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> M i n e r a l P r o c e s s i n g > E n g i n e e r i n g D e s i g n > T r a i n i n g > S p e c i a l i s t S e r v i c e s > RESOURCE PROJECTS > TECHNOLOGY > INTEGRATED SERVICES > Mineral Processing > Engineering Design > Training > Specialist Services
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COM 2013
Independent Mineral Processing Project Technical
Due Diligence
Presented by Damian Connelly,
Mineral Engineering Technical Services
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> DISCLAIMER With respect to all the information contained herein, neither Mineral Engineering Technical Services Pty
Ltd, nor any officer, servant, employee, agent or consultant thereof make any representations or give
any warranties, expressed or implied, as to the accuracy, reliability or completeness of the information
contained herein, including but not limited to opinions, information or advice which may be provided to
users of the document. No responsibility is accepted to users of this document for any consequence of
relying on the contents hereof.
> COPYRIGHT © Passing of this document to a third party, duplication or re-use of this document, in whole or part,
electronically or otherwise, is not permitted without the expressed written consent of Mineral
Engineering Technical Services Pty Ltd.
> ACKNOWLEDGEMENTS This document is a dynamic record of the knowledge and experience of personnel at Mineral
Engineering Technical Services. As such it has been built upon over the years and is a collaborative
effort by all those involved. We are thankful for the material supplied by and referenced from various
equipment manufacturers, vendors, industry research and project partners.
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Key Attributes
> Working globally since 1988
> Dynamic and innovative niche consultancy
> Dedicated team providing customised service
> Specialist in mineral processing & engineering projects
> Unique solution finder
Pragmatic, efficient, complete engineering through
quality, personalised & exceptional service delivery
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Introduction to Due Diligence
> Independent technical due diligence is a part of the accountability
process
> Due diligence of mining operations and projects are nearly a
mandatory requirement for companies seeking external finance,
development, acquisitions, mergers etc.
> The due diligence examines the underlying robustness of the company
as a going concern and the viability of any expansion plans
> Establish the underlying value of the company based on mine life as
supported by the mineral reserves
> Sign off by the expert as a business opportunity with no fatal flaws
> RESOURCE PROJECTS > TECHNOLOGY > INTEGRATED SERVICES > Mineral Processing > Engineering Design > Training > Specialist Services
Introduction to Due Diligence
> Independent technical due diligence is a part of the accountability
process
> Due diligence of mining operations and projects are nearly a
mandatory requirement for companies seeking external finance,
development, acquisitions, mergers etc.
> The due diligence examines the underlying robustness of the company
as a going concern and the viability of any expansion plans
> Establish the underlying value of the company based on mine life as
supported by the mineral reserves
> Sign off by the expert as a business opportunity with no fatal flaws
> RESOURCE PROJECTS > TECHNOLOGY > INTEGRATED SERVICES > Mineral Processing > Engineering Design > Training > Specialist Services
Introduction
> Types of financial deals for which
due diligences are required
– Debt finance from development and
commercial banks
– Stock exchange listing or share
placement
– Sale or purchase of equity holding
by publicly quoted or state company
– Privatisation sale by state company
– Insurance policy and premium
> Stages of project or operation at
which an due diligence may be
required
– Expansion of existing operation
– Start up of new operation
– Proposed feasibility study
– Rehabilitation programme
– Care and maintenance programme
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Introduction to Due Diligence
> Underlying asset is the mineral reserve
> Reserves must be defined in familiar manner
to the investor-JORC
> Project and operations are judged by
internationally applied criteria
> The independent consultant represents the
parties in a finance deal who cannot in
practice carry out their own due diligence
> Independence is critical
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Key Aspects
> Due Diligence consultant must be independent
> Must be carried out by experts of demonstrable competence and
experience
> A full due diligence will necessitate a team of complementary experts
> Value of the project is dependent on the reserves which must be
defined in a clearly understood and universally accepted method
> Result of the due diligence will be a valuation of the property or project
and assessment of any liabilities
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Due Diligence Components
> A due diligence involves a review of documentation and data
> Each technical aspect has its own specific critical areas
> The due diligence or must have free access to documentation and
operations
> Reserves are considered the prime asset and underlying security
> A NPV is estimated for the life of the reserves in most cases
> Depth of due diligence is similar for all end users
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Due Diligence Components
> Location and access
> Geology, mineral resources and reserves
> Beneficiation, metallurgical methods and production levels
> Health and safety
> Operating costs
> Revenues and cash flows
> Ownership and mining leases
> Mining methods and production levels
> Infrastructure, power, water supplies, etc.
