A Framework for Presenting & Benchmarking Mineral Projects

AusIMM Project Evaluation, Mar 2016

Mark Noppe SRK Consulting Brisbane, Australia mnoppe@srk.com.au

Content Presenting mineral project development status - how confident are we?

• Introduction • Context is everything

• Technical factors • Social, Environmental and Governance factors

• Codes, standards, guidelines and industry practice • Accuracy, confidence and quality • Case studies • Conclusions

Introduction Mining is an inherently risky business

The market needs transparent, consistent and balanced views of a project’s technical confidence and development status, including social, environmental and governance factors Risks and opportunities exist for

• advancing an exploration prospect to a viable project, and

• operating a mine

Noppe, 2014

This talk focuses on presenting a mineral resource project in the correct context for the benefit of all stakeholders

Context Why feasibility studies or mine projects fail: technical factors

• Mined ore grade is lower than expected • Processing plant under-performs • Development cannot keep up with planned schedule

Technical factors resulting in feasibility study failure: • Geology, resource and reserve estimation: 17% • Geotechnical analysis: 9% • Metallurgical test work, sampling, mineralogy: 15% • Geo-hydrology: 4% • Mine design and scheduling: 32% • Mining equipment selection: 4% • Process plant design: 12% • Cost estimation: 7%

Some 50% of technical causes relate to geo–technical data collection and

interpretation

How do we communicate uncertainty?

McCarthy, 2014

Context Why feasibility studies or mine projects fail: Social, Environment, Governance (SEG) factors

• Development timelines have nearly doubled in the past decade (from 5-7 years to 10-15 years)

SEG themes critical to mining project success / failure: • Communication • Community conflict • Quality of information • Social investment versus risk mitigation • Value versus cost / benefit decision making • Timeframes: social / legal / technical / financial (incl. markets) • Incentive structures (to manage adverse impacts) • Market drivers (lenders, insurers, customers

governments)

Corder, 2015. Davis & Franks, 2014. Ernst & Young, 2015. Fraser Institute, 2014.

Non-technical risks account for up to half of all risk factors faced by

extractive industries

Context Importance of Resources, Reserves and SEG

• Mineral Resources and Ore Reserves

underpin strategic and actual investment and technical valuations

• SEG and market factors moderate value

Residual resources

Exploration potential

Reserve (mine schedule)

Valuation “buckets”

Xstract, 2014

Codes Reporting definitions Don’t forget about: • Development stages • Timing • Level of technical-economic

study • Level of confidence in all

relevant factors, including SEG factors

• Transparent, consistent, balanced reporting

JORC Code, 2012

Codes Project development stages

Project development

stage

Criterion

Exploration areas Mineralisation may or may not be defined, but where a Mineral Resource has not been identified.

Advanced exploration areas

Considerable exploration has been undertaken and specific targets identified. Sufficient work has been completed on at least one prospect to provide a good geological understanding and encouragement that further work is likely to result in the determination of a Mineral Resource.

Pre-development / resource

Mineral Resources and/or Ore Reserves were identified and estimated. A positive development decision has not been made. This includes properties where a development decision has been negative and properties are either on care and maintenance or held on retention titles.

Development Committed to production but not yet commissioned or not initially operating at design levels.

Operating Mineral properties, in particular mines and processing plants, which were fully commissioned and are in production.

VALMIN Code, 2005

Codes Project development stages

Project development

stage

Criterion

Early-stage Exploration

Mineralisation may or may not have been identified, but where Mineral Resources have not been identified.

Advanced Exploration

Considerable exploration has been undertaken and specific targets identified that warrant further detailed evaluation, usually by drill testing, trenching or some other form of detailed geological sampling. A Mineral Resource estimate may or may not have been made, but sufficient work will have been undertaken on at least one prospect to provide both a good understanding of the type of mineralisation present and encouragement that further work will elevate one or more of the prospects to the Mineral Resources category.

Pre-development Mineral Resources have been identified and their extent estimated (possibly incompletely), but where a decision to proceed with development has not been made. Properties at the early assessment stage, properties for which a decision has been made not to proceed with development, properties on care and maintenance and properties held on retention titles are included in this category if Mineral Resources have been identified, even if no further work is being undertaken.

Development A decision has been made to proceed with construction or production or both, but which are not yet commissioned or operating at design levels. Economic viability of Development Projects will be proven by at least a Pre-Feasibility Study.

Production Tenure holdings – particularly mines, wellfields and processing plants – that have been commissioned and are in production.

