Basics of Mining Mining and Money[1]
Transcript of Basics of Mining Mining and Money[1]
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The 13th Annual
Americas School of Mines
Basics of Mining and Mineral
Processing
Part E: Mining and Money
Vancouver Instructor: W. Scott Dunbar
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Mining and Money: The Topics
Metal markets
and prices
Mine project cash
flows, costs
Resources and
reserves
Mineral and metal
products, metal contracts
Reportingstandards
Click on any of the topic icons below to view the slides on that topic
Things
accountants do
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Metal and Mineral Production
ore direct to
buyer
Smelter/
refinery
Buyers
refinery
smelter
contract
refinery
contract
flotationconcentrate
precious
metals
impure metalleaching
crushing
sorting
separation
iron ore, coal, potashindustrial minerals
delivery
contract
Mine
base
metals
leachingoxides
sulfides
electro-
winning
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Notes: Metals and Mineral Production
A mill at a base metal mine typically uses flotation to produce a concentrate that has a concentration of 20-40% of a
primary metal. Copper concentrates are typically 25-30%. The concentrate is transported to a smelter/refinery
complex. Unless the mining company owns the smelter/refinery, the sale of concentrate is governed by a smelter
contract.
The situation for a precious metal mine is similar. The mill at the mine uses leaching to produce an impure metal
product which must be refined to produce pure metal (99.99% pure) The impure metal at a gold mine is called doré,
a mixture of 60-90% gold and other metals, often silver. Unless the mining company owns the refinery, the sale of
the impure metal is governed by a refinery contract.Iron ore, potash and industrial minerals typically require some form of separation technology to produce a desired
product. Flotation is used to obtain fertilizer grade potassium chloride and to separate coal from stones. Grinders
and cyclones are used to produce iron ore products. The processed ore is shipped to a buyer under terms of a
delivery contract which specifies the delivery times of required quantities and the required grades.
In some rare cases, the ore from a mine is so rich, it is shipped directly to a smelter or refinery. For some time the ore
from the Eskay Creek mine in British Columbia was shipped by train to smelter/refineries in Quebec or Japan. Eskay
Creek currently sells concentrate and doré.
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Smelter contracts
Concentrate
25-30% Cu
Freight costs,
insurance ,etc
Orebody
<1% CuAnode copper
95-98% Cu
Treatment
charges (TC)
and penalties
Cathode
copper
>99.9% Cu
Refinery
charges (RC)
At Mine Return
(AMR)Net Smelter
Return (NSR)
Credits forprecious and
other metals
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Notes: Smelter contracts
A smelter contract contains details concerning:•how the mine will be paid for the principal metal in its concentrate,
•how the mine will be credited for other desirable metals in the concentrate (e.g., by-products
such as gold),
•what penalties will be applied for materials that affect the performance of the smelter (e.g.,
antimony, bismuth, moisture)
•how the delivery is to be made, and
•the manner in which check assays of the concentrate will be done.
The payment received by the mine is often called the Net Smelter Return (NSR). The mine is usually
responsible for transportation, insurance, and agents’ costs (realization costs). These costs are
subtracted from the net smelter return to obtain the At Mine Return (AMR). The AMR can be as little
as 60% of the value of the metal shipped to the smelter.
A simple mass balance between ore and concentrate can be used to determine how many tons of ore
are needed to produce one ton of concentrate:
K tons grade g recovery r = 1 ton grade G
Given the concentrate grade G, the ore grade g, and the metal recovery r, K can be computed. For
example: g = 0.5%, r = 92%, G = 28% gives K = 60.9 tons.
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Refinery contracts
Orebody
0.0003-0.0008%MineralProcessing Doré60-90% Au
For precious metals
RefineryMine
Larger mining operations have their own refineries
Gold bars
>99.5% Au
~25 kg ~13.4 kg
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Notes: Refinery contracts
Typical terms of a gold refinery contract are:
A treatment charge of $0.80 to $1.20 per oz, depending on current market conditions
The refinery typically pays the mine for 98% to 99.95% of the gold contained in the doré,
depending on market conditions.
Penalties are applied for deleterious elements such as iron, lead, tellurium and nickel.
The refinery will pay between 95% and 99% of the silver content of the doré.
The complexity of refinery contracts lies in the procedures established for weighing and assaying.
Security measures, delivery dates, disposition of refinery waste, and transportation of the gold are all
dealt with in a refinery contract.
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By-products and Co-products
By-product
• secondary metal produced in the mining and processing of another metal
• usually not important to the viability of mine
• e.g. gold/silver in copper concentrate, copper/molybdenum
Co-products
• metals that are mined and produced together
• important to the viability of a mine
• e.g. gold and silver in lead/zinc mines
From an accounting perspective, this distinction does not exist.
