Technical Due Diligence in Mining

Andrew J Vigar

26F, 414-424 Jaffe Rd, Wan Chai, Hong Kong SAR | Phone: +852 8198 8451|

www.miningassociates.com

GLOBAL MINERALS ADVISERS

March 2013

M&M HK 2013 Page 2 of 42

Independent Report needed ?

Stock Exchange investors require specialist advice in mining

Keep the market informed

Capital raisings for development

Capital raisings for exploration

Fraud and misleading promotions forced exchanges to regulate

Internally, e.g. to assist in valuing of assets

Need to be completed by a respected consulting firm

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Review previous audit material.

Site based audit:

- Collect and review site data

- Selected audit of key data

- Answers to prepared questions

- Interviews with Mine Staff

Evaluate and compare data.

Complete report draft for company review of factual content.

Methodology

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Agreed Scope

Purpose of the report.

Extent of responsibility of the Specialist.

Clearly understood and agreed by both parties in writing.

Scope and budget reflect the purpose.

Team of suitable standard and approved.

Variations agreed at the time in writing.

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Attitude

Determine the purpose for which the resource estimates have been made.

- Estimates made for short-term planning in a long established mine are often conservative.

- Estimates in a feasibility study for a green-fields operation are often optimistic.

A touch of cynicism is recommended as a survival instinct during the Due Diligence process.

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Technical Due Diligence Topics Geological Setting

Mineralisation Styles, Ore Types and Controls

Resource Estimates

Mine Design, Production Schedule & Reserves

Metallurgical Testwork

Capital and Operating Costs

Cash Flow Projections, NPV and IRR

Social and Environmental

Government and Right to Operate

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Mine Site Review

Staffing & technical support

Deposit geology

Exploration programs

Estimated deposit estimation

Reserve conversion & estimates

Grade & blend control

Plant performance

Reconciliation & closure

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Check List

- Checklist of technical issues to be addressed.

- Agreed between the Financier and Specialist as part of the initial project brief.

- Forwarded to the Miner well in advance of the site visit.

- Miner has time to prepare the technical supporting information for examination.

- Give examples of the required data and format.

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Background

- Project history, location

- Regional & deposit geology

- Deposit style, similar deposits local & world-wide

- Likely ore controls, Genesis concepts

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Example of Site Plans

Powerline

Waterway

Cable way

Bauxite outcrop

Mining Right boundary

Segment boundary

Existing pit

Planned pit

Existing waste dump

Planned waste dump

Office or workshop

Blending, crushing,loading area

Blast area

Roadway

LEGEND

0 0.5 1km

SCALE

GUIZHOU No1 MINE

Magazine

Crusher

Cableway to Plant

Blending Area

Dazhushan

Wanikeng

Moshipo

Doufution

Yinchangpo

Jiujialu

Jinlangsi

Zhubatui

Trejiango

Shenjiagou

Wulongsi

Bauxite depositswell outside existingMining Right

Bauxite depositswell outside existingMining Right

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Project Staff

- Levels, management, documentation, overlap

- Live models, rock boards/specimens, academic back-up

- Experience, contacts, depth, enthusiasm, thinking

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Procedures & Records

- Documentation, execution, QA & ISO, audit trail

- Grids, surface samples, drill collars & down-hole

- Notebooks, maps, date/time, location, persons

- Exposure, lithology, structure, oxidation, alteration, mineralisation, structure.

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Clear Procedures Aurukun Project Flow Chart

Field Program

Resource Estimation & Reporting

Preliminary Study

Project design in conjunction with Client Budgeting

Logistics Support for 5 day field program Liaison with local community Collection drill samples Road freight to Brisbane

Analysis Primary analysis 30 samples XRD clay analysis 20 samples Mineralogy formulas

PIMA trail all samples

Attrition trial Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA

Surve y clear access & mark drill holes

Drilling mobilization/demobilization drilling geology logging sample selection rehab. of drill holes

Analysis washing @ screening ICP multi - element scan storage for future use

PIMA all samples (if results of trial are good)

Attrition tests Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA (if results of trial are good)

Data Management iPAQ Handheld Computers Design of Data Collection forms Database setup Ongoing data management Website setup (interactive GIS)

Logistics Support for 30 day field program Liaison with local community Collection drill samples Road freight to Brisbane

Program Location of survey control & pits Reconnaissance geology Prepare base plans Collection bulk samples

Logistics

Geology Model Seam model based on geology Grades and tonnage's

Economic Model Seam model based on geology Overlay based on cut - off criteria Grades and tonnage's

Reporting Final report All data in digital interactive form Presentation

Reporting Preliminary report, results of trials, Presentation, Final Desi gn of Field Program

Bauxite Exploration Project Flow Chart

Field Program

Resource Estimation & Reporting

Preliminary Study

Project design in conjunction with Client Budgeting

Logistics Support for 5 day field program Liaison with local community Collection drill samples Road freight to Brisbane