VALMIN Code, 2015

Industry practice Timeline of project development stages

Social, Environment and Governance engagement

5-15 years 1-10 years 1-5 years

Construct

Financing

Industry practice & guidelines Technical-economic study levels

• Accuracy and confidence levels are not provided in reporting Codes

• There are industry guidelines

• Actual cost accuracy is often less

Measure / Item Scoping Study Pre-feasibility Study

Final Feasibility Study

Cost accuracy ±25%-50% ±15-25% ±10-15%

Cost contingency 30-50% 15-30% <15%

Proportion of Engineering

complete

<5% <20% <50%

Resource categories

Mostly Inferred Mostly Indicated Measured and Indicated

Reserve categories

None Mostly Probable Proved and Probable

Mining method Assumed General Optimised

Mine design None or high-level conceptual

Preliminary mine plan and schedule

Detailed mine plan and schedule

Scheduling Annual approximation

3-monthly to annual

Monthly for much of payback period

Risk tolerance High Medium Low

M E White & I Harrington, 2014. Feasibility Studies – Scope and Accuracy. AusIMM Monograph 30.

Context How it all fits together • Project advancement • Data quantity and

data quality • Technical/economic

assessment - Resource & Reserve reporting

• Final engineering / Construction

• Commissioning • Production

Noppe, 2014

Context How it all fits together • Project advancement • Data quantity and

data quality • Technical/economic

assessment - Resource & Reserve reporting

• Final engineering / Construction

• Commissioning • Operating • SEG factors

Noppe, 2014

Social

Environmental

Governance

Operations

Context – weak links in the “chain” How it all fits together • Project advancement • Data quantity and

data quality • Technical/economic

assessment - Resource & Reserve reporting

• Final engineering / Construction

• Commissioning • Operating • SEG factors

Noppe, 2014

Social

Environmental

Governance

Operations

So why do we still get it wrong? Technically: ASX Release ASX Retraction More work to be done: DFS was far from a definitive Feasibility Study

Codes & guidelines Technical Reporting Codes

• Provide minimum standards,

recommendations and guidelines

• Principles of transparency and materiality in reporting

Materiality All reasonable information

expected

Transparency Clear, unambiguous presentation

Competence Work completed by Competent

Person Reporting is subject to interpretation, therefore require greater transparency and consistency

Codes & guidelines Mineral Resources - reasonable prospects for eventual economic extraction

• “assessment … of all matters likely

to influence the prospect of economic extraction including the approximate mining parameters”

• “not an inventory of all mineralisation drilled or sampled, regardless of cut-off grade, likely mining dimensions location or continuity.“

• Economic assessment applies

equally to Inferred Resources

• “Eventual economic extraction” does not provide a license to speculate

• “Approximate mining parameters” are not necessarily the same as Modifying Factors required for defining an Ore Reserve

Codes & guidelines Mineral Resources to Ore Reserves • Indicated and Measured Mineral

Resource • Consider and apply Modifying

Factors • At least a Pre-feasibility Study

level of assessment • The level of confidence in the

relevant Modifying Factors must be sufficient to support the category of Ore Reserve

• Must demonstrate a technically achievable and economically viable mine plan and schedule for the reported Ore Reserves

Modifying Factors • Cut-off parameters • Mining factors or assumptions • Metallurgical factors or assumptions • Environmental • Infrastructure • Costs • Revenue factors • Market assessment • Economic • Social • Other

– material naturally occurring risks – material legal agreements and marketing

arrangements – Critical governmental agreements and

approvals

Codes & guidelines Ore Reserves – timing of study & reporting

• “The studies at Pre-Feasibility or Feasibility level demonstrate that, at the time of reporting, extraction could reasonably be justified”

• “If re-evaluation indicates that the Ore Reserves are no longer viable, the Ore Reserves must be reclassified as Mineral Resources or removed from Mineral Resource/Ore Reserve statements”

Applicable if • longer term price trends, market

conditions, political, environmental, social or infrastructure issues, legislation or approvals, or funding issues that may prevent the intended project being developed in the time frame considered in the relevant technical study

Codes & guidelines Ore Reserves – infrastructure, approvals & contracts

• “The term ‘Ore Reserves’ need not necessarily signify that extraction facilities are in place or operative, or that all necessary approvals or sales contracts have been received

• It does signify that there are reasonable grounds to expect that such approvals or contracts will eventuate within the anticipated time frame required by the mine plans”

Transparency and materiality Highlight and discuss the materiality of: “any unresolved matter that is dependent on a third party on which extraction of the Reserve is contingent”

