in Proceedings of ACG I nternational Seminar on Deep and
High Stress Mining, Perth
Feasibility Studies and Economic Models For Deep Mines By P L McCarthy 1
Introduction
Feasibility studies for deep mining projects must address the particular risks that arise in that environment. These include:
Increased geological risk due to sparse data density. Increased capital risk due to higher cost of establishing the mining operation. Increased technical risk due to the challenging environment for materials handling, ventilation, services, employees and ground control.
Feasibility studies for such projects must show how each of these risks can be managed to a level that will provide sufficient comfort for project finance to proceed. Economic models must present a realistic range of operating outcomes so that the commercial implications of those outcomes can be properly assessed. A rigorous process of peer review and audit is essential.
Introduction
A deep mine is one that presents challenges in evaluation, finance, construction and subsequent operation through a combination of absolute depth (ventilation difficulties, increased travel times etc), increasing rock stress and seismicity (which may occur at relatively shallow levels), or inaccessibility for economic geological assessment (which depends on the thickness and continuity of the potentially economic mineralisation). In general, deep mines challenge the existing technology and present technical risks that discourage investment.
In the Victorian quartz (gold) mines of the 1860s, deep sinking referred to depths around 300m. By the turn of that century, Bendigo (1600m) and Ballarat West (1000m) were among the worlds deepest mines. Ventilation and dewatering had become difficult, but rock stress was apparently not a problem at the scale and rate of mining that applied. Twenty years ago, Mount Isa Mines and North Broken Hill were pushing the technological boundaries with depth in Australia, but could not be compared with the challenges of the Kolar mines in Karnataka or of the Witwatersrand, where Western Deep Levels reached 3500m in 1977.
In each of the leading mining countries of today, Canada, Australia and South Africa, a different context for deep mining has developed. South African gold mining generally enjoys a favourable stress gradient and very predictable geology, so that absolute mining depths are greatest. There, the leading-edge technical competencies relate to deep shaft sinking, narrow- vein stoping on flat dips, hoisting and ventilation. In Australia,
1. Managing Director, AMC Consultants Pty Ltd, 19/114 William Street, Melbourne Vic 3000. E-mail: pmccarthy@amcconsultants.com.au mining methods based on decline access provide labour productivities nearly double those in Canada, where shaft access is used with otherwise similar technology. Decline methods become economically challenged at depths approaching 1000m, where coincidentally the management of rock stress often becomes a serious issue. Prediction and management of stress and seismicity is a major theme of other papers in this International Seminar and is not taken further in this paper. A useful summary of the topic is given in Turner (2002).
All feasibility studies for new mines must address the technical and commercial risks and present a scenario that attracts the required finance. For deep mines, the size and/or grade of the orebody must be sufficient to make the project robust under a reasonable range of technical outcomes. Deep mineralisation that is marginally attractive is unlikely to be developed.
The Feasibility Study Process
The feasibility study process usually proceeds from Conceptual studies, through a series of increasingly better- defined Prefeasibility studies, until at last a Feasibility study provides sufficient justification for approval by the owners for the project to proceed and by the financiers to lend the funds required. At any step along the way, unfavourable conclusions arising from this process may lead to the project being shelved, abandoned or sold. Each step requires the results to be sufficiently encouraging to justify proceeding to, and funding, the next step.
The challenges to the study team change significantly as the project proceeds through this process. In the early stages, a study may be used as a basis for acquiring exploration areas or to justify exploration funding. While the investment risk may be small, there is a major risk that a good project might be written off prematurely. The proportion of early-stage Feasibility Studies and Economic Models For Deep Mines
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2 exploration projects that survive to become mines is very small, so the penalty for misidentifying the good one is not only the lost opportunity but also the cumulative wasted cost of evaluating the tens or hundreds sub-economic opportunities that preceded it.
It is acceptable for early studies to be based on very limited information or speculative assumptions in the absence of hard data. The study is directed at the potential of the property and a lack of information is not, at this stage, a reason for conservatism. No-one should expect the study to be definitive, and this should be made clear through the use of appropriate disclaimers in the report.