Analysis Primary analysis 30 samples XRD clay analysis 20 samples Mineralogy formulas

PIMA trail all samples

Attrition trial Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA

Surve y clear access & mark drill holes

Drilling mobilization/demobilization drilling geology logging sample selection rehab. of drill holes

Analysis washing @ screening ICP multi - element scan storage for future use

PIMA all samples (if results of trial are good)

Attrition tests Attrition tests 200 samples PIMA analysis at each step XRD clay analysis if no PIMA (if results of trial are good)

Data Management iPAQ Handheld Computers Design of Data Collection forms Database setup Ongoing data management Website setup (interactive GIS)

Logistics Support for 30 day field program Liaison with local community Collection drill samples Road freight to Brisbane

Program Location of survey control & pits Reconnaissance geology Prepare base plans Collection bulk samples

Logistics

Geology Model Seam model based on geology Grades and tonnage's

Economic Model Seam model based on geology Overlay based on cut - off criteria Grades and tonnage's

Reporting Final report All data in digital interactive form Presentation

Reporting Preliminary report, results of trials, Presentation, Final Desi gn of Field Program

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Drilling and Sampling 1

- Procedures, documentation, responsibility

- Planning, authorisation, team activity

- Drilling conditions, companies, sample/core handling

- Types, hole sizes, drill campaigns

- Sample storage, documentation, security

- Sample recovery, loss and voids

- Lithology, alteration, mineralisation

- Structure

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Drilling and Sampling 2

- Weathering & oxidation, original vs post collection

- Tonnage factors, voids, core loss

- Metallurgical characterisation

- Geotechnical, RQD, fractures, point load, hardness

- Geophysics, down-hole, MagSus

- Sampling methods, data collection, validation, box marks

- Field records, thought & not just codes, team access

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Examples of Core Storage

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Database 1

- Field data to DB, methods, validation, authority

- Updates, audit trail, authority

- Types, access, KISS, back-ups, multiple locations, hard copy

- Map data

- Drill data

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Database 2

- Sample data, sample security, prep., analysis methods, lab independence, duplicates & standards, data transfer

- Interpretations, knowledge capture, data is not knowledge

- Plans & sections

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Data Verification

- Surface & underground type mapping

- Selected drill hole re-logs, sampling & assay if required

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Geology Models

- Fact vs Interp, Maps & sections, 3D thought

- Lithology, alteration, mineralisation, structure, oxidation, Met

- Regional context but local detail

- Concept of key mineralisation controls and sequence

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Resource & Reserves 1

- Procedures, documentation, responsibility

- Staff, mine/project experience

- Updates, audit trail, authority

- Data used, mixed types, data density & spatial variations, support

- Methods used, full documentation sufficient to reproduce

- Data projection, volume variance, smoothing, blanks

- Spatial changes in levels of data & knowledge

-

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Resource & Reserves 2

- Based on coherent geology model

- Geological/structural controls honoured, domains, constraints

- Other factors, eg Metallurgical, blasting, waste types

- Mining & treatment methods and costs

- Validation, checks with other methods, global estimates

- Plans & sections showing raw data, geology models & estimates

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Resource & Reserves 3

- Raw data vs estimates, against geology models, realistic

- Grade – tonnage variations, spatial variations, weathering

- Resource categories, why, support, makes sense

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Grade Control & Reconciliation

- Similar issues to resource estimation

- vs production, vs other estimates, vs previous estimates

- Grade control vs resource estimates

- Trends, projections, changes in geology

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Environment

- Impact, closure & rehabilitation

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Resource estimate is the key

The Resource base is often stated at a lower cut-off than the reserve.

The resource is largely fixed by the Feasibility Study stage, yet this has the largest impact.

There is considerable scope with the advanced computer techniques currently available to seriously distort the grade/tonnage profile of a deposit, just are there powerful techniques available to get it right.

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International Systems

Australian JORC

Australian Valmin Code

Canadian NI43-101

SAMREC

CRIRSCO

UN UNFC

General agreement on Resources, Reserves and Competent Person

US SEC Guide7 – Reserves only

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JORC Code Requires

Minimum for reporting Resources & Reserves

Transparency

Data and Assumptions

Missing or inadequate data

Resource has reasonable expectation of eventual economic exploitation

Conversion of Resource to Reserves

Personal responsibility - Competent Person

Has some Limitations

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JORC Code & Beyond

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Estimation Issues

A poor understanding of the geological controls will always lead to a poor resource estimate.

Simple techniques such a polygonal estimation may highlight the strength of underlying geology knowledge.

The over-estimation of grade is worse for the project than under-estimation but both are bad in that neither truly reflect the actual cash-flows.

Have multiple methods been used and compared.