> Capital costs
> Sales contracts, smelter agreements, etc.
> Net present value (NPV)
Main technical & related aspects considered in a due
diligence
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Due Diligence Documentation
> Documentation and data has to be prepared and assembled prior to
due diligence
> Supervised Data Rooms are common. Sometimes with strict rules.
> Technical due diligence will assist by providing a ‘wish list’ of
documentation expected
> Key documentation should be assembled in one place
> The planned use of the funds to expand and improve profitability must
also be due diligence
> Total Confidentiality is a given - NDA
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Documentation
> Details of location, access & climate
> Geological studies, exploration results, core recoveries, assay methods, etc.
> Mineral resource/reserve estimations, parameters, methodology, data, sections and ore model
> Mine plans showing planned production sequence, production statistics and forecasts
> Mineralogical information, details of metallurgical sample collection, testwork & results
> Equipment list for mine, concentrator and other facilities
> Details of power and water supply arrangements and contracts
> Waste disposal for rock and tailings
> Employee numbers, classifications, wages, overheads and IR
> Production and operating information, future production and business plan
> Financial information
Examples of documentation required for Due Diligence
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Site Visits
> Prime requirement of any due diligence is to visit all
key sites. Considered mandatory. Photos don’t cut it.
> Collection of new data isn’t essential
> Mineralisation will be examined- core farm
> Emphasis should be made to sample collection,
preparation and analysis procedures. QA/QC
> General requirement that site visit be made within 6
months of the date of the report or since the last major
development on site
> Revisiting may be required due to
delays or developments on site
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Project History
> Due diligence must review history of the project
> Provide annual reports to support recent history and project reports
> Information for new projects or planned expansions
> False starts, technical issues, changes of ownership, new technology
> Not usually a difficult task
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Location, Access & Climate
> Report requires information on the site location, access
and climate conditions
> Infrastructure, ports, power, water, rail, roads near by
> Good quality maps are required for location and access
> Climatic extremes of temperature and
rainfall may affect the number of
operational months
> Impact on construction schedule
> Look at climate extremes not averages
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Mining and Exploration Leases
> Examine the tenements and other permit documents. In good
standing?
> Key factors are that license and leases cover the minerals and area
concerned, have adequate life or can be renewed and have no
significant constraining clauses
> State owned companies may have additional protection of title
compared to private companies
> Good quality maps are required with adequate information on scale
and co-ordinates
> Bonds or EPA requirements
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Project Geology
> Review of geological reports, plans, cross
sections, computer models and the
examination of exposures and any cores
> Confirm the validity of the interpretation of the genesis
and geological controls on the mineralisation
> Issues include
– Distribution and concentration of particular minerals
– Amenability to mineral processing and choice of
metallurgical processes
– Ground conditions effect on mining methods, recoveries
and dilution
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Resources and Reserves Estimation
> Mineral resource is defined as an identified in situ mineral occurrence
from which valuable mineral may be recovered
– 3 categories of increasing accuracy; inferred to indicated to measured
> Mineral/ore Reserves is the part of the mineral resource which could
be mined and from which valuable minerals could be recovered
– 2 categories of increasing accuracy; probable to proved
> Reserves are derived from the resources by application of factors for
economics, mining, metallurgy, marketing, legal, social issues,
environmental controls and government acts
> Mineral reserves form a key guideline for adjudging the eligibility of a
company in raising certain types of finance
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Resources and Reserves Estimation
> Confirmation of the mineral reserve is a pivotal part of due diligence
> Sampling collection methods, accuracy of surveying, sample preparation and analysis procedures
> Spacing of sample sites to give a high level of correlation and interpretation between sites
> Appropriateness of the tonnage and grade estimates
> Derive the reserves from the resources require due diligence of the engineering and financial factors
> Independent check estimation of total reserves
> For an operating mine reconciliation between historic forecast production
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Mining
> Overlap between due diligence of the geology,
mineral resources and the mining of the
deposit
> Shape and size of the ore body, ground
conditions and hydrogeology all affect the type
of mining methods used
> Due diligence will concentrate application of
mining methods in terms of equipment
selection, grade control , mining dilutions,
recoveries, production and safety record
> Ore schedule to process plant
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Mining Assessment Methods
> A range of methods are available to any mining operation
> Some of the more important methods are: – Open cut/underground
– Mine fill
– Equipment
– Contract/Owner
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Beneficiation & Metallurgy
> Samples used to confirm the metallurgical process must be representative
> Need careful selection of drill samples, oxidation/refrigeration?
