Bankable feasibility studies for mining projects

Bankable feasibility studies for mining projects

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

D. S. Evans, PhD, PGeol.
Sr. Partner
CSC Project Management Services
Calgary
403-233-7994,

CSC
Excellence In Risk Management


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

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Statements, other than statements of historical fact, may constitute forwardlooking information and include, without limitation, timing and content of
upcoming feasibility studies and other economic or financial analyses;
anticipated availability and terms of future financing; future production,
operating and capital costs; and operating or financial performance.
-ORForward-looking information involves various risks and uncertainties. There can
be no assurance that such information will prove to be accurate, and actual
results and future events could differ materially from those anticipated in such
information. Important factors that could cause actual results to differ materially
include: fluctuations in commodity prices and currency exchange rates; the need
for co-operation of government agencies in the issuance of required permits and
approvals; the possibility of delay in development work or in construction and
uncertainty of meeting anticipated milestones; and other risks and uncertainties.

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

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Political
Uncertainty

Investor
Uncertainty

Financial &
Economic
Uncertainty

Science &
Technology
Uncertainty

Investor
Uncertainty

Mining
Complexity

Geological
Uncertainty
Construction
Uncertainty

Mining
Uncertainty

Metallurgical
Uncertainty

Market &
Commodity

Pricing
Uncertainty

Exploration
Performance

Development
Performance

Mining
Performance

Processing
Performance

Marketing
Performance

Social &
Environmental
Uncertainty

Social &
Environmental
Uncertainty

Social &
Environmental
Uncertainty

Social &
Environmental
Uncertainty

Social &
Environmental
Uncertainty

Location
Uncertainty

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Pervasive,
Largely
Uncontrollable
Risks

Poorly Defined
and somewhat
Controllable
Risks

Political
Uncertainty

Direct
Controllable
Risks

Global Financial &
Economic Risks

Corporate
Performance

Social &
Environmental
Uncertainty

“Risk Categories”


Definitions & Basis
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Typically, a bankable feasibility study is a comprehensive
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forward analysis of a project’s economics (+/-15% precision)
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be used by financial institutions to assess the creditworthiness for project financing.
The feasibility part is guided by a set of assumptions, a

strategy, development conditions and a planned outcome. The
outcome is uncertain and targets and objectives may not be
achievable.
The bankable part relates to the basis and conditions for a
future financial agreement to collateralize mining assets for a
project loan, to set a premium and a repayment schedule, with
appropriate risk/reward factors.


What do others say about mining
feasibility studies…
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“The mining industry has had a spotty record in the area
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estimating initial capital cost and operational performances,

even though the standard of feasibility studies has improved in
the last decade. Third party reviews rarely have time and funds
for due diligence”…taken from Shillabeer and Gypton, Mining
Risk Management, 2003, Australian IMM Proceedings
Project Evaluation 2007 contains an article entitled “The Use
and Abuse of (Mining) Feasibility Studies” by Mackenzie and
Cusworth who state that most feasibility examples are

unbalanced, or provide inaccurate views of one or both
technical and business aspects. The authors subscribe to a
project management framework (to include risk analysis) to
overcome strategic and execution failures that often occur
following feasibility studies

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Excellence In Risk Management


So what does +/- 15% really mean?
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A +/-15% estimate is somewhere between the definition
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Class 5 and Class 2 estimate. Class has to do with both the
content and quality of the estimate and the estimating
confidence (precision).
Well, doesn’t contingency cover estimate shortfalls (+15%)?
Contingency is a separate decision in support of the estimate
to resolve cost uncertainty precision. Current thinking is that

contingency will be “used up” for some, but not all cost
categories. Contingency does NOT make the estimate “more
accurate”.
Quantitative Risk Analysis is a process to assess and quantify
the potential variances around project drivers. When key
project drivers (i.e. risks) become quantified, corrective
measures and actions can be taken, with confidence, in the
making of quality decisions about precision and accuracy.

