Guidelines to Exploration and Mining Investment

Transcription

1 A Raw Materials Group event in cooperation with the School of Professional Development Guidelines to Exploration and Mining Investment August 2012 For Professionals Involved in the Development of Mining and Natural Resource Projects

2 Introduction While the key asset for the minerals sector is the un-mined mineralisation associated with the deposit, the value to the company can only be released if exploration is able to identify extensions of the mineralisation and mining and processing can be undertaken efficiently and at minimum cost. This involves consideration of grade control procedures and the approach to metal reconciliation from bock estimates of in situ grades through mining dilution, determination of head grades, the proportion of production tied up in stockpiles and then plant recovery. It follows from that that any interrelationships with capital investment decisions aimed at improving grade control and reducing operating costs would always be important. This is particularly the case in the Scandinavian countries which have benefited less from increases in dollar metal prices over the last year against escalating local currency-based Capex and Opcosts. This has encouraged the implementation of mechanised mining techniques but does require close co-operation between a parent company and the operating division in undertaking technical and financial appraisal of new investment options. Securing finance (whether equity or debt) requires all the relevant technical, operational, permitting and financial components to be presented in an integrated and transparent manner. For projects to be able to secure equity funding they normally require the inclusion of a resource that can be placed into one of the internationally recognised systems of classification. To take a resource into the reserve category requires the development of a prefeasibility or full technical feasibility study. This would expect to add significant value to a project which might otherwise comprises mainly exploration potential as it permits the generation of a discounted cash flow financial model. Where the NPV and IRR generated can be shown, through sensitivity analysis, to be robust this not only enhances the valuation of the project for the equity market, it can also be used to secure project finance. Course Structure The aim of the course is to provide a guide to understanding the main factors involved in securing the financial support for mining projects through equity, debt, or entering into a joint venture. This involves addressing the underlying technical principles, applying these to mineral projects and demonstrating how these influence the financial modelling. Particular attention will be given to the treatment of key independent variables, such as grade and metal price, dependent variables, such as grade-tonnage relationships, and the way these influence the rate of mining, associated operating and capital costs, and the optimisation of the NPV of a project. The structure of joint ventures and the role of tax models in enhancing the features of a mineral project will be outlined. During the workshop sessions use of the IC-MinEval software provided by IC-FinEval. The course was launched in Stockholm in November 2004 and was re-delivered annually since then. Each delivery was fully subscribed and was well received by delegates.

3 Who Should Attend? This course will be of particular interest to all professionals who are involved in the funding of minerals projects from exploration through to development and making investment decisions in operating mines. The course will also be of interest to those based with for financial institutions as mining analysts, fund and asset managers, or securities and corporate finance investment bankers. IC-MinEval Use will be made in the workshop sessions of the IC-MinEval software provided by IC- FinEval, Excel -based spreadsheet programmes automating all stages required to produce models for a wide range of mineral projects. IC-MinEval produces a Balance Sheet, and Profit and Loss account from the cash flows, with tax provisions linked to the Profit and Loss Account. The cost of debt is calculated, as is the weighted average cost of capital and the cost of equity. Output modules include the base case discount cash flows, as well as key financial ratios and performance indicators such as NPV, IRR payback and maximum cash exposure. Sensitivity analysis can be undertaken on key variables. The functionality of IC-MinEval will be delivered over the internet through the Software as a Service (SAAS) system with InfoMine ( Delegates will be expected to have their own laptop computers available and will be provided with wireless access to the College's internet. They will need to have administrative rights for their laptops, as there will be the need to install ActiveX to access the system. Delegates will be given access to SaaS a few days before the start of the course. (Delegates with AppleMac and Firefox internet browsers may need some support.) Delegates all have access to the functionality of IC-MinEval through SaaS for a further four weeks after the course. Access beyond that will be available on subscriptions. Pre-course E- learning To enable registered delegates to derive maximum benefit from the live sessions, an internet url, user name and password will be supplied prior to the course providing access to a Virtual Learning Environment (VLE) designed for the programme. All the course material covered in the live sessions will be available here prior to the start of the course, together with important course information, including joining instructions. It will also enable participants to post details about themselves and be involved in post course follow-up. For a limited period, participants will be able to access an EduMine e-learning module through the VLE. This gives an introduction to modelling project finance and covers the critical issues associated with the debt financing of mining projects.

