quality of the estimate and the estimating
confidence (precision).
• Well, doesn’t contingency cover estimate shortfalls (+15%)?
Contingency is a separate decision in support of the estimate
to resolve cost uncertainty precision. Current thinking is that
contingency will be “used up” for some, but not all cost
categories. Contingency does NOT make the estimate “more
accurate”.
• Quantitative Risk Analysis is a process to assess and quantify
the potential variances around project drivers. When key
project drivers (i.e. risks) become quantified, corrective
measures and actions can be taken, with confidence, in the
making of quality decisions about precision and accuracy.

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 The bankable feasibility study as a comprehensive engineering
study, cost estimate and mining development plan

• Normally, a feasibility study is prepared by a qualified

engineer or estimator. It is a forward-looking document that
captures a precision level but not necessarily an acceptable*
level of accuracy.

• So, what does “bankable feasibility” really mean in terms of

accuracy for owner and investor confidence in the
development and construction of a mining project?

• And how does risk analysis capture precision and accuracy

for better decision-making and executing a transparent,
accountable and defensible execution plan?

* As known or required by the project owner

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 The hierarchy of Capital Cost estimates

• Conceptual (Class 10 Estimate)

• Class 5 (also called DBM Estimate)
• Pre-Feasibility (Class 3 or 5, depending)
• Class 2 or 3 (+/-15% has now gained acceptance as a
bankable feasibility study)
• AFE Estimate, may be a Class 1 or Class 2 and is
designed to go for project sanction & EPC bids. It
should be the most accurate and the most precise
estimate obtainable given circumstances and
conditions; and, is normally accompanied by a PEP.

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Precision and accuracy are separate variables in the Cost Estimate

“Precision” “Accuracy”

•Precision is the ability to reproduce a result;

•Accuracy is a confidence in the absolute result or outcome.
 The Definition of Estimate Classes

• The Study or Class 5 estimate is prepared in conjunction with the Design

Basis Memorandum phase of the project. At this point all critical design
alternatives have been examined and the preliminary project execution
plan has been established. This type of estimate is defined as “an estimate,
including contingency, that has a probability of overrun by more than 10%,
1 time in 3”.

• The AFE or Class 2 estimate is prepared in conjunction with the Basic

Engineering phase of a project. At this point, all key design documents
such as P&ID’s, layouts and electrical single lines have been established.
The project execution plan, construction plan, and schedule have also
been established. This type of estimate is defined as where “the final cost
of the project will be within plus or minus 10% of the estimated value, 80%
of the time”.

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 The definition of estimate classes describes the expected range of
uncertainty around an estimate (in assessment and simulation this is
the slope of the probability distribution)

Class II Accuracy Class V Accuracy

Final cost will be within Estimate including contingency,
+/- 10% of the estimate, 80% of the time has a probability of 10% overrun, 1 time in 3.

Base estimate plus contingency Base estimate plus contingency

200 $MM 200 $MM
100% 100%

90% 90%

80% 80%
P90 =220 $MM
P90 =237 $MM
70% +10% 70%
+19%
Probability

60% 60%

Probability
P50 = 200 $MM P50 = 200 $MM
50% 50%
P90-P10 = 80%
40% 40% P67.7 crosses at 10% over estimate

30% 30%

20% 20% P10 =168 $MM

P10 =180 $MM
-10% -19%
10% 10%

0% 0%

180 200 240 160 180 200 220 240

$MM $MM

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 Quantitative risk analysis calculates the probability distribution of a cost outcome

This distribution can be used to :

1. Determine the contingency required for any confidence level (probability).
2. Compare the estimate uncertainty (slope) with other estimate class definitions.

Base = 160 $MM

100%
90%
P90 =222 $MM
80% +11%

70% Slope of
Probability

40 $MM
Class V Estimate
60% Contingency Slope of
Required for
P50 Confidence Class 2 Estimate
50%
40% P50 = 200 $MM

30%
20% P10 =178 $MM
-9%
10%
0%
120 160 200 240 280
$MM
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 A example of risk analysis applied
to a mining capital cost estimate

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 The CAPEX Influence Diagram for a UG Mining Construction Project

Bid $ 3,799k
Rate
Shaft
Excavation $ 53,635k
Competing Mine
Materials/ $ 38,215k
Projects Estimate
Variance Level
Excavation
Labour $ 11,621k
Rate
Subsurface
Equipment

Scope
Variance $58,387k $ 171,682k
Mill Total
Used
Equipment Project
Labour CAPEX
Productivity $ 1,270k
Roads $ 17,570k
Organization
Performance Infrastructure Exchange
Rate
Local
Benefits Water Miscellaneous
Cost
Variance $5,179k $ 11,121k

$22,088k
($ 1,602k/yr) $ 2,592k
Engineering Contingency
Sustaining @ 15%
Cost Capital Administration
Variance $ 17,409k $ 20,001k

EPCM Indirects

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 From the probabilistic simulation conducted during the quantitative risk
analysis, the Expected Value output of Total CAPEX is $ 181 MM, which
is $ 9 MM above the Base with contingency.