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Notes: By-products and Co-products
Prices can determine whether a metal is a by-product or co-product. For example, in a period of high
metal prices, each metal could be considered a co-product (or simply a product). During periods of low
metal prices, the gold in a copper concentrate may be important to the viability of the mine. Mines
with poly-metallic ores (e.g., Myra Falls, Eskay Creek) sometimes call themselves different types of
mine depending on prices.
Current accounting rules (GAAP) specify that revenue from by-products and co-products be stated as a
line item for each individual product. Costs for production of a particular by-product or co-product
cannot be used to reduce overall operating costs. Thus, by-product gold credit for a copper
concentrate cannot be used to reduce the operating cost of a copper mine.
Before the current accounting rules were established, in some cases the high prices of a by-product
caused operating costs to become negative, clearly not representative of the actual conditions.
Essentially the new accounting rules eliminate the distinction between by-products and co-products.
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How metal prices are determined
Producer Prices
• producers set price
• common for industrial minerals
Independent Pricing• pricing determined by independent bodies
• eg Platts, London bullion dealers, Uranium: Ux, Trade Tech, Nukem
Negotiated Prices
• pricing determined by direct negotiation between buyer and seller
• long-term contracts for metals or concentratesCommodity Exchanges
• London Metals Exchange (LME)
• New York Mercantile Exchange (NYMEX)
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Notes: How metal prices are determined
Producer Prices
Producer(s) set price taking into account costs, potential markets, and levels of competition
Was common in aluminum, molybdenum and nickel industries
Common for industrial minerals where transportation costs are high
Independent Pricing
Pricing determined by sources that are neither buyer nor seller of metals
Prices are averages of prices of actual transactions between producers, consumers, and metals traders
Metals include: magnesium, titanium, iridium, aluminum
Examples: Platts, Metal Bulletin, Handy and Harman, London bullion dealers
Negotiated Prices
Pricing determined by direct negotiation between buyer and seller
Common in long-term contracts for ore, metal concentrates or metal products
Examples:
iron ore to steel mill
base metal concentrate to smelter (smelter contract)
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Commodity Exchange Pricing
Prices determined by transactions by dealers on an exchangesuch as the LME or NYMEX
Spot (present) or forward (in future) prices
LME trades in Al, Cu, Pb, Ni, Sn, Zn
NYMEX trades in Al, Cu, Au, Ag, Pt, Pa
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Notes: Commodity Exchange Pricing
Base metals: Al – Aluminum, Cu – Copper, Pb – Lead, Ni – Nickel, Sn – Tin, Zn – Zinc,
Precious metals: Au – Gold, Pt – Platinum, Pa – Palladium
LME – London Metal Exchange www.lme.co.uk
NYMEX – New York Commodity Exchange www.nymex.com
Prices at these exchanges are determined by a continuous auction carried between member dealers acting on behalf
of their customers, the companies they represent, or themselves. The auction is done by open outcry.
See www.lme.co.uk/pricing.asp
www.nymex.com/how_exchang_works.aspx has a more descriptive explanation.
Both NYMEX and LME engage in e-trading of metals. There are other sites where e-trading of metals is done, e.g.,
www.suppliersonline.com
The Shanghai Futures Exchange (www.shfe.com.cn/Ehome/index.jsp) provides services for trading futures contractsin commodities such as copper, aluminum, natural rubber and fuel oil.
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Precious Metals Markets
London Bullion Market Association:
• Members meet twice daily to review offers from worldwide sourcesto buy and sell gold and silver
• Results averaged and announced as the official AM and PM“fixings” for each of the two metals.
London Platinum and Palladium Market
• Similar to London Bullion Market
Since mid-70s, gold fixings made in Tokyo, Singapore and Zurichhave become important
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Gold Prices and Inflation?
0
100
200
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500
600
700
800
900
1 9 7 0
1 9 7 5
1 9 8 0
1 9 8 5
1 9 9 0
1 9 9 5
2 0 0 0
2 0 0 5
0
2
4
6
8
10
12
14
16
Annual change in CPI
A n n u a l c h a n g e i n C P I ( % )
Oil price
increases
Central bank
gold sales
Gold Price
G o l d P r i c e ( U S $ / o
z )
Recession
Market
uncertainty
Terrorism, War
Gold prices: www.lbma.org.uk
CPI indices: http://stats.bls.gov/cpi/#tables
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Notes: Gold Prices and Inflation?
Until about 1990, there seems to be a correlation between inflation and gold price. However, after1990 the correlation is not as good. In the late 1990s, central banks began selling their gold supply so
that gold price decreased even though inflation increased. Hedging of gold by gold producers during
the same period effectively increased the supply because hedging is effectively selling gold that is not
yet mined; however, producers have decreased hedging activity since about 2000. Terrorist activities
in 2001-2002 may have caused investors to protect the value of their portfolios with gold causing an
increase in price. But the more recent price increase is large and cannot be explained by the increase
in inflation or by the need for portfolio protection. Other forces may be at work.