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

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Normally, a feasibility study is prepared by a qualified

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

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

accuracy for owner and investor confidence in the
development and construction of a mining project?
• And how does risk analysis capture precision and accuracy
for better decision-making and executing a transparent,
accountable and defensible execution plan?
* As known or required by the project owner
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The hierarchy of Capital Cost estimates

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Conceptual (Class 10 Estimate)
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Class 5 (also called DBM Estimate)
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Pre-Feasibility (Class 3 or 5, depending)
Class 2 or 3 (+/-15% has now gained acceptance as a
bankable feasibility study)
• AFE Estimate, may be a Class 1 or Class 2 and is
designed to go for project sanction & EPC bids. It
should be the most accurate and the most precise
estimate obtainable given circumstances and
conditions; and, is normally accompanied by a PEP.
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Precision and accuracy are separate variables in the Cost Estimate

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“Precision”

“Accuracy”

•Precision is the ability to reproduce a result;
•Accuracy is a confidence in the absolute result or outcome.


The Definition of Estimate Classes

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• The Study or Class 5 estimate is prepared in conjunction with the Design
Basis Memorandum phase of the project. At this point all critical design
alternatives have been examined and the preliminary project execution
plan has been established. This type of estimate is defined as “an estimate,
including contingency, that has a probability of overrun by more than 10%,
1 time in 3”.
• The AFE or Class 2 estimate is prepared in conjunction with the Basic
Engineering phase of a project. At this point, all key design documents
such as P&ID’s, layouts and electrical single lines have been established.
The project execution plan, construction plan, and schedule have also
been established. This type of estimate is defined as where “the final cost
of the project will be within plus or minus 10% of the estimated value, 80%
of the time”.
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The definition of estimate classes describes the expected range of
uncertainty around an estimate (in assessment and simulation this is
the slope of the probability distribution)

Class II Accuracy

Class V Accuracy

Final cost will be within
+/- 10% of the estimate, 80% of the time

Estimate including contingency,
has a probability of 10% overrun, 1 time in 3.

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Base estimate plus contingency
200 $MM
100%

100%

90%

90%

80%

P50 = 200 $MM

P90-P10 = 80%

40%
30%
P10 =180 $MM
-10%

10%
0%

50%

P50 = 200 $MM

P67.7 crosses at 10% over estimate

40%

20%

P10 =168 $MM
-19%

10%
0%

180

200
$MM

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60%

30%

20%

CSC

P90 =237 $MM
+19%

70%
Probability

60%
50%

80%

P90 =220 $MM
+10%

70%
Probability

Base estimate plus contingency
200 $MM

240

160

180

200
$MM

220

240


Quantitative risk analysis calculates the probability distribution of a cost outcome
This distribution can be used to :
1. Determine the contingency required for any confidence level (probability).
2. Compare the estimate uncertainty (slope) with other estimate class definitions.

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Base = 160 $MM

100%
90%

P90 =222 $MM
+11%

Probability

80%

Slope of

Class V Estimate

70%
40 $MM
Contingency
Required for
P50 Confidence

60%
50%

Slope of
Class 2 Estimate

40%

P50 = 200 $MM

30%
20%

P10 =178 $MM
-9%

10%
0%
120

160

200
$MM

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240

280


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A example of risk analysis applied
to a mining capital cost estimate

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The CAPEX Influence Diagram for a UG Mining Construction Project
$ 3,799k

Bid
Rate

Competing
Projects

Shaft
Excavation

Materials/
Estimate
Variance

$ 53,635k
Mine

$ 38,215k
Level
Excavation

Labour
Rate

$ 11,621k
Subsurface
Equipment

Scope
Variance
Used
Equipment

Labour

Productivity

Roads

$ 171,682k

Mill

Total
Project
CAPEX

$ 17,570k
Infrastructure

Cost
Variance

Engineering
Cost
Variance

Local
Benefits

$ 17,409k
EPCM

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$58,387k

$ 1,270k

Organization
Performance

CSC

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Water

Miscellaneous

$5,179k

$ 11,121k

($ 1,602k/yr)

$ 2,592k

Sustaining
Capital

Administration

Exchange
Rate

$22,088k
$ 20,001k
Indirects

Contingency
@ 15%


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

Base

Mine CAPEX
Mill CAPEX
Infrastructure
Indirects
Contingency
Total CAPEX

53.6
58.4
17.6
20.0

22.1
172 $MM

Expected

66.6
60.6
23.6
30.5
0.0
181 $MM

P10

49.1
58.3
16.0
21.6
0.0
151 $MM

• Expected Value is P55 or about a 55% chance of happening
• P10 & P90 are each about a 10% chance of happening and define the
range of this outcome which is a measure of the accuracy of the estimate

