Quantitative Risk Analysis for Mining Life

Cycle Management.

CIM Conference – Risk Workshop

Toronto
April 24, 2005

C. Coulthard, B.A.
D. S. Evans Ph.D., P. Geol.
I. Henderson M.Sc., P. Eng.

CSC Project Management Services

CSC
20 Fourth Street NE, Calgary. T2E 3R5
Excellence In Risk Management
(403) 233-7994 cscmain@cscproject.com April 2005
 Presentation Agenda

(1) Mining Issues and Problems

• Mining Activities – Life Cycle
• Key Uncertainties

(2) Introduction to Risk Management

• Risk Management
• Risk Identification and Quantification

(3) Risk Analysis and the Risk Management Process

• Quantitative Risk Management Tools

(4) Specific Application Examples

• Portfolio Management
• Mine Development

(5) Summary

CSC
Excellence In Risk Management April 2005
 Mining Issues and Problems - Mining Life Cycle Activities

Life Cycle Activity: Business Focus

Strategic Planning Stakeholder Value / Governance
Selection of Business / Areas
Portfolio Management Balance of Portfolio
Rationalization of Assets

Prospect Definition Rationalization of Assets

Development Project Execution

Start Up / Ramp Up Production On Stream

Expansion Project Optimization and

Planning

Production Volumes, Rates, OPEX,

Product Slate and Quality

Abandonment Long Term Liabilities, Closure

CSC
Excellence In Risk Management April 2005
 Mining Issues and Problems – Key Uncertainties
Life Cycle Activity: Business Focus
Strategic Planning Stakeholder Value / Governance
Selection of