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The gold market is a paper market
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2,000
4,000
6,000
8,000
10,000
12,000
14,000
T o n n e s g
o l d
LBMA trading
Physical demand
Data sources:
www.lbma.org.uk
www.gold.org
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Notes: The gold market Is a paper market
Trading in physical gold is done for electronics fabrication, jewellery, dentistry, coin and medal makingand retail investment. The London Bullion Market trading volume is mainly composed of the purchase
of large lots of gold by central banks and financial institutions, a paper market.
It is evident from the graph that the paper market for gold is much larger than the physical market and
that trading in physical gold has remained relatively constant since about 2000. Transactions in the
paper market, a representation of the demand for investment in gold, affect the price of gold more
than physical transactions. The paper market for gold investment constitutes a fundamental aspect of
the gold market.
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September October 2008 gold
0 9 - S e p
1 0 - S e p
1 1 - S e p
1 2 - S e p
1 5 - S e p
1 6 - S e p
1 7 - S e p
1 8 - S e p
1 9 - S e p
2 2 - S e p
2 3 - S e p
2 4 - S e p
2 5 - S e p
2 6 - S e p
2 9 - S e p
3 0 - S e p
1 - O c t
2 - O c t
3 - O c t
6 - O c t
7 - O c t
8 - O c t
720
740
760
780
800
820
840
860
880
900
920
950
1000
1050
1100
1150
1200
1250
Gold
G o l d p r i c e ( $ U S / o z )
Lehman Bros
bankruptcy
The September 2008 credit crisis
S & P 5 0 0S&P 500
US govt announces
bank bailout Sep 19
Bailout rejected
Sep 29
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W. Scott Dunbar
Copper Supply and Price
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
0
200
400
600
800
1,000
Source: www.lme.co.uk
S t o c k s ( k i l o t o n n e s )
Price
Copper: LME stocks vs price 1990-2008
P r i c e ( U S $ / t o n n
e )
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Notes: Copper Supply and Price
Commodity exchanges have warehouses where a physical supply of a metal is stored. In this case thecopper supply is the total available for purchase in these warehouses on a particular day. Traders know
this supply and also know of any constraints on supply (eg smelter or mine shutdowns) Thus they
know as much as possible about the market and bid or ask a price on that basis.
The correlation coefficient between copper stocks and price is -0.76, almost completely anti-
correlated. Similar results for other base metals.
From these data, an empirical relationship between supply and price can be determined. Predictions
of supply can be made using macro-economic factors. The empirical relationship between supply and
price can then be used to predict future price from future predicted supply. Results are generally good.
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Speculation in the copper market
0 4 - J a n - 0 0
0 4 - A u g - 0 0
0 8 - M a r - 0 1
1 1 - O c t - 0 1
2 1 - M a y - 0 2
2 0 - D e c - 0 2
3 0 - J u l - 0 3
0 2 - M a r - 0 4
0 5 - O c t - 0 4
1 1 - M a y - 0 5
0 9 - D e c - 0 5
1 8 - J u l - 0 6
1 9 - F e b - 0 7
2 4 - S e p - 0 7
2 9 - A p r - 0 8
2 8 - N o v - 0 8
-200
-100
0
100
200
300
S p o t P r i c e - 3 m o
F u t u r e s P r i c e ( $ U S / t )
Source: London Metals Exchange
Copper
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Notes: Speculation in the copper market
Backwardation is a situation in which the price of a commodity for future delivery is lower than thespot price or, more generally, a far future delivery price is lower than a nearer future delivery price.
Backwardation is a premium representing what a buyer is willing to pay for the immediate delivery of
the commodity.
The difference [Spot Price – 3 month Futures price] would be an indication of this premium. A plot of
this difference for copper between 2000 and 2008 is shown below. Until about the end of 2003 there
was little to no premium associated with immediate delivery of copper. Then there was a significant
premium and some rather wild changes.
The simple explanations for the increase in premium are the increase in demand for copper in China
and India and the supply interruptions caused by strikes at copper mines in Chile, Peru and Mexico.
The demand and the strikes put pressure on copper supplies so that manufacturers pay more to assure
delivery now rather than later when the price may increase.
However, the wild changes in the premium suggest to some that the market is being influenced by
speculators who have the ability to enter and exit the copper market depending on their investmentgoals. Their trades typically involve large volumes of copper which have an influence on spot price.
(Note that the copper likely does not move to or from the warehouse – it is merely tagged as sold.)
Essentially the copper market is becoming a financial market, much like a stock exchange, which
introduces an unknown element to the market.