As the project proceeds through Prefeasibility status, the purpose of studies is usually to justify further substantial exploration and development expenditure. Sometimes the aim is to attract a buyer or joint venture partner or to provide a basis for a major underwriting to raise the required risk capital. Sometimes a Prefeasibility study may be prepared (in full or in part) by potential purchasers as part of the due diligence process. Eventually, the aim will be to justify funding a final Feasibility Study.
The results of a Prefeasibility study may be the first hard project information which is seen by corporate decision makers. There is a risk that the findings are committed to memory so that it becomes difficult to dislodge them with subsequent information. In such cases, the Prefeasibility study becomes the real decision point, with the subsequent Feasibility study being seen by management as a necessary step along a path that has already been irrevocably committed. Clearly, this build-up of corporate momentum can lead to poor investment decisions.
For these reasons, the conclusions of a Prefeasibility study should be heavily qualified wherever necessary. Assumptions should be realistic rather than optimistic because it is very difficult to bring management and markets back to reality in the event that the final feasibility study is significantly less favourable.
The final Feasibility study is usually based on the most attractive technical alternatives for the project, from those evaluated through earlier studies. The aim is to identify and quantify the technical, commercial and environmental risks and opportunities and to present the relevant information with back up material in a concise and accessible way. The study will be used in different ways by investors, regulators and the community in deciding whether the project should proceed and on what terms. If it proceeds, the Feasibility study will provide a basis for detailed design and construction.
What is Bankable?
The term Bankable Feasibility Study is in widespread use. To the engineers preparing a feasibility study, the term bankable only refers to the technical completeness and the level of detail contained in the report that they are preparing. Whether a bank will lend against it depends on the inherent merits of the project. A bank may be satisfied with the technical work and the project economics sufficient to lend 60% of future development cost where the sponsors are seeking 80%. Despite the accuracy of the engineering, in this case the sponsors have not got what they required. Daley (1990) argued that engineers and project sponsors should avoid the term Bankable.
The robustness of the project is tested by its cash flow coverage, typically not less than 160% to 200% of the amount required to service the debt. There will also be a debt ceiling, or limit on the debt/equity ratio, which may run as high as 80%.
A bank typically requires that the loan facility can be fully repaid within the period of depletion of the Proved Ore Reserve estimated in the Feasibility study, as defined in Australia by the JORC Code (1999). A mine life (Proved and Probable Ore Reserves) at least twice the projected loan life is usually required. Competition between lenders at certain points in the business cycle may relax these requirements, with Measured and Indicated Mineral Resources being allowed in a production schedule. However, Inferred Resources are not allowed by banks to support project finance.
Project finance is initially secured against the assets of the owners, until a bank completion test has been satisfied. The owners are usually anxious to satisfy the bank test as it frees them to undertake other corporate activities. The completion test typically requires:
3 to 12 months of design level production. 90% of design throughput. 95% of design metallurgical recovery. Specified plant operating cost (usually up to 110% of feasibility study estimate is allowed). Products on specification. Mining to plan (ie, not high grading). Nothing from geological exposures to suggest that budgets will not be met.
Gaining Access to the Deposit
The first problem in deep mine studies is that geological information is expensive to obtain. It may be prohibitively expensive to establish ore reserves from surface drilling alone. Figure 1 shows the cost per tonne of ore reserve for drilling out a gold deposit from surface on a 25 x 25m grid, assuming four intercepts from each parent hole, and that every intercept is an ore intercept.
Figure 1 - Cost of Drilling Ore Reserves from Surface
0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 0 1000 2000 3000 4000 5000 Depth (m) D r i l l i n g
C o s t
( $ / t ) 2m thick 5m thick 10m thick 20m thick
This high cost of information applies not just to the global estimation of tonnes and grade, but to understanding the local variability of grade, thickness, dip, geotechnical character and so on. There is usually very little sample available for metallurgical characterisation and test work. In some cases, the deep deposit is a continuation or repetition of mineralisation previously mined at higher levels, so that a better understanding Feasibility Studies and Economic Models For Deep Mines
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3 of these matters can be inferred from limited drill data. However, it may prove impractical to promote the resource category beyond Inferred from surface drilling alone.