Accuracy, confidence & quality Accuracy and the nature of the deposit No two deposits are identical

Essential the Competent Person’s meaning of Resource or Reserve categories is provided

May be possible to report the same accuracy for Measured Resources for

• a stratiform base metal deposit over a 3-month period

• a nickel sulphide deposit over a 6-month period, or

• A nuggetty gold deposit over 2-years of production

Accuracy, confidence & quality Discussing reporting confidence • What do we really mean? • Discuss and where possible

provide a statement of the relative accuracy and confidence level of the reported Resource and Reserve categories, or

• Provide at least a qualitative discussion of the relevant uncertainties

• Over what particular scale or period of time:

• a resource block, selective mining unit, mining panel or strip, or the entire resource domain?

The Code terminology • Measured, Indicated, Inferred • Proved and Probable • “accuracy”, “uncertainty”,

“reliability”, “confidence”, “confidence level”, “quality of data”, “quality of information”, “quality of reported results”

http://geovoices.geonetric.com/author/kevin-reiter/

Accuracy, confidence & quality Need for increased disclosure on confidence

• What is meant by confidence and accuracy levels in the context of your project

• Over a particular scale or period of time

• Confidence in a resource block, selective mining unit, mining panel or strip, or the entire resource domain

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Context - quantity & quality

Increasing Confidence in Quantity and Quality of

Grade Information (JORC Code, ASX)

Item

Reconciliation

Ore Reserves

Production Target on Measured + Indicated (ASX)

Measured and Indicated Resources

Production Target on Inferred (ASX)

Inferred Resources

Foreign / Historical Estimate (ASX)

Exploration Target

Exploration Results

Early Exploration

Context - project development stages

Project Development Stage Exploration

Areas

Advanced Exploration

Prospect Evaluation Development Operating / Production

Resource Definition

Preliminary Development

Options

Final Development

Option

Context - study accuracy

Level of Technical-Economic Accuracy

Exploration (pre-discovery)

Mineralisation Delineation

(post-discovery)

Approximate Mining

Parameters

Scoping Study

Pre-Feasibility

Study

Feasibility Study

Final Engineering

Operating/ Production

Context - project reporting

Context - project reporting

ASPIRATIONAL

CONCEPTUAL

DATA DRIVEN

Example

Context – project reporting example

Example – retraction & clarification

Context – project reporting example

Not a “definitive” Feas Study

Yet to define a Reserve; Economics not available;

Development decision conditional

Still to update

Resources

Project development & reporting context

Conclusion

• Investors have access to an array of public information. • Inconsistent use of reporting definitions, supporting information /

project assumptions and outcomes may be confusing and even misleading.

• Confirming the correct project development context is essential for assessing the risk, opportunity, relative confidence and value associated with a resource project.

• A simple Resource Project Framework can provide a balanced assessment of a project’s reported technical, SEG and financial status.

• Such a Framework readily allows cross-checking and benchmarking of project development and reporting confidence in a structured context.

Mark Noppe: mnoppe@srk.com.au

Thank you

References Corder, G.D., 2015. Insights from case studies into sustainable design approaches in the minerals industry.” Elsevier, Minerals Engineering 76 (2015), 47-57. Davis, Rachel and Daniel M. Franks, 2014. “Costs of Company-Community Conflict in the Extractive Sector.” Corporate Social Responsibility Initiative Report No. 66. Cambridge, MA: Harvard Kennedy School. Ernst & Young, 2015. Business risks facing Mining and Metals 2015-2016. Forrest, A., 2014. Responsible mining investment in Africa. Resource Capital Funds. Fraser Institute, 2014. “Survey of Mining Companies, 2013.” McCarthy, P.L, 2014. Managing risk in Feasibility Studies. In AusIMM Ninth International Mining Geology Conference Proceedings, Adelaide August 2014, and In AusIMM Monograph 30, Mineral Resource and Ore Reserve Estimation, 2nd Edition. Noppe, M A, 2014. “Reporting and converting resources to reserves – how confident are we?” In AusIMM Ninth International Mining Geology Conference Proceedings, Adelaide August 2014, and In AusIMM Monograph 30, Mineral Resource and Ore Reserve Estimation, 2nd Edition. Noppe, M A, 2015. “A framework for presenting and benchmarking resource projects.” In preparation for the 2016 AusIMM Project Evaluation Conference. Xstract, 2014. AusIMM Monograph 30 Roadshow Presentations by Noppe, M A.

Mark Noppe: mnoppe@srk.com.au