> Ore may be selected from near surface and not have the same properties of
ore at greater depth
> Historical data of production can provide longer term information on the
performance of the process plant
> Need to ensure that the products meet downstream specifications and have no
major problems such as penalty elements
> Process point is generally the point at which there is the most environmental
impact
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Types of Beneficiation Processes
1. Crushing and Scrubbing
2. Screening
3. Classification
4. D.M.S.
5. Flotation
6. Gravity
7. Magnetic Separation
8. Leaching
9. Sorting
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Project Infrastructure
> Level of infrastructure will depend heavily on the size of
the operation
> Includes: workshops, stores, offices, roads, tailings
facility, power lines or stations, water lines, railways,
ports, ships, housing and other social services
> Due diligence confined themselves to the technical
infrastructure
> Supply agreements and consents of water and power
are reviewed
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Environmental Issues
> Expectation that project meets international environmental standards
> Key operating issues:
– Type and control of emissions, disposal of waste rock, disposal of process
tailings and the adequacy of associated consents, monitoring, compliance
and future capabilities
> Key rehabilitation issues:
– Revegetation performance and requirements, reclamation liabilities and mine
closure plans
> Issues best handled by full environmental management plan based on
standards and having ISO 9001 certification
> Permitting & rehabilitation
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Capital Costs (CAPEX)
> Aim of raising finance is to meet capital requirements to expand or
rehabilitate an existing mine or start a new mine
> Capital costs must be supported by feasibility level study
documentation, pro-forma invoices of major equipment and
construction costs
> Examination of the adequacy of provisions for working capital,
contingency expenditure and replacement capital
> Clear statement of depreciation policy and capital allowances is
required
> If the capital costs are considered inadequate then additional
contingencies may be recommended
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Operating Costs (OPEX)
> Injection of capital is expected to increase production levels, improve efficiency
and reduce unit cost
> Detailed review of how estimates of future capital costs were derived
> Should be supported by feasibility level documentation
> Important issues are the distribution of costs between fuel, wages, spares and
consumables
> Details of recent annual inflation and exchange rates is required, as is expected
future rises in prices of consumables and wages above inflation
> Details of royalties are also required as they are normally considered an operating
expense rather than a tax
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Unit Costs/Benchmark
35%
6% 10% 10%
37%
2%
Unit Costs of Production %
SiteOperationRoyalties
Treatment
Refining
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Project Revenues
> Metal price assumed?- basis
> Ability to repay loan capital or maintaining/increasing the value of
equity shares is crucial
> Depends on secure market and a good margin between costs and
sales price
> In order to forecast revenues the sales price of the product is chosen
> Important to demonstrate the market acceptance of their product by
way of sales agreements
> It is important that the operation can remain viable even at low prices
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Cashflows & NPV
> CAPEX, OPEX and revenues are used to construct a cashflow model
> Cashflow can be pre-tax or include tax, depending on the purpose of
the due diligence
> Due diligence role to produce a transparent and simple cashflow and
net present value
> Level of certainty of different classes of mineral reserves has to be
accounted for
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Financial Modeling Guidelines
> Capital Expenditures
> Demolition / Closure Costs
> Costs And Prices
> Financial Leverage
> Operating Costs
> Residual Values
> Revenue Forecasting
> Stand Alone Basis
> Taxes
> Time Horizon
• Check ramp up, assumptions, realistic?