To advance beyond surface drilling requires underground access for drilling and trial mining. The options for initial access are by decline (as at Newcrests Telfer Deeps project) or by vertical shaft (as proposed for the Gwalia Deeps project). With current truck technology, a vertical exploration shaft becomes attractive beyond about 1000m. The cost of access is about $30,000 per vertical metre for a decline, more for a conventionally sunk shaft. There is usually little cost saving in reducing the internal diameter of a conventionally sunk shaft below 5.5m, and larger diameters are usually required for equipment and services. Smaller diameters can be economically blind-bored, but failures have been frequent and a meticulous geotechnical appraisal is required.
The technological limit for shaft sinking and hoisting is currently about 2800m, well below the depths for deep mining being contemplated in Australia. The technical challenges for deeper sub-mine development and ventilation are unlikely to arise here in the medium future and can be addressed by current South African technology when they do. The challenges of stress and seismicity are already with us.
For a resource at 1200m depth, the decision to proceed underground is likely to involve expenditure of at least $60M for access and drilling before the next level of feasibility study can be undertaken. One attraction of decline development is that it may be possible to break the expenditure up into two or more phases of development and drill appraisal, with the option of suspending work if the underground drilling does not support the original interpretation.
As an example of this process, Bendigo Mining NL expended about $30M on geological assessment and the first phase of decline development, and is currently spending about $50M on further decline development, drilling and bulk sampling to establish the information required to support a final Feasibility Study. Thereafter, project finance options can be assessed. The New Bendigo mineralisation lies beneath old workings, generally below 600m down to an arbitrary 1500m limit. Despite a resource potential well in excess of 20 Mt within these limits, the configuration of the mineralisation and the extremely nuggetty gold distribution make it difficult to establish mineral resources. An Inferred Resource of 1.8 Mt has been published based on the work to date.
Resource Evaluation
The thickness, dip, continuity and spatial relationship of ore zones, the regularity of wall contacts, strength of ore and wall rocks are all critical inputs to planning. These are drawn from the resource model and directly from the geologists knowledge of the deposit gained during the data-gathering and modelling phase. Some parts of the resource may be impossible to mine; others may be located too far from development to be economic; others may suffer severe dilution.
A sectional interpretation by an experienced geologist at one or more possible cut-off grades is usually the first step in preparing the resource model. This sectional interpretation will include features inferred from the drill logs that would not be generated by any grade interpolation software. The geologists experience tells him or her how variable the ore boundaries are in this type of deposit and what shapes the variations might take. When the sections are linked and wireframed, then checked and corrected in plan and back to section, the resulting three-dimensional outlines can be used to validate the grade- interpolation process.
The above procedure is usually necessary regardless of whether or not the limits of the mineralisation envelope have been interpreted (at a sub-economic cut-off) and wireframed as limits to the grade block model. This is because the shape of the mineralisation envelope may be quite different from the boundary of the economic material.
It may be acceptable to let the grade interpolation process determine limits of economic mineralisation in large deposits to be mined by caving methods, where the edge inaccuracies of the model become insignificant. For other cases, the geologist must form a view about the spatial limits of ore at the chosen cut-off grade, and must be prepared to model the ore boundaries realistically. To do this, the geologist needs to understand the style of mineralisation and to be able to infer irregularities, including structural dislocations such as faults, at a scale smaller than the drill spacing.
The ability to think ahead to the scale of variation that will apply during mining is crucial in deep mines, because the information available is unlikely to reveal this variation directly. All orebodies appear easy (and cheap) to mine when the data is sparse; reality is usually a disappointment.
The mining engineer will design stopes which have geometric limitations dictated by geotechnical factors, the economic spacing and length of production blastholes, or the need to combine blocks of ore and waste into mineable units. When these shapes are overlaid on the resource model, the resource grade is diluted and some of the resource is lost. The resource model will contain internal dilution according to the model block size, based on an assumed Selective Mining Unit that may or may not accord with the engineers proposed method.
