Post on 15-Aug-2015
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Presenter:
Location:
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© SRK Consulting (UK) Ltd 2014. All rights reserved.
Technical Due Diligence on
Oil Shale Mining Projects
Dr Sergei Sabanov
Golden, Colorado School of Mines, 15/10/2014
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Table of Contents
• WHAT IS DUE DILIGENCE
• TECHNICAL VALUATIONS
• RESOURCES AND RESERVES ESTIMATION
• DUE DILIGENCE ISSUES, CAUSES AND IMPACTS
• KEY FEATURES OF QUALITY TECHNICAL STUDIES
• CONCLUSION
34th Oil Shale Symposium, Colorado School of Mines, 15/10/2014
Dr Sergei Sabanov ssabanov@srk.co.uk
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WHAT IS DUE DILIGENCE?
Definition of Due Diligence :
‘An investigation or audit of a potential
investment. Due diligence serves to confirm all
material facts in regards to a sale’
Technical Due Diligence – concerned with the
technical and operational aspects of a mine or
project
Legal Due Diligence – concerned with the legal
aspects of a project eg company status, licence
validity, security of tenure, permitting, liabilities,
obligations etc
Technical Due Diligence is the focus of this talk
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WHAT IS TECHNICAL DUE DILIGENCE NECESSARY FOR?
• Support Project Finance – when banks lend
money the credit committee needs to assess the
technical risk, will I lose my shirt ?
• A pre-cursor to a listing document – before a CPR
is prepared a consultant will review the assets
• Mergers – need to determine what are the assets
you are merging with, must assess risk, value?
• Acquisitions – it is a good purchase, how much
should be paid for it?
• Investments – should we purchase shares?
You could be on thin ice!
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PROJECT FUNDING OPTIONS
All of these require some kind of technical due diligence
Source: Ernst & Young, Mining Journal, Global Mining Finance Guide 2014
There are
many ways
projects get
funding
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WHAT DOES TECHNICAL DUE DILIGENCE PROCESS INVOLVE ?
• Collation of information about the project /
operation / group of assets
• Visit to the project site by a team: mining
engineer, geologist, process engineer, E+S
specialist plus other experts as required
• Review of the information – what is available
and what does it tell us?
• Analysis - what are the impacts / effects, what is
going on?
• Conclusions – what do we think? Eg marginal
asset, poor technical work, unknowns
• Recommendations – how to fix key issues,
adjusted production profiles, capital and
operating costs, lead times
Effective TDD is a process resulting in some practical advice
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TECHNICAL FOUNDATIONS – ASSET TYPES SUBJECT TO DUE DILIGENCE
• Exploration Property • Oil content may or may not be identified
• No Mineral Resource
• Advanced Exploration Property • Considerable exploration undertaken
• Specific targets identified that warrant
further detailed investigation by drilling,
trenching or other detailed geological
sampling
• May or may not have a Mineral resource
Estimate.
• Sufficient work on at least one prospect to
provide good geological understanding
and encourage further work to elevate to
Mineral Resource Category
Similar approach, different assets
• Pre-Development Property • Mineral Resources identified and their extent
(possibly incomplete)
• Decision to proceed with development has not
been made
• Early Assessment stage
• Also includes Resources with a plan not to
develop and those on ‘Care & Maintenance’
• Development Property • Decision has been made to proceed with
construction and/or production but not
commissioned or operating at design levels
• Operating Mines • Mineral Properties, particularly mines and
process plants that have been commissioned
and in production
MINERAL ASSET DEVELOPMENT STAGES
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TECHNICAL FOUNDATIONS
• Classification of Mineral Resources
• Study objectives
• Site specific technical Information
• Degree of engineering completed (%)
• Design basis and Cost estimation
methodology
• Cost estimation accuracy (Capital and
Operating)
• Cashflow analysis & valuation
• Level of contingency
All disciplines must be considered
KEY FEATURES OF TECHNICAL STUDIES
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TECHNICAL FOUNDATIONS
This is a key issue
ENVIRONMENTAL AND SOCIAL
• The International Finance Corporation
(“IFC”) Performance Standards on Social
and Environmental Sustainability (2006;
updated January 2012).
• The Equator Principles (“EPs”) is a risk
management framework adopted by
financial institutions.
National legislation and international standards require that an environmental and social impact
assessment (“ESIA”) is undertaken for a mining project, during the planning of the project.
Complemented by an environmental and social management plan (“ESMP”). The ESIA and ESMP are
often used to set legally binding conditions of environmental approval.
Implementation of ESMP/s requires an environmental and social management system (“ESMS”).
The IFC Performance Standards are complemented by the World
Bank Group Environmental, Health and Safety (“EHS”) Guidelines
(April 2007), comprising a series of General EHS Guidelines and
Industry Sector EHS Guidelines.