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P90

85.7
63.5
35.3
42.1
0.0
212 $MM


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

Total CAPEX
100
90

Mine Base
54 $MM

80
Probability

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Base with
contingency
( 172 $MM)

Mill Base
58 $MM

70

EV = 181 $MM

60
50
40
30
20

Mill CAPEX EV = 61 $MM
Mine CAPEX EV = 67 $MM
Total CAPEX EV = 181 $MM

10
0
0

50

100

150
$MM

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200

250


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

Total Capital Expenditure
-15

Mine Unit Cost Variance - Multiplier
Mine Quantities Variance - Multiplier

-10

-5

$MM
0

5

0.86

20

1.26
Cool

Execution Organization Performance

Heated
0.84

Infrastructure Costs

1.18

0.7

2

Excellent

Infrastructure Construction Duration - Months
Regulatory Process Duration - Months

Poor
7

12
10

34

Tailings Cost Variance - Multiplier

0.8

6

Road Cost Variance -Base - 1.27 MM

2.5

7

Subsurface Equipment Costs
Mine Construction Duration - Months
EPCM Cost Variance -Base - 9.6 + 6.7MM 15.5%
Community Negotiations & Agreements Duration - Months

1.01

1.3

18

28

0.12

0.14

11

25

4.2

7

181 $MM
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15

1.5

Level Excavation Scope Variance- Multiplier

CSC

10

1

Competing Projects Environment

Water Cost Variance -Base - 5.2 MM

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

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Total CAPEX

190

EV = 181 $MM

+9

180

0

-1

$MM

+2
+12

170
160
150

+7

Base = 150 $MM

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Indirect Costs

Labour Costs

Mill Costs

Infrastructure
Costs

CSC

Mine Costs

Schedule

140


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

Strategy
Flawed

Flawed

Doomed
from the
Beginning

Sound
A
Botched
Job

Execution
Sound

Flirting
with
Disaster

A Pretty
Good

Chance

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In absolute terms, there
is about a one in four
chance of getting the
“right” strategy paired
with the “right”
execution plan for the
“planned outcome”…

...the idea is to get it approximately right rather than perfectly wrong...
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Excellence In Risk Management


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

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Accuracy and precision are different. Accurate estimates are precise, but
precise estimates are not necessarily accurate.
Beware of the Halo Effect: the tendency to believe and place faith that
your strategy and execution plan are sound, grounded, etc.;
The Delusion of Absolute Performance: any given formula cannot ensure
high organizational performance, etc.;
The Delusion of Lasting Success: enduring success is not sustainable;
Recognize the Role of Uncertainty: adjust your thinking to accommodate
uncertainty (risk & opportunity!) and make better decisions;
See your Project through Probabilities: approach problems as
interlocking internal and external probabilities;
Separate Inputs from Outcomes: actions and outcomes are imperfectly
linked. It is easy to infer that bad outcomes must mean somebody made
mistakes, or a good outcome must mean somebody made good decisions
(or got lucky!);
There are more things that can go wrong rather than right in execution:
determine the project drivers, assess & quantify risk and develop a risk
management plan to build better valued projects;

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Excellence In Risk Management

A Final Note….
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We often hear the phrase “We have to get cost certainty for
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else……) We are rarely told what the “or else” is, but it
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pretty awful. In these circumstances, CSC takes the position
that owners, their consultants and contractors to look for the
value proposition in their development and construction
projects. Should your project go over budget, or goes long,
make sure that the project achieves value in the completed
cost. When the project delivers value that respects or justifies
the cost, then it is a good project.


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Excellence In Risk Management

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Specifics:
• Supports Owner Organizations in major project development.

• Group formed in 1982, over 350 project assignments in 7 countries.
• Extensive and varied background in Project Planning and Management.
Specialties:
• Risk & Decision Analysis for a wide range of capital Projects.
• Strategic & Mitigation Planning for projects using risk models.
• Facilitation of Project Management, Business Planning, Environmental &
Safety Planning & Management and Team Building.
• Project Management Education Workshops.
• Development of Contract Claims and disputes and litigation support.