In an underground mine, levels are planned on the basis of relatively coarse-spaced drilling. Stopes are designed and then mined with limited flexibility for change. Pods of ore not identified by drilling will be lost, even if they are expected statistically to be present. When the data are limited, techniques such as Conditional Simulation can be useful in defining the range of possible variations in the deposit, provided the mining implications of each simulation cycle are considered independently. After all, it will not be the average of the simulations that is eventually mined, but one of the possible cases.
Predicting Mining Dilution and Mining Recovery
In most underground mine feasibility studies, sensitivity analysis shows that the commercial outcome is most sensitive to head grade. Realisation of head grade depends on the quality of geological data-gathering and modelling and also on the prediction of mining dilution. Geostatisticians sometimes claim that a resource model inherently contains an appropriate allowance for internal and edge dilution. This is an obvious fallacy; the dilution estimate must derive from mining and geotechnical considerations. Key variables are:
The mining method and size of equipment; Grade variability at the resource boundary; Feasibility Studies and Economic Models For Deep Mines
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4 Ore width, dip, geometry and continuity; Grade control method and proposed mining rate, and Geotechnical design criteria, including the stress and seismicity environment, hydraulic radius, rock quality and pillar dimensions.
The availability of digital resource models has led some practitioners to calculate diluted grades based on an assumed average thickness of overbreak. For example, 0.5 m on each wall of a 3 m wide stope represents a 33% tonnage increase. Grades from assays or composites within this envelope are used to interpolate a diluent grade. Caution is needed, as the search ellipsoid used for ore may have already considered this material, or conversely the grade of this material may be related to the sample grades lying outside the diluent boundaries in ore or waste.
In practice, stope overbreak usually takes an arcuate shape, deepest at the mid-point of the stope and minimal at the pillar sides. In large open stopes (~20 m spans), the normal arch may be 3 m deep at mid-span. If drill assays outside the stope (or ore) limits are statistically analysed to calculate diluent grade, then this shape must be allowed for. The shape of overbreak may be predicted using techniques such as the Radius Factor (Dunne and Pakalnis, 1996). In deep mines, modelling of the stress regime around stopes is likely to be instructive. In some fields such as the Yilgarn (Lee et al, 2001), there may be very good predictive information about the likely magnitude of the virgin stress field. Even so, local variations between rock units can be critically important.
Where there is a sharp geological cut-off between ore and waste, simple geometric analysis, assuming dilution at zero grade, is often satisfactory. Where the boundary is gradational (a flat grade-tonnage curve at the chosen cut-off) then some credit should be given for values in the diluent.
Dilution is greatest in narrow ore zones with sharp contacts, and least in massive ore with gradational boundaries. Dilution from backfill may be significant. If pillars are to be extracted against freestanding, cemented fill in open stopes, then the stability and likely frequency of fill failure must be considered, even if rigorous control procedures are in place. In cut-and-fill mining, more dilution may be experienced if the miners are paid on a piecework (tonnage) contract because they may dig deeper into the fill floor.
Dilution can be reduced over time as experience is gained and the mining method is optimised. Decisions about the level of stope-wall support using cable dowels are based on cost-benefit analysis, and will affect dilution. It should be obvious that experience of dilution at shallow levels has limited relevance to deep mining.
The proportion of a resource that can be recovered is typically 70 to 90% of the material available after removing inaccessible or uneconomic blocks and shaft pillars. The higher recoveries can be justified using more selective mining methods in ore of higher unit value. With all methods, some resource that would otherwise be classified as ore will be left in pillars or abandoned due to premature ground failure.
Pillar recovery may be justified as part of the ongoing mining process or as a retreating salvage operation at the end of mine life. In most studies, resources remain open along strike or at depth, so that it may appear that any error in the recovery estimate will be rendered inconsequential over time. However, it is critical to estimate mining recovery accurately so that the scheduled tonnes of ore can be delivered to the mill using the scheduled development resources and capital. As the mining recovery is increased, lower capital and operating costs are incurred in accessing each tonne of ore. Whether the increased recovery is desirable depends on how quickly the corresponding stoping costs increase in achieving the higher recovery.