The EPs require that the mining projects (Category A projects)
undertake an ESIA, produce an ESIA report, develop an ESMP,
establish and maintain an ESMS and undertake effective
stakeholder engagement. Address compliance with host country
legislation and observe the relevant IFC Performance Standards
and the World Bank Group EHS guidelines.
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TECHNICAL FOUNDATIONS
• Many banks and financial institutions (78 so far) in 35
countries have adopted the EP’s. This covers 70% of
international project finance debt in emerging
economies.
• Environmental liabilities of borrower can affect lenders
by (i) reducing borrowers ability to pay (ii) reducing
value of security (iii) raising potential for direct liability.
• Lenders will try to protect themselves by carrying out
thorough due diligence prior to entering into a loan
agreement.
• Due diligence may include an assessment covering,
for example, whether land is contaminated, whether
hazardous materials are stored on site, waste
disposal at the site, whether necessary environmental
permits are in place and whether any legal
proceedings have been made or are pending.
For many banks this is the key issue
FINANCING VIEWPOINT
ENVIRONMENTAL AND SOCIAL
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RESOURCES AND RESERVES ESTIMATION
1. Mining
2. Beneficiation/Processing
3. Economic
4. Marketing
5. Legal
6. Environmental
7. Social and Governmental
1. Dilution, mining losses and extraction ratios, grade adjustment factors, Geotechnical and hydrogeological, Minimum mining width, interbedded waste, mineralised thickness, stripping ratio, grade/stratigraphic continuity
2. Bulk sample and sizing selection for plant design, representative of planned plant feed, grade variability, Product recoveries, Material hardness (Bond work index), Bulk density, Presence and distribution of deleterious elements (sulphur, etc.), Sales specifications, Plant capacity versus production rate, Stockpiling requirements/capacity. Can all of the deposit be processed using proposed processing technology?
3. Links production schedule to costs and revenues, Should use realistic, long-term price, Used to demonstrate economic viability, Traditionally uses discounted cash flow methods (NPV, IRR, etc.), Sensitivity analysis on inputs should be understood. Verify cut-off grade: average, marginal, operational; strip ratio limits; is UG development justified?
4. Saleable product; Availability of market for the product; Capacity affect production rate? Is there a market for the product? Is the production rate constrained by market capacity?
5. Mining legislation, Other land users (native title, etc.) Does the client have uncontested title for the mineral deposit? Is the licence likely to be granted / extended?
6. May restrict mine or infrastructure footprint, Stakeholder engagement/ESIA. Is mining restricted on any portion of the deposit? Will the community support the project?
7. Licensing and permitting; Government energy policy. Is there any doubt that the government may not grant the necessary permits?
34th Oil Shale Symposium, Colorado School of Mines, 15/10/2014
Dr Sergei Sabanov ssabanov@srk.co.uk
MODIFYING FACTORS
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RESERVES ESTIMATION
1. Factor 17%
2. Factor 18%
3. Factor 20%
34th Oil Shale Symposium, Colorado School of Mines, 15/10/2014
Dr Sergei Sabanov ssabanov@srk.co.uk
Geotechnical Unit Value
Overall slope angle (Deg) 45
Mining Dilution thickness (cm) 10
Mining recovery (%) 95
Processing Recovery (%) 85
Operating Mining costs (US$/trock) 3
Incremental Mining Cost (US$/10m) 0.05
G&A (US$/tROM) 3
Oil Price (US$/bbl) 100
OPTIMISATION PARAMETERS
Example of parameters
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RESERVES ESTIMATION
• Validation of capacity & Production schedule What equipment is required?
If in operation, are the forecast efficiencies/productivities consistent with historical achievements?
Are the projected productivities consistent with benchmarks?
Are inferred resources used in the production schedule? What % used in each year? Is this reasonable?
• Verification of opex forecasts. How will opex change as workload changes?
• Verification of capex forecast OP – sustaining equipment required for changes in
Strip ratio / changes in pit depth / haul length
UG – development
Replacement
• Any material constraints Manpower?
Seasonal access?
Maintenance practice?
• Risks & opportunities: What issues could have a material impact and what
would need to be done to manage them?
Are there any assumptions / judgements or areas of uncertainty which should be highlighted?
34th Oil Shale Symposium, Colorado School of Mines, 15/10/2014
Dr Sergei Sabanov ssabanov@srk.co.uk
MINING PRODUCTION
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RESERVES ESTIMATION
34th Oil Shale Symposium, Colorado School of Mines, 15/10/2014
Dr Sergei Sabanov ssabanov@srk.co.uk
New slope length distance
Slope length distance
Volume difference
20deg slice
Overburden
Slope angle M Slope angle S
Oil shale
Modified slope (M)
• NPV can be increased by minimising
the stripping ratio in early years.