4 Provisional Schedule Day 1 08:30-09:00 09:00-09:30 09:30-11:00 14:00-15:30 15:30-15:45 15:45-17:00 Registration Welcome and Profile of Participants 1.1 Value Creation in Mineral Projects - The Life Cycle of mineral projects. Drivers. Stages of planning and execution. Relationship between risk and valuation. Exploration and mining leases. Permitting and environmental impact. 1.2 Feasibility Studies - Role of a prefeasibility study. Scope of a full technical feasibility study. Role in raising equity. Role in securing debt finance. Engineering, Procurement, Construction and Management contracts. 1.3 Formulation of a Joint Venture agreement - Consideration of vend-in conditions and link to valuation. Defining deliverables and the role of the feasibility study. Clawback agreements. 1.4 Resource Estimation - Drilling technology, sampling and principles of uncertainty and concepts of geological continuity. Grade and volume estimation. Cut-off grades, establishing resources and reserves. Day 2 09:00-10:00 10:00-11:00 14:00-15:30 15:30-15:45 15:45-16:00 16:00-17: Mine Planning - Mine block models. Relationships between costs and scale of mining. Mining dilution and mining recovery. Sampling on the scale of mining. Proven and probably reserve categories in operating mines. Metal reconciliation from in situ reserve estimation to metal produced. 2.2 Discounted Cash Flow Analysis - Time value of money. Incremental cash flow model. Discount rates. Optimisation of the scale of mining. NPV, IRR, payback, maximum cash exposure. - DCF exercise based on annuity tables. Review of spreadsheet- based solution. 2.3 Workshop Session: Botswana Gold Using IC-MinEval 2.4 Case History of a Gold Operation - Setting up base case. Optimisation of NPV. Determination of cut-off grade. Sensitivity analysis. 2.5 Analysis of Risk and Uncertainty in Financial Models - Monte Carlo simulation. 2.6 Base Metal Project Workshop 1 - IC-MinEval-based DCF evaluation of nickel metal operations. Setting up the model. Determination of key performance variables. - Analysis of relationship between cashflow, maximum cash exposure debt and equity ratios (gearing). Project acquisition cost estimates.

5 Day 3 09:00-11:00 14:00-15:30 15:30-15:45 15:45-17:00 Day Base Metal Project Workshop 2 - Project Finance - Capital Asset Pricing Model. Relationship between cost of debt, taxation, Balance Sheet, Profit and Loss account and cash flow. Calculating the cost of debt and equity. Determining the weighted average cost of capital and optimum level of gearing. Debt performance indicators (debt service coverage and ratios such as loan life, project life, reserve tail, interest cover, principal cover and residual cover). 3.2 Underground Operation - Engineering concepts behind block caving mining method. Technical risks of the side-wall failure in the open pit on dilution in subsequent block caving operations. Implications for the reserve tail and project finance. Multipartner scenario analysis determining relative return for different stakeholders as a function of investment contribution. 3.3 Scenario Analysis Industrial Minerals - Workshop session. Iron ore. Chemistry of primary minerals. Price based on dry metric tonne units as a function of iron content. Product specifications and penalties. Beneficiation and yields as a function of iron content. Infrastructure Power, transport of ore (rail and slurry pumping) and port facilities 3.4 Scenario Analysis - Energy - Workshop session. Coal Geology and classification. Evaluation. Coking Coal. Role of volumetrics in setting up a financial model. 09:00-10:00 10:00-11:00 14:00-15:00 15:00-16: Surface coal operations - Justification of an investment in equipment. Set up IC- CoalEval open pit scenario. Funding based on debt and equity. Sensitivity analysis. Coffee 4.2 Underground Coal Operation - Long wall mining. Set up IC-CoalEval underground mine base case. DCF evaluation exercise demonstrating relationship between efficiency and profitability. Introduction to EduMine course. 4.3 Diamonds - Geological settings and pricing. Alluvial deposit case history. Evaluation of projects. Instability of DCF models. Primary kimberlitic projects. 4.4 Mineral exploration and reporting codes. 4.5 A Financial Perspective: What do banks want to know? What is limited recourse finance? A brief overview of who the lenders are, their thinking and what you as a borrower should think of. Alternative to banks?

6 Course Director and Presenter Professor Dennis Buchanan Emeritus Professor of Mining Geology & Senior Research Fellow, Imperial College London Professor Buchanan works jointly between the Department of Earth Science and Engineering and the Business School at Imperial College London and will act as the Course Director. Professor Buchanan's current research interest lies in addressing the underlying technical principles applying to mineral projects and demonstrating how these influence financial modelling. He is founder and Chairman of the Imperial College startup company, IC-FinEval Ltd, which provides financial evaluation, risk assessment and decision making software. He has 30 years experience teaching mining geology, mineral exploration and mineral project appraisal and is responsible for the MSc in Metals and Energy Finance. This is a new joint degree between the Department of Earth Science and Engineering and the Business School at Imperial College. Professor Buchanan has worked as a Mining Geologist in both gold and platinum mines in South Africa and had wide experience as a consultant to industry, as an expert witness and in designing and delivering short courses for industry.

7 General Information Important information to all delegates prior to attending the course: Delegates will be expected to have their own PC laptop computers with Windows 95/NT 4.0 (or newer version) and Excel 97 (or better) already installed. If you are using MAC please notify Mr. Kiram Sundblad. In both cases you should have administrative rights to install software. Delegates will be given access to the IC MinEval SAAS-software a few days prior to the course and this will be administrated by Infomine in Vancouver. Blackboard access will be administrated by the Imperial College London, by Miss Stephanie O'Mahony, cpd@imperial.ac.uk and she will send the delegates their usernames and passwords. All delegates are expected to log on to both Blackboard and the SAASsoftware when they receive their login details, to make sure that everything works properly prior to the course. Course location: Stockholm, City Conference Centre, Norra Latin, Drottninggatan 71. Fee: Registration SEK. Please register before 15th June All prices are excluding Swedish VAT if applicable. This includes all course materials, coffee & lunch. Other meals and hotel accommodation are not included. Limited number of participants, first come first served. Registration: Please contact: Kiram Sundblad, Raw Materials Group kiram.sundblad@rmg.se Phone: The organisers reserve the right to cancel this course at their discretion. Cancellations received later than four weeks before course beginning will not be refundable.