• Sensitivity- OPEX, metal price, recovery
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Key Performance Indicator
A critical aspect of any due diligence study is to derive the Key
Performance Indicators (KPI’s) for the project.
Examples of typical KPI's are:
Capital Cost per annual pound
or tonne of production
Operating Cost per annual
pound of production.
These and other KPI's should
be benchmarked to other
projects, including appropriate
existing project owners projects.
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Benchmarking
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Risk Management Process
Identify the
Hazards
Assess the
Risks
Decide to
Mitigate
Take Action
Decide to
Eliminate
Decide to
Tolerate
Monitor Performance
Monitor for
Change
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Risk Table
Consequence
Likelihood
Catastrophic Major Moderate Minor Insignificant
Certain High High High Significant Significant
Likely High High High Significant Moderate
Moderate High High Significant Moderate Low
Unlikely High Significant Moderate Low Low
Rare Significant Significant Moderate Low Low
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Project Risks
Threats
1. Mining operating costs
2. Mining productivity
- wet weather, equipment, people
3. Throughput
- links to geology and the mine
schedule
- stockpiles, mill spare capacity
4. Operatorship
- Ramp up, plant operations
- Metallurgical skills, plant
availability
5. Implementation plan
(Operations/EPCM
/Labour/Logistics)
Opportunities
1. Pit wall slopes
2. Pit depth criteria
3. Re-optimise pit with gold, silver,
and inferred
4. Drop copper rate recovery and
increase throughput
5. Increase metal recovery– circuit
change
6. Optimise CAPEX in mill & float
circuits
7. Conveyor vs. tails pipe lines vs.
haul road
8. Trade off study potentials
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Threats
6. CAPEX’s – Basis of estimates of bulk materials & construction (Scope for WBS)
7. Construction labour – numbers & productivity
8. Schedule
9. Risk assessments & mitigation
10. Integration gaps
Opportunities
9. Concentrates transport
10. Tails thickening
Project Risks Cont.
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Scope
Study
Define
What it
might be
Prefeasibility
Study
Options
Best Value
What it could be
Final
Study
Validate
One Case
What it will be
Project Development
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Management, Staffing & Training
> Review the ability of management and staff to carry out the planned
production or expansion
> Key factors are experience, competency, drive of management, skill
level and experience of the workforce
> May also need rationalisation of staffing levels
> New equipment or techniques may require fewer operators
> Training plans
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Stock Exchange Requirements
> There are minimum requirements set by stock exchanges that must be
met to protect investors
> Requirements vary across countries, i.e.: to float on the LSE a
company needs proven reserves of at least 2 years production, to float
on the TSE at least 3 years production is required. ASX minimum 5
years experience. Longer experience generally the norm.
> Most mining companies are expected to have reserves well above the
minimums
> Reserves establish the underlying value of the company
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Valmin Code & NI43101
> The VALMIN Code provides a set of fundamental principles and
supporting recommendations regarding good professional practice
> Prepared by a joint committee of The AusIMM, AIG and MICA with
participation from the ASIC, ASX, MCA, PESA, SIA and
representatives of the Australian finance sector
> NI 43101 used in Canada.
> Resultant reports are reliable, thorough, understandable and include
all the material information required by investors and their advisors.
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Project Sanity Check
> Is the project prudent?
> Is the project reasonable?
> Is the project achievable?
> Are there any technical GAPS?
> Any disconnects between Geology, Mining and Metallurgy?-working in
technical towers
> Any Fatal Flaws?
> Sensitivity analysis
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Basis For Successful Projects
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Due Diligence Conclusion
> Most if not all projects that seek to raise capital will require an
independent technical due diligence
> Due diligences should be seen not only as a mandatory requirement
but rather as an activity which can benefit the company
> Due diligences assist in making a clear presentation to potential
investors and lenders- Responsibility & Integrity
> Reduce risk of prematurely seeking outside finance and exposing the
project to technical questions which can delay or jeopardise the raising
of finance
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