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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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AUSTRALIA

COM 2013

Independent Mineral Processing Project Technical

Due Diligence

Presented by Damian Connelly,

Mineral Engineering Technical Services

> RESOURCE PROJECTS > TECHNOLOGY > INTEGRATED SERVICES > Mineral Processing > Engineering Design > Training > Specialist Services

> 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.


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


Unit Costs/Benchmark

35%

6% 10% 10%

37%

2%

Unit Costs of Production %

SiteOperationRoyalties

Treatment

Refining


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


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


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


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.


Benchmarking


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


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


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


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.


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


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


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


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.


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


Basis For Successful Projects


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


THANK YOU www.metsengineering.com

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