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Cut-off Grade

Should be realistic and achievable

The sensitivity of the estimates to changes

- grade/tonnage curves

- plans and sections of changes

The Specialist will be required to comment whether the chosen mining method and costs reflect the chosen mining method.

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Reserves with time

Variation of the resources and reserves with time

Major milestones of the project

Use a time-line chart

- major changes in all areas the project milieu

- not just the hard technical issues of the mine production team.

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Ore Feed vs time

ROM Feed by Quarter with Tonnage by Category and Grade

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

250,000

Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406

To

nn

es

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

Gra

de

%

Proved Reserve Probable Reserve

Other Measured & Indicated Resource Inferred Resource

Pre-Resource Mineralisation ROM Grade

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Sensitivity and Risk

Look at the likely range of values of the reserves rather than just state a single figure.

The impact of variations to be tested, eg

- impact of high values are dealt with (eg top-cutting)

- grade tonnage curves

- using different geological domains

- changing the estimation methods

- optimization of production plans

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Start-up risk

A quick cash injection at the start from higher grade or lower cost ore.

Small changes in the start-up period cash-flow can have a dramatic impact

Negative impacts from which it will never be able to recover

There are several recent major projects, which have stumbled at this first hurdle and thus completely removed their ability to ever repay the original debt.

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Sensitivity plot

$ 0

$ 1 0 ,0 0 0 ,0 0 0

$ 2 0 ,0 0 0 ,0 0 0

$ 3 0 ,0 0 0 ,0 0 0

$ 4 0 ,0 0 0 ,0 0 0

$ 5 0 ,0 0 0 ,0 0 0

$ 6 0 ,0 0 0 ,0 0 0

lo w b a se h ig h

R e c o ve ry

G o ld P ric e

P ro c e s s c o s ts

C h a n g e D C F

In c lu d e in fe rre d

re s o u rc e

P re -p ro d u c t io n c a p ita l

R e d u c e d

e n viro n m e n ta l

c h a n g e in s ta rt -u p

P ro d u c t io n c a p ita l

5 y e a rs ta x fre e

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Cash Flow Sensitivity with Time

Project Cash Flow Sensativity with Time

-$60.00

-$40.00

-$20.00

$0.00

$20.00

$40.00

$60.00

$80.00

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Years

Ne

t C

as

h F

low

$M

Best Case Worst Case

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A range of likely outcomes

Distribution for NPV1 (10%dcf) after tax

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Values in A$ Millions

PR

OB

AB

ILIT

Y

1 8.8

17.7

26.6

35.5

44.5

53.4

62.4

71.6

80.3

M&M HK 2013 Page 39 of 42

Risk is OK

The Financier is in the business of dealing with risk

The expression of a reserve in terms of an expected outcome with upper and lower limits is quite acceptable

The old practice of giving just one number will hide the risk factors

Risk is not bad, it just needs to be known

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Risk Matrix

# Risk Event Likelihood Consequence Risk Comment and Possible Mitigation

1 Geology: Ore Body Interpretation

Possible Moderate High

Correlation of veins where there are no old underground workings, in particular California low grade open pit. Requires closer spaced drilling within open pit.

2

Lack of understanding of Geological Controls

Possible Moderate High

Understand the geological controls of the ore zone and its related mineralisation so that more accurate and precise modeling can be conducted. This can be done from detailed logging which will then feed into the resource estimate and ultimately mining targets and ground support regimes.

3 Mineralisation may not extend to depth

Likely Moderate High

Mineralisation may be restricted at depth with a sudden drop in intensity and grade once below the “boiling zone”. Caution needs to be exercised with projections at depth No RL limit is placed on the current resource estimates. MA would suggest a limit at 100m rl.

4 Grade Capping Possible Minor Moderate

Grade capping applied to informing sample composites is too high in some domains, resulting in over-influence of high grade samples on estimation. Review caps

5

Incorrect Resource estimate methodology distorts the grade tonnage curve

Possible Major Extreme

Incorrect estimation methodology according to the geology and statistics can distort the grade/tonnage curve and ultimate resource numbers, hence affecting all subsequent activities leading on to mine development.

Based on AS/NZS 4360:1999

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Margins in Mining – Where are they

What is and is not included in C1 costs

The real cost of Capital and how to hide it

Overheads, R&D (incl. exploration) and core values

Why high commodity prices do not equal high margins

Value Waves

Examples

Production

Company

Ex

plo

rati

on

Co

mp

an

yE

xp

lora

tio

n C

om

pan

y

Exploration Discovery Pre

FeasibilityFeasibility Construction Production

Time

Deve

lopm

ent

Com

pan

y

Time

PEA

Exploration Discovery

M&M HK 2013 Page 42 of 42

Contact

Andrew J Vigar

Phone: +852 63815197

Benny Cha

26F, Chinaweal Centre, 414-424 Jaffe Rd, Wan Chai, Hong Kong SAR

Phone: +852 2430 7575

www.miningassociates.com