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Canadian Mineral Production
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
4
6
8
10
12
14
16
18
20
22
24
2628
Source: Natural Resources Canada
V a l u e ( C $ b i l l i o n )
Metallic
NonMetallic
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Notes: Canadian Mineral Production
The top ten industrial minerals ranked by value are shown in the following table:
Source: http://mmsd.mms.nrcan.gc.ca/stat-stat/prod-prod/ann-ann-eng.aspx
2008 Industrial mineral production ranked by value (preliminary)
Value Production Unit value
C$(thousands) kilotonnes $/t
1 Potash (K2O) 8,243,156 10,455 788.44
2 Diamonds 2,403,554 14,803 162.37 $/carat
3 Sulphur, elemental 2,388,537 7,971 299.65
4 Cement 1,792,110 14,028 127.75
5 Sand and gravel 1,496,100 239,646 6.24
6 Stone 1,373,088 145,825 9.42
7 Salt 537,780 14,168 37.96
8 Lime 273,576 2,069 132.23
9 Peat 215,636 1,151 187.35
10 Sulphur, in smelter gas 192,865 704 273.96
Ra nk Product
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The Project Cash Flow Machine
Mining Project
Revenue
Operating
Costs
K Loan
A = Principal +
Interest
Capital costs
K = E + LCash at time t:
f = -K (construction)
= R-C-T-A-Q (operation)
Royalties Q Taxes = (R-C-D-I-Q)
D = Depreciation
I = Interest
= tax rate
Equity
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Notes: The Project Cash Flow Machine
Equity comes from the owner of the mining project who may have the cash available or could issue
shares to obtain the cash. The loan may come directly from a commercial bank or the company may
issue bonds to obtain cash.
During the construction period a total K is spent to build the project. Alternatively K may be the cost
to buy the project from another company.
Assets such as equipment and buildings are depreciated by an amount D during the course of the
operation. Various depreciation schemes are used. Canada uses the double declining balance method
for mine equipment. The depreciation is tax-deductible.
The mine reserves are an asset but are usually depreciated in a different way depending on the
jurisdiction.
In general, a loan is paid off by means of a payment to principal and interest: A = P + I. The interest
payment is tax-deductible.
Royalties paid to private party are tax-deductible. In Canada, royalties are paid to the province inwhich the mine is located, but these are accounted for as a deduction from federal taxes.
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Typical Mining Project Cash Flow
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-60
-40
-20
0
20
C a s h f l o w f ( $ M )
End of Year
C o n s t r u c t i o n Operation
C l o s u r e
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Notes: Typical Mining Project Cash Flow
Cash flows are assumed to occur at the end of a period and are discounted to the beginning of the
first time period, t = 0. During construction, cash flow is negative. The cash flows f are
estimated for each year j of the project, N j 1 . The net present value of the cash flows is
given by
1 1
during construction
during operation
N j
j j
j j
j j j j j
f NP V
r
f K
R C T A Q
where r is the discount rate equal to the cost of capital for the owner of the project.
One goal of mine design is to establish a mining schedule that will lead to particular behavior of
the cash flows during operation, despite small price fluctuations. Examples include: large cash
flows at the beginning of the operation or minimal fluctuations of cash flow during later years.
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But all prices go up
1970 1975 1980 1985 1990 1995 2000 2005 2010
20
40
60
80
100
120
140
160
180
200
P r o d u c e r p r i c e i n d e x
Metals and metal products
Construction machinery and equipment
Source: www.bls.gov
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Cutoff Grade
Questions:
Effect of price and recovery variations
What costs should be included?
Reserves must be extracted economically:
Price Grade Recovery > Total Costs
For equality
Total costs usually include all the costs of mining, processing, and overheads. What
overheads and how to attribute them is an interesting question.
Total costsCutoff grade =Price Recovery
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PricewaterhouseCoopers
W. Scott Dunbar
The things accountants do (in their offices)
Inventory of metal available under leach
Stripping costs
Rehabilitation and reclamation costs
Assessment of asset impairment
Each involve uncertaintyEach depend on an estimate of available ore
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PricewaterhouseCoopers
W. Scott Dunbar
How much metal inventory is in this leach pad?
A lot, but it cannot all be recovered
Recovery is uncertain and varies over the life of the pile
Typical recoveries: 40-70% See notes for example
less consolidated
more flow
more consolidated
less flow
Note difference in color at
top of pad
mineral particle
Leach pad, Anchor Hill pit, South Dakota
Photo courtesy Robertson Geoconsultants
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: How much metal inventory is in this leach pad?
Suppose Bagdad piled some oxide ore into a 200m 200m pile and suppose the pile was 10 m high.