Base Expected P10 P90

Mine CAPEX 53.6 66.6 49.1 85.7
Mill CAPEX 58.4 60.6 58.3 63.5
Infrastructure 17.6 23.6 16.0 35.3
Indirects 20.0 30.5 21.6 42.1
Contingency 22.1 0.0 0.0 0.0
Total CAPEX 172 $MM 181 $MM 151 $MM 212 $MM

• Expected Value is P55 or about a 55% chance of happening

• P10 & P90 are each about a 10% chance of happening and define the
range of this outcome which is a measure of the accuracy of the estimate

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 The Base Capital Cost estimate is $ 172 MM. The expected Total Capital Cost
is $ 181 MM. In this case there is only a 39% chance that the project will
achieve the CAPEX Base Case estimate with contingency

Base with
Total CAPEX contingency
( 172 $MM)
100
90 Mine Base
54 $MM
80
Mill Base
70 58 $MM
Probability

EV = 181 $MM
60
50
40
30
20 Mill CAPEX EV = 61 $MM
Mine CAPEX EV = 67 $MM
10 Total CAPEX EV = 181 $MM

0 50 100 150 200 250

$MM
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 The Range in CAPEX is largely due to uncertainty in
Mine Unit Cost Variance, Mine Quantities Variance and
Level Development Scope Variance.

Total Capital Expenditure $MM

-15 -10 -5 0 5 10 15 20

Mine Unit Cost Variance - Multiplier 1 1.5

Mine Quantities Variance - Multiplier 0.86 1.26
Competing Projects Environment Cool Heated
Level Excavation Scope Variance- Multiplier 0.84 1.18
Infrastructure Costs 0.7 2
Execution Organization Performance Excellent Poor
Infrastructure Construction Duration - Months 7 12
Regulatory Process Duration - Months 10 34
Tailings Cost Variance - Multiplier 0.8 6
Road Cost Variance -Base - 1.27 MM 2.5 7
Subsurface Equipment Costs 1.01 1.3
Mine Construction Duration - Months 18 28
EPCM Cost Variance -Base - 9.6 + 6.7MM 15.5% 0.12 0.14
Community Negotiations & Agreements Duration - Months 11 25
Water Cost Variance -Base - 5.2 MM 4.2 7

181 $MM
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 Expected increases to Construction Costs add $ 23 MM to the
Base CAPEX Estimate. Schedule Impacts add $ 7 MM.

190 Total CAPEX

+9 EV = 181 $MM
180 0 -1
+2
+12
170
$MM

160
+7

150 Base = 150 $MM

140

Indirect Costs
Mill Costs

Labour Costs
Schedule

Infrastructure
Mine Costs

Costs

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 A planned outcome requires a sound strategy and a sound execution plan

Strategy
Flawed Sound

Doomed A
Flawed from the Botched In absolute terms, there
Beginning Job is about a one in four
chance of getting the
“right” strategy paired
with the “right”
Flirting A Pretty execution plan for the
with Good “planned outcome”…
Sound
Disaster Chance

...the idea is to get it approximately right rather than perfectly wrong...

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 Bankable Feasibility Studies for Mining Projects….things to remember.

• Accuracy and precision are different. Accurate estimates are precise, but
precise estimates are not necessarily accurate.
• Beware of the Halo Effect: the tendency to believe and place faith that
your strategy and execution plan are sound, grounded, etc.;
• The Delusion of Absolute Performance: any given formula cannot ensure
high organizational performance, etc.;
• The Delusion of Lasting Success: enduring success is not sustainable;
• Recognize the Role of Uncertainty: adjust your thinking to accommodate
uncertainty (risk & opportunity!) and make better decisions;
• See your Project through Probabilities: approach problems as
interlocking internal and external probabilities;
• Separate Inputs from Outcomes: actions and outcomes are imperfectly
linked. It is easy to infer that bad outcomes must mean somebody made
mistakes, or a good outcome must mean somebody made good decisions
(or got lucky!);
• There are more things that can go wrong rather than right in execution:
determine the project drivers, assess & quantify risk and develop a risk
management plan to build better valued projects;
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 A Final Note….
• We often hear the phrase “We have to get cost certainty or
else……) We are rarely told what the “or else” is, but it sounds
pretty awful. In these circumstances, CSC takes the position
that owners, their consultants and contractors to look for the
value proposition in their development and construction
projects. Should your project go over budget, or goes long,
make sure that the project achieves value in the completed
cost. When the project delivers value that respects or justifies
the cost, then it is a good project.
 CSC
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Specifics:

• Supports Owner Organizations in major project development.

• Group formed in 1982, over 350 project assignments in 7 countries.
• Extensive and varied background in Project Planning and Management.

Specialties:

• Risk & Decision Analysis for a wide range of capital Projects.

• Strategic & Mitigation Planning for projects using risk models.
• Facilitation of Project Management, Business Planning, Environmental &
Safety Planning & Management and Team Building.
• Project Management Education Workshops.
• Development of Contract Claims and disputes and litigation support.