Jaco van der Merwe & Sarah Dyke Palisade Risk …...• This not meant to be a highly technical...

Mining RehabilitationInvesting Against Uncertainty

Jaco van der Merwe & Sarah Dyke

Palisade Risk Conference 2015, Johannesburg

Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited1

Introduction 3

Aim of this presentation 4

Disclaimer 6

Mining Rehab Overview 8

Case Study 11

Conclusion 26

Contents

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

Actuarial & Insurance Mining & Environmental

Introduction

Who are we?

Aim of

This Talk

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

2. Mining rehab straddles two of our core fields

1. Mining & environmental science

2. Actuarial & insurance modelling

3. From our own experience, the financial modelling of mining rehabilitation funding risk is not often well done

4. How does @Risk present an attractive solution?

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

Aim of This Talk

What is this all about?


Disclaimer

• This not meant to be a highly technical presentation.

• It is based on a hypothetical business case. The real-world scenarios have been simplified & sanitised for the purpose of today’s discussion.

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

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

• Of course, as always: we accept no responsibility or liability for any use of information contain in these slides!

Disclaimer

There are always T&Cs!


Mining Rehab:

A brief overview

Mining Rehabilitation

A Brief Overview


Mining Rehabilitation 101:

Required for all mines

Requires input from the Government,

Company

Various technical, scientific, engineering

studies, valuation input and management

required

Constantly changing

4 structural aspects to the quantification of

cost estimates for each element of C&R

1) quantity of activity (which may be subject

to variance)

2) cost rate per unit quantity of the closure

activity

3) technical allowances and inputs (at least

annually)

4) Contingency planning

Strip MineOpen Pit Mine

Process & outputs: The “Risk Ball”

• Key points, abc, xyz, abc, xyz










Mining Rehabilitation

A Brief Overview


Modelling Solution

Case Study:

DigDugMine

Background

• A well run mining company is looking at starting a new mine in the PMG

(Platinum Metals Group)

• The owners and management are astute businessmen and have applied

their minds to all aspects of the project plan and business case

• One item of concern, though:

Legal requirement for Mining Rehabilitation

MPRDA (Mining Petroleum Resources Development Act)

Especially since: rich biodiversity, many stakeholders (community &

settlements)

Case Study: DigDugMineBackground


Background

• Cost & risk associated with the rehabilitation is complex and highly variable. If done wrong, the financial implications can be catastrophic.

• If done right, the operation promises to be highly lucrative

Key problem statements:

• How do we fund for the rehabilitation requirements, such that:

− We reduce risk of funding shortfall to an acceptable level

− We facilitate proper & responsible environmental care and sustainability

− We avoid the risk of overfunding and the inefficient use of capital

− We remain regulatory compliant at all times?




The plan of action…

• They start by drawing a plan for the life of the mine

• Even with planning there is still uncertainty…

Project Commences

Planned Mine Closure

2015 2045 2055

Completion

Concurrent

Rehabilitation

Planned Post Closure

Rehabilitation

2055

CompletionConcurrent

Rehabilitation

Cost? Will we get

there?

Bring in the experts…

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



DigDug Rehabilitation Analysis

Cost # Cost Type Estimated costs per year

Lower Bound Average Upper Bound

17 180 575 149 1 500 000

Joe Soap

Manager

Deloitte

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

Cost Profile

1 Concurrent:

2 Planned closure: Fixed 8 000 000 (80 000 000 over a ten year period)

Replicate the world in a model…

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

Case Study: DigDugMineModelling the risk


0%

20%

40%

60%

80%

100%

120%

2015 2020 2025 2030 2035 2040 2045 2050 2055

Cost Profile: Immediate Closure

Pre planned closure Post planned closure

Fund

Inflows Outflows

Bringing it all together


RiskCumulDRisk(various) RiskCormatt

Liabilities

Fund

Concurrent

Post

Closure

Immediate

Closure

Cash

Equity

Bond

Likelihood

Severity

C

o

r

r

e

l

a

t

i

o

n


(100)

-

100

200

300

400

500

2015 2020 2025 2030 2035 2040 2045 2050 2055

Am

ou

nt

Ra

nd

sM

illi

on

s

Time

Buildup of fund overview.