Then there are 400,000 m3 of ore in the pile. The density of the ore might be 2.0 tonnes/m 3. That
means there are 800,000 tonnes of ore in the pile. In 2005 the oxide ore grade was approximately 0.1%
Cu [1] so that there are about 800 tonnes of copper in the pile. That’s 800,000 kg or about 1.76 million
pounds.
However, recovery of copper in a leach pad is typically 40-70%. Leach pad recovery (over multiple leach
cycles) at Bagdad averaged 43.3% in 2005 [2]. Thus for the hypothetical leach pad above, the expected
amount of recovered copper would be 800,0000.433 = 346,400 kg or 763,681 lb.
Recoveries from gold leach pads are similar. The reason for the low recoveries is that not all of the
leaching solution (acid in the case of copper, cyanide in the case of gold) can flow past the mineral
particles. Flow paths to the particles may be blocked. In addition, as more ore is placed on top of the
pad, the particles in the underlying ore become consolidated (closer together) and can block the flow
of the leaching solution. For this reason, a layer of ore is placed on top of a pad only after the recovery
from the lower layers begins to decrease.
[1] Phelps Dodge 2005 Annual Report, p. 9
[2] Phelps Dodge 2005 Annual Report, p. 16
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PricewaterhouseCoopers
W. Scott Dunbar
Is it development or is it production?
Development is depreciable, production is an expense, but …
Waste removal (stripping) occurs during development and production stages.
Is waste removal developing the future mine or is it part of production?
When does development end and the full production phase begin?
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PricewaterhouseCoopers
W. Scott Dunbar
Stripping Costs
During production, should they be capitalized or expensed?
Strip Ratio (= Waste/Ore) varies during mine life
amount of ore produced
changes
If expensed, production costs per
ton of ore vary over life of mine
If capitalized, amortization
schedule changes over life of mine0 5 10 15 20 25 30
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
S t r i p r a t i o
Year of production
Life of Mine strip ratio = 1.6
Seabridge Gold Inc
Kerr-Sulphurets-Mitchell Mine, BC
Source: Preliminary Economic Assessment, 2009
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: Stripping CostsThe numbers shown on the graph are illustrative. The point is that the strip ratio may be high after production starts
and then decrease to a “life of mine” value.
Following commencement of commercial production, stripping costs are not generally capitalized, but are included as
a cost of production as incurred. However, Canadian GAAP permits capitalization of stripping activity, during
production, if the stripping allows access to additional ore (a betterment of an asset). Capitalized stripping costs are
amortized on a units-of-production basis over value of the additional ore (actually the proven and probable reserves –
see later). Under US GAAP, all stripping costs are treated as variable production costs of current production.
A pushback of the west wall of the Valley pit at Highland Valley, BC will provide access to additional ore. The pushback
could not have been done until some geotechnical issues had been resolved and is therefore considered abetterment. The waste stripping associated with the pushback will be capitalized and amortized based on the
estimated value of the additional ore. However, the amounts of waste and ore are subject to a number of
uncertainties and could change over time. (This manifests as changes in the strip ratio or the cutoff grade.) If the
amount and/or value of ore changes, the amortization schedule will have to be changed.
The cost of the north wall pushback at Bagdad is treated as a cost of current production and is not related to the ore
underlying the pushback. The cost per ton of ore will therefore change as the current strip ratio changes. In effect,
Bagdad is buying an option on the underlying ore, the value of which is uncertain.
See
EITF Issue No. 04-6 available at www.fasb.org/eitf/0406WGR1S2.pdf (p. 13)
CICA EIC-160, dated March 2006 (was available somewhere on CICA web site)
Teck Cominco Annual Report 2007, p. 112 (available at www.teckcominco.com)
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PricewaterhouseCoopers
W. Scott Dunbar
Is this ore or waste?
Bagdad Pit 2005 low grade waste pile
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PricewaterhouseCoopers
W. Scott Dunbar
Rehabilitation and Closure (R&C) Costs
On the balance sheet in the year of recognition:
Liability: PV(R&C costs)
Annually on the income statement:
Depreciation expense: PV(R&C costs) Mine Life
Several uncertainties in estimation of R&C costs
PV(R&C costs) a function of mine life. Mine life depends on oreavailable.
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: Rehabilitation and Closure (R&C) Costs
The reclamation and closure costs might include:
Removal of plant and other facilities
Restoration, rehabilitation and other environmental liabilities
There are several uncertainties in the estimation of these costs:
Length of time required to treat acid drainage or mine waste water
Whether reclamation/rehabilitation methods will be effective
Changes to closure costs as a result of changes to an operation
Mine life depends on available ore which is also uncertain and may vary over time.