Use of Benchmark Data
The lack of detailed information for deep mine studies can be addressed in part by the use of benchmark data obtained from other mines. This data will show the likely spread of values for each parameter so that realistic simulation modelling can be undertaken. For example, Figure 4.2 shows the spread of unit mining costs over a range of production rates.
Figure 2 - Benchmark Unit Mining Costs
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Mining Rate (Mtpa) U n i t
M i n i n g
C o s t
( $ / t )
It is noteworthy that, at least for depths down to 1500m, there is little correlation between depth and unit mining cost. The real value of the benchmark data set is in knowing:
Which mine is represented by each data point, Why it has a value higher or lower than the trend, and How similar that mine is to the project being evaluated.
High-level data such as Fig. 2 is useful in early studies, but detailed benchmark data on drilling, loading, trucking etc becomes more useful as the quality of the geological information improves and the studies become more detailed and specific. While there is a limited benchmark database for deep mines, the parameters from the wider database can be adjusted as necessary for variations in the operating environment.
Risk and Decision Making
The track record of mine feasibility studies is poor. A study reported by Tatman (2001) compared the final feasibility study production rate with the average sustained production rate from sixty steeply dipping tabular deposits. Tatman found that 35% of the mines did not achieve their planned production rate, and was able to derive an empirical formula relating the risk of failure to the geometry of the deposit and the rate of mining.
The failure rate observed by Tatman may be compared with the observation that only 50% of underground base metal mines and mills reach design throughput by Year 3 and 25% never reach design throughput, as shown in Fig.4.3 (Ward and McCarthy, 1999). In an earlier study of 35 Australian gold Feasibility Studies and Economic Models For Deep Mines
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5 mines (Burmeister, 1988), 68% of mines failed to deliver the planned head grade, while a review of nearly 50 North American projects showed only 10% achieved their commercial aims with 38% failing within about one year (Harquail 1991). Similar statistics can be found on studies from the 1960s and 1970s.
This history of poor feasibility study performance applies to all mines, not just the deep ones. Studies for deep mines have to overcome this inherently poor performance using below- average data quality while supporting larger than average capital investments. Given this reality, some conclusions can be drawn: Deep resources have to be of very high quality to attract finance. The expenditure on exploration, research and studies has to be higher for deep mines in order to adequately quantify the risks. A staged approach to evaluation, possibly with multiple capital raisings, may be the only way to bring a deep mine to Final Feasibility status. Access to relevant benchmark data, and an understanding of where past studies have failed, are essential inputs to the process.
Figure 3 - Startup Performance of Ten Base Metal Mines (annual data) 0% 20% 40% 60% 80% 100% 120% 140% 160% 1 2 3 4 5 6 7 8 9 10 Mine production (tonnes) as percentage of designed mill capacity Time from start-up (years) x
The question of what level of risk is acceptable to investors and lenders must be answered on a case-by-case basis. If the probability of failure is significant, then the reward for success must be very high and the likely source of funding will be equity rather than debt.
Financial Modelling
Two types of financial modelling are used in the feasibility study process:
Complex models used for choosing between options and optimising study cases. Simple presentation models that can present the base case and sensitivity analysis.
The study team uses complex models throughout the study process. They are typically macro-driven spreadsheets and may include add-ons based on genetic algorithms or other goal- seeking optimisers. Some models may be based on simulations of physical activities such as materials handling. The complex models may, within the time and cost constraints of a study, be impossible to independently check and may be meaningless to anyone but the author. They are, never the less, valuable tools that lead to optimised results that can be verified with more simple and robust models. The output from complex models is typically presented as three-dimensional plots, histograms and probability distributions. The presentation models use no macros or other hidden functions. They can be independently verified on a line-by-line basis on screen, or from hard copy using only a hand calculator. They reach a single bottom-line answer that can be flexed by changing a single input such as head grade or product price. They provide definitive confirmation that the underlying logic of the financial evaluation is robust.
Both types of models must be driven by a physical schedule. The physical schedule must be sufficiently detailed that it identifies, for example, ore sources by stope type or development type. Any model that generates a global average cost per tonne without the ability to change the proportion of ore obtained from each source can be seriously misleading.