Surplus 1 Surplus 2 Liability Fund Contribution 1 Fund Contribution 2

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

13.00%

14.00%

15.00%

16.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

20

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Avera

ge r

etu

rn o

n a

ssets

Asset

All

ocati

on

Year

Average Asset Return

Bond Equtiy Cash


0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055

Re

turn

Year


Upper 98th Upper 75th Lower 25th Lower 2th Mean Meadian

-200

-150

-100

-50

0

50

100

150

200

250

300

2015 2020 2025 2030 2035 2040 2045 2050 2055

Am

ou

nt

Milli

on

s

Year

Liquidity

Area of concern Median 99.5% 75% 25% 0.5%

Case Study: DigDugMineModelling Results


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

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2028

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2031

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2050

2051

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2053

2054

2055

Avera

ge r

etu

rn o

n a

ssets

As

se

t A

llo

ca

tio

n

Year


Bond Equtiy Cash Mean Upper 98th Lower 2th




(100)

-

100

200

300

400

500

2015 2020 2025 2030 2035 2040 2045 2050 2055

Am

ou

nt

Ran

ds

Millio

ns

Time

Buildup of fund overview.

Surplus 1 Surplus 2 Liability Fund Contribution 1 Fund Contribution 2



-200

-150

-100

-50

0

50

100

150

200

250

300

2015 2020 2025 2030 2035 2040 2045 2050 2055

Am

ou

nt

Mil

lio

ns

Year

Liquidity

Area of concern Median 99.5% 75% 25% 0.5%



0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2015 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055

Re

turn

Year


Upper 98th Upper 75th Lower 25th Lower 2th Mean Meadian

Results

Taking it a step further


0 100 200 300 400 500 600 700 800 900 1000

Avera

ge S

urp

lus

Std Dev (Increasing risk by asset allocation) Millions

Efficient Frontier

Risk appetite

threshold

Minimum

required return

Efficient

points

Efficient

points


Conclusion


Conclusion: DigDugMineModelling Results

So, what was the right answer?

- It all depends!

- Also considered funding vehicle decision (Trust, Account, Insurance, etc…)

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

How do we fund for the rehabilitation requirements, such that:

• We reduce risk of funding shortfall to an acceptable level

• We facilitate proper & responsible environmental care and

sustainability

• We avoid the risk of overfunding and the inefficient use of capital

• We remain regulatory compliant at all times?s

How did @Risk help?

Familiarity: remain in familiar analytical environment; Microsoft Excel

Speed: runs fast, quick to build, set-up & populate

Cost: more affordable than most other modelling solutions

Complexity: easier to deal with more complex scenarios (correlations,

compound distributions)

Flexibility: able to alter results easily by changing the parameters or

updating the structures… can even do this in real time

Visualisation: able to visualise Monte Carlo simulation elegantly

Ultimately: got client to think about risks, instead of worrying about

modelling

Conclusion

The Benefits of @Risk


Team members

Questions

Sarah Dyke

Environmental Industry Advisor

Venmyn Advisory & Valuation

[email protected]

Mobile +27 76 424 8221

Direct +27 11 517 4165

Industry Specialist


Jaco van der Merwe

Director FASSA FFA

Actuarial & Insurance Solutions

[email protected]

Mobile +27 82 682 3270

Direct +11 209 8163

Director

Kgositsile Moeng

Junior Actuarial Analyst

Actuarial & Insurance Solutions

Analyst

Any Questions?

mailto:[email protected]

mailto:[email protected]

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Palisade Risk Conference 2015, Johannesburg © 2015 Deloitte Touche Tohmatsu Limited30

Jaco van der Merwe & Sarah Dyke Palisade Risk …...• This not meant to be a highly technical...

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