• The reduction in capital expenditure
early in the mine life has been shown
to improve project economics.
NPV MAXIMISING
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COMMON DUE DILIGENCE ISSUES, CAUSES AND IMPACTS (1 of 2)
• Non compliance with International Reporting
Codes.
• Insufficient Drilling for development of Mineral
Resources.
• Mineral Resources are often presented as Ore
Reserves.
• The modifying factors used in Ore Reserves are
not sufficiently justified. Dilution is under
estimated – planned grade is too high
• Deposits can be structurally and geochemically
complex and hence have issues with
geotechnical, processing and environmental
engineering.
Key aim of due diligence is to assess the quality of technical work
Root cause:
Poor quality of
underlying technical
work
Impacts:
Poor Project
performance
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COMMON ISSUES AND IMPACTS (2 of 2)
• Insufficient Long Term Mine Planning and examples
of ‘hand to mouth’ style operations.
• Underinvestment in quality technical work
• Technical specialists lack knowledge of best
international practices.
• Large investments in infrastructure and projects
without adequate supporting technical work.
• Safety culture requires improvement.
• Environmental Concerns are restricted to obtaining
and complying with relevant permits only. No
proactive environmental management or monitoring.
• No or insufficient Closure provisions
Many operations are not well run
Root cause:
Poor quality of underlying
technical work
Ineffective management
Impacts:
Poor Project performance
Increased risk
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FAILING OPERATIONS - THE SAME OLD STORIES
Issue:
Planned grade is not
being achieved
(not enough oil is
recovered in the plant
to pay the bills)
Too many operations don’t have a good plan
Why?
• Poor plan, unrealistic ?
• There is no plan
• Plan not followed
• Too much dilution caused by
poor grade control, blasting
practices, ‘tonnes’ culture, poor
reconciliation, don’t know why
• Oil not there in first place – poor
geological model not validated
Root causes:
• Operations
• Poor quality of
underlying
technical work
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THE INGREDIENTS OF PROJECT FAILURE
Poor due diligence can compound poor technical work
Underlying Technical
Studies are poor –
standards not
followed, hours not put
in, inexperienced or
under qualified staff
Technical Due
diligence exercise is
not completed or
carried out by
inexperienced or under
qualified staff who
don’t follow standards,
hours not put in
• Risks too high
• Many unknowns
• Targets not
reached
• Delays
• Cost overruns
• Losses
• Project finance
issues
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IMPORTANCE OF INDEPENDENCE: WHAT CAN BE DONE ?
• Be careful how you engage consultants, contractors and advisors to deal with
project development and acquisitions.
• Conflict of Interest
• Fees are linked to the deal going ahead
• The likelihood of future consulting, supply services or construction contracts
• Companies or individuals who have an interest or shares in the project
• An Independent Consultant will provide due diligence feedback that the
Finance Institution does want to hear but the Company may not.
• Identify gaps in the Project Study or Development prior to seeking finance.
Warren Buffet Quote
“Every large deal should have a consultant working on the deal who
only gets paid or gets a bonus if the deal doesn’t go through”
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KEY FEATURES OF QUALITY TECHNICAL STUDIES
A quality technical study has the following attributes:
• The study is prepared by independent, qualified specialists,
following the standards and reporting codes, putting in the
hours
• Site specific technical work must be completed
commensurate with project status or type
• The study has considered all the infrastructure required for
the project
• Environmental and social issues are usually more important
than the technical work – these issues commonly delay or
cause suspension of Projects, in most cases satisfying local
rules is not enough
• Public consultation commenced early in the Project life
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KEY FEATURES OF QUALITY TECHNICAL DUE DILIGENCE
A quality due diligence study is carried out by
independent, qualified specialists, following the
standards and reporting codes, putting in the hours –
just like the technical studies
Beware of the following shortcuts:
• ‘I can do it all, you don’t need that specialist in X and
Y and Z’
• ‘You don’t need us to visit site’
• ‘it will only take a week’
• ‘We don’t need all that background data’
• ‘The answers are simple’
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CONCLUSION
Key Considerations
• Strategic planning can be multi-disciplinary with conflicting objectives
• Majority of projects are not properly optimised for the key study objectives
• Strategic planning is a dynamic process, objectives and policies change throughout
the project life cycle
• The available mine planning software allows for quick evaluation of strategic planning
scenarios
• Technical due diligence analyses the risks & opportunities to ensure that risks are
suitably quantified and mitigation plans put in place where necessary. A thorough due
diligence will also advise the client if projections are unlikely to be achieved. This
approach can be applied for oil shale mining projects producing oil, electricity, thermal
energy and chemical products to demonstrate financial viability different scenarios.
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