The relevant accounting standards are:
IAS 37 (1999): Provisions, Contingent Liabilities, and Contingent Assets (similar to UK standard FRS12)
SFAS 143 (2001): Accounting for Asset Retirement Obligations
CICA Handbook Section 3110 (2003): Asset Retirement Obligations
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PricewaterhouseCoopers
W. Scott Dunbar
Asset Impairment
For a mine, this inequality may be affected by:
changes in future costs
• difficult or unstable ground conditions
• damage such as flooding, tailings dam failure, etc.
• difficulties or delays with development or expansion
changes in estimated output changes in depreciation rate
• decreases in grade or amount of ore
• low metal prices what was ore becomes rock
A producing asset is impaired if
Future cash inflows < Undepreciated value of asset
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: Asset Impairment
Considerable judgment and technical input often required to estimate the projected costs and the oreavailable. (reserves) Only proven and probable reserves (see later) are used in calculating depreciation
expense on a unit-of-production basis to measure impairments.
The undepreciated value is computed by subtracting the sum of annual depreciation expenses from
the original cost of the asset
Depreciation rate = (Acquisition cost – Residual value) Estimated production
Depreciation expense = Depreciation rate Units produced
Undepreciated value = Acquisition cost – Depreciation expense
The estimated production of a mine depends on the mine life which, in turn, depends on the estimates
of resources/reserves (higher reserves, longer life). This affects estimates of the depreciation rate.
The relevant standards are:
IAS 36 (1998, revised March 2004): Impairment of AssetsFASB 144 (2001): Accounting for the Impairment or Disposal of Long-Lived Assets
CICA Handbook, Section 3063 (2003): Impairment of Long-lived Assets
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PricewaterhouseCoopers
W. Scott Dunbar
How much is in the ground?
Resources - commercial extraction is potentially feasible
Reserves - can be extracted economically and legally
• reported in annual financial reports
Classifications of known mineral deposits:
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PricewaterhouseCoopers
W. Scott Dunbar
In 1989 the Australasian Joint Ore Reserves Committee (JORC) issued the Code for Reporting of Mineral Resources
and Ore Reserves following some notable “misstatements” in mineral property valuation reports in Australia. The
code can be downloaded from www.jorc.org. Various other codes based on JORC have since been developed and are
used by regulatory and legal authorities as standards for methods of reserve and resource estimation:
VALMIN: (1995, revised 2005), Australian Institute of Mining and Metallurgy (AusIMM). The VALMIN Code is
obligatory for reports relating to mineral and petroleum assets and is supported by other entities, including the
Australian Stock Exchange, the Australian Securities and Investment Commission, the Institute of Chartered
Accountants in Australia, and the Australian Institute of Company Directors. Download fromhttp://www.mica.org.au/ Click on codes link.
National Instrument 43-101: (Dec 30, 2005) NI 43-101 was formulated by the Canadian Securities Administrators
(CSA), an umbrella association of Provincial Securities Commissions across Canada. Download from
http://www.ccpg.ca/guidelines/index.html
CIMVAL: (February 2003) Standards and Guidelines for Valuation of Mineral Properties was formulated by a
special committee of the Canadian Institute of Mining and Metallurgy. This supplements NI 43-101. Download
from www.cim.org/committees/CIMVal_Final_standards.pdf
US Securities & Exchange Commission, 2007. Industry Guides, “Industry Guide 7”, available at
http://www.sec.gov/about/forms/industryguides.pdf , pp 34-37.
Notes: How much is in the ground?
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PricewaterhouseCoopers
W. Scott Dunbar
Resources to Reserves
Exploration
results
Mineral
Resources
Mineral
Reserves
Inferred
Indicated
Measured
Increasing level
of geological
knowledge and
confidence
Consideration of mining, metallurgical, economic,
marketing, legal, environmental, social and
government factors
(the “modifying factors")
Probable
Proven
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: Resources to Reserves
One way to describe the difference between resources and reserves is
Resources are reported as in situ estimates of mineralization (e.g., “The grade in this drill core is x%.”)
Reserves are reported as masses with a particular grade distribution that can be mined (e.g., “There are X
tons of reserves with an average grade of y%”)
Note the need for geological knowledge to go from indicated to measured resources or from probable to proven
reserves. Several modifying factors cause resources to become reserves. Reserves cannot be estimated from
inferred resources.
Measured resources often become probable reserves even though geological knowledge does not decrease. For
example, the drill hole spacing may not be sufficient to classify the reserves as proven, but a few modifying factorsmay be established or assumed. For this reason, some think that probable reserves should be moved down to
become aligned with measured resources.
Estimation of reserves involves considerable technical difficulties and uncertainty. Among the considerations are:
the distribution of grade in the resource
the portion of the mineral resource that can be extracted when allowance is made for dilution and recovery
metal prices
production costschanges in technology
Information concerning the first two items tends to increase as the mine is developed. The last three items can
change during the life of the mine and it is not uncommon to see reserve estimates change as a result.