Similarly, the use of contractor unit rates in a final feasibility study can disguise the reasons why this mine may vary from the average. Either the rates must be contractually binding at the study stage, or the study team should build up its own first principles estimates for all activities. With the uncertainty inherent in deep mining studies, there is much potential for contract variations and claims arising from various forms of latent conditions. It is not commercially feasible for the project owner to lay off these risks onto the contractor.
Where the decision makers (company directors and financiers) are mathematically literate, presentation of Monte-Carlo style simulation results can provide a much better insight into risk and reward than the traditional sensitivity analysis. In the Feasibility Studies and Economic Models For Deep Mines
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6 authors experience only a small minority of projects have been presented in this way because of a lack of interest by the decision makers. This is changing, and such presentations are particularly relevant to the higher risk and high capital environment of deep mines.
Peer Review and Audit
Hindsight is a wonderful thing, and in retrospect most feasibility study failings should have been identified before the capital commitment was made. The project owners and the study team usually share the aim of getting the project over the hurdle, which makes them less than impartial assessors of the risks. It might be thought that the financiers would provide an impartial check on study findings, but the bonus system available to lending teams gives them a bias toward approving finance where any negative outcome will only be realised several years in the future.
Major studies for deep mines, and in fact for any mines, should include:
A formal process of risk assessment. Peer review by a specialist team that has no interest in the project outcome. Independent audit of data gathering and analysis for each step in the study process.
The necessary independence is not generally available within the project teams parent organisation, so external consultants are commonly used.
Conclusion
The disappointing performance of feasibility studies noted in Section 8 might lead to the conclusion that many mining projects should never have proceeded. This view is reinforced by the poor return on investment provided by the mining sector over at least the last two decades. In the authors view the success of the Rio Tinto group has been due, at least in part, to rigorous risk assessment and a willingness to forgo the marginal opportunities.
Deep mining projects add to the problems that are generally inherent in mine development. The challenge in managing studies for deep mining projects is to balance the progressive financial exposure with the ongoing assessment of risk and reward. From the outset, peer review and audit mechanisms should be set up so that the project can be taken out and shot if ever it becomes apparent that the original expectations of financial performance are unlikely to be met.
The technological challenges are necessarily the focus of the study team. The study manager must ensure that the work is carried out within a framework that reflects the commercial environment.
References
1. Burmeister B.B., From Resource to Reality: A Critical Review of the Achievements of New Australian Gold Mining Projects During the Period January 1983 to September 1987, Macquarie University, 1988. 2. Daley A., Is it Bankable? Ore Reserve Estimates. The Impact on Miners and Financiers AusIMM March 1990. 3. Dunne, K., & Pakalnis, R. C., 1996. Dilution aspects of sublevel retreat stope at Detour Lake Mine Rock Mechanics, Aubertin, Hassani & Mitri (eds) Balkema 1996. 4. Harquail D., 1991. Investing in Junior Mining Companies. Proceedings of the 6th Mineral Economics Symposium of CIM. CIM Montreal Canada. 5. Lee, M, Pascoe, M and Mikula, P, 2001. Virgin Rock Stresses vs Rock Mass Strength In Western Australias Yilgarn Greenstones, in Ground Control in Mines Workshop, 22 June 2001, The Chamber of Minerals and Energy of Western Australia Inc: Perth. 6. JORC 1999, The Australasian Code for Reporting of Mineral Resources and Ore Reserves. Prepared by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists, and Minerals Council of Australia. 7. Tatman C.R. 2001 Production Rate Selection for Steeply Dipping Tabular Deposits Mining Engineering October 2001 pp. 62-64 8. Turner M. 2002 Seismically Active Mines To Buy or Not to Buy Underground Operators Conference. The AusIMM Townsville July 2002 pp. 141-150 9. Ward D.J. and McCarthy P.L. 1999 Startup Performance of New Base Metal Projects in Adding Value to the Carpentaria Mineral Province, Mt Isa, Qld, Australian Journal of Mining, April 1999.