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W. Scott Dunbar
The call of the reserves
0 500 1000 1500 2000 2500 3000 3500
0.2
0.40.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
GrasbergNorthparkes
Palabora
Andina
El Teniente
Codelco Norte
Highland Valley
Antamina
Minto
BagdadCerro VerdeBingham CanyonMorenci
Resolution
Galore Creek
Oyu Tolgoi
New Afton
Fungurume
LegendProven + Probable Reserves
Measured + Indicated Resources
A v e r a g e C o p p e r G
r a d e ( % )
Reserves or Resources (Mt)
All near endof mine life
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: The call of the reserves
To obtain reserves mining companies must take on some significant unsystematic risks (risks notrelated to market changes) associated with exploration, project feasibility and constructability of new
projects in places where there is little geological knowledge or infrastructure. One way to diversify
these risks and still attract investment is to have a steady flow of cash from existing operations, some
of which can be used to provide opportunities for development of new projects. If the unsystematic
risks cause the new projects to fail, the existing operations provide a “safety net”.
The large grades and/or resources of some copper deposits shown here attract large mining
companies, but there are significant unsystematic risks:
•Freeport McMoran: Fungurume in the Congo. Political risks as well as social and health issues
•Rio Tinto, Ivanhoe Mines: Oyu Tolgoi in Mongolia. No infrastructure and uncertainty about what
royalties the Mongolian government will charge
•Rio Tinto: Resolution project east of Phoenix. Orebody at a depth of 2 km in rock where the
temperatures are 80C. Feasibility of any mining method under these conditions is uncertain.
•Teck Cominco, Novagold: Galore Creek in northwestern BC. No roads, no power and significant watermanagement issues at the proposed mine.
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W. Scott Dunbar
Which is a resource and which is a reserve?
Thunderbox gold projectLionore Mining International
2000 Annual Report
www.lionore.com
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: Which is a resource and which is a reserve?
On the left is a measured resource because the outline of the orebody has been determined by estimation from
measurements (assays) in boreholes. On the right is an open pit mine design. If the design is feasible, then at least a
few of the modifying factors have been taken into account and the orebody is a reserve. Most likely it is a probable
reserve since there may not be enough drillhole data to prove that the orebody is as shown. A “bankable” feasibility
study would have to prove the reserves by means of further drilling on a finer grid (“infill drilling”)
The transition from probable to proven reserves depends on geological information obtained from drillholes. At
Bagdad Phelps Dodge uses different drillhole spacings to establish estimates of probable and proven reserves of
concentrator ore. For probable reserves, it is 440 ft whereas for proven reserves it is 190 ft. (Phelps Dodge 2005
Annual Report, p. 16) Different spacings are used for leach ore and the spacings change depending on the
characteristics of the orebody.
Quote from Teck Cominco 2006 Annual Report, p. 110 in reference to Highland Valley Copper:
Reserves have been drill defined at 60 to 115 metre [197-377 ft] centres and resources at 125 metre [410 ft]
centres.
Note that at Highland Valley, all reserves are proven and all resources are indicated.
For proven reserves the drill spacing to define reserves at Highland Valley is greater than that at Bagdad. No drill
spacing is specified to define reserves – it depends partly on the geological environment and partly on the physical
conditions at a mine.
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From paper to pit – Thunderbox pit in 2006
www.lionore.com
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PricewaterhouseCoopers
W. Scott Dunbar
How to estimate mineral resources
Map and sample deposit (e.g., drillholes)
Appropriate estimation technique determined by geologist
Geological interpretation done by geologist who
carries out the estimationdecides whether resource is inferred, indicated, or measured
Reporting standards (discussed later) do not specify the estimation
method
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PricewaterhouseCoopers
W. Scott Dunbar
Resource estimation – two examples
Possible
underestimation
Possible
overestimation
Drillholes
Assumecontinuity?
ignored
ignored
ignored
ignored
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W. Scott Dunbar
Minto Project,
Yukon Territories
Capstone Mining Corporation
Chalcopyrite and bornite
mineralization
9 Mt ore with average grades:
1.78% copper
0.62 g/t gold
7.3 g/t silver
7 year mine life
Source: Technical Report (NI 43-101) for the Minto Project, Hatch
Associates, August 2006
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PricewaterhouseCoopers
W. Scott Dunbar
Minto Project: N-S Geological Cross-section
Continuity is assumed
between drillholes
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PricewaterhouseCoopers
W. Scott Dunbar
Minto Project
Resource Estimate
From inferred to indicated to
measured
Shape of resource dictated
by geological cross-section
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: Minto Project Resource Estimate
The resource estimate is classified into inferred, indicated and measured. The measured resource is
the area where the most drill hole data are available while the inferred and indicated resources are in
areas with fewer drill holes.
The extent and orientation of the inferred and indicated resources are suggested by the geological
cross-section which shows a northerly-southerly orientation of the mineralization. Thus, for example,
the inferred and indicated resources circled with the dashed red line is oriented as shown even though
there is only one drill hole at the center of the indicated resource. Note that no continuity is assumedbetween these resources and the other resources to the east.
Source: Technical Report (NI 43-101) for the Minto Project, Hatch Associates, August 2006
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PricewaterhouseCoopers
W. Scott Dunbar
National Instrument 43-101 (NI 43-101)
Rules developed by Canadian Securities Administrators (CSA) togovern how issuers of shares in a mining company disclose
scientific and technical information about mineral projects to the
public
Applies to:
oral statements
written documents (eg feasibility studies)
websites
Requires that all disclosure be supervised by or advised by a
“qualified person” (QP)
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: National Instrument 43-101 (NI 43-101)
Copies of NI 43-101 can be found at
http://www.ccpg.ca/profprac/index.php?lang=en&subpg=natguidelines
A “qualified person” is responsible for the content of any technical report or disclosure of scientific
information concerning mineral projects. The QP must be independent of the owner of the mineral
project and must have demonstrable experience and competence in the preparation or evaluation of
information and data related to mineral projects.
A qualified person is an individual who
a) is an engineer or geoscientist with at least five years of experience in mineral exploration, mine
development or operation or mineral project assessment, or any combination of these;
b) has experience relevant to the subject matter of the mineral project and the technical report; and
c) is in good standing with a professional association and, in the case of a foreign association listed in
Appendix A, has the corresponding designation in Appendix A
See Appendix A in NI 43-101 for foreign designations recognized.
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PricewaterhouseCoopers
W. Scott Dunbar
Feasibility Studies
Comprehensive documents usually carried out by consulting
engineering companies
Cost: $100k to >$1M depending on level of detail
NI 43-101 defines two types:
Pre-feasibility study – makes reasonable assumptions about
relevant factors
Feasibility study – all factors considered in sufficient detail to
allow a decision on financing project
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PricewaterhouseCoopers
W. Scott Dunbar
Notes: Feasibility Studies
Pre-feasibility study (aka “Preliminary Feasibility Study”)
a comprehensive study of the viability of a mineral project that has advanced to a stage where the
mining method, in the case of underground mining, or the pit configuration, in the case of an open pit,
has been established and an effective method of mineral processing has been determined, and
includes a financial analysis based on reasonable assumptions of technical, engineering, legal,
operating, economic, social, and environmental factors and the evaluation of other relevant factors
which are sufficient for a qualified person, acting reasonably, to determine if all or part of the mineral
resource may be classified as a mineral reserve
Feasibility study
a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating,
economic, social, environmental and other relevant factors are considered in sufficient detail that it
could reasonably serve as the basis for a final decision by a financial institution to finance the
development of the deposit for mineral production
Note: financial institution or a mining company. Sometimes the adjective “bankable” is used but thiscan only be decided by a bank or lending institution.
See www.sedar.com to download copies of feasibility studies or technical reports from public
companies.
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The need for reporting standards
Actual conflicts and information withheld:
Direct conflict with NI 43-101 or similar:
• Significant parts of orebody are difficult to process – poor recovery
• Large water-bearing fault intersects orebody
Not in the spirit of NI 43-101 or simply unethical
• Local groups do not want mine
• Legislation may change economic viability
• 7% royalty paid to numbered company owned by CEO and threedirectors on board of six
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Palabora, South Africa – open pit to underground
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After startup of underground operation –
a 100 Mt slope failure
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Notes: 100 Mt slope failure
This slide occurred after underground operations began at Palabora. The slide extended some distance
from the pit rim. Movement and cracking occurred within 300 m from the pit rim and affected or
damaged the following facilities:
haul road and access road
tailings lines
water supply pipes and tans
water supply dam
railway line
44 KV power line
The slide is composed of waste material and some of it entered the underground and diluted the ore.
The mine nearly went out of business as a result of the loss of ore.
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But more importantly …
The slide caused a loss of ore reserves in the undergroundoperation. The slide might have been predicted had there been
sufficient geotechnical information.
Grade and tonnage of reserves and resources can be defined with
sufficient drillhole data. But reserves imply mining and othertechnical factors have been considered. This raises a question:
Can reserves be defined without geotechnical information?
Likely not, but no standard is available yet.
The Large Open Pit Project (http://www.lop.csiro.au/) has developed guidelines for dealing with uncertainty in
geotechnical data. It may take some time for these to be incorporated into a standard having the same authority as
NI 43-101.
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END OF PART E
© 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to
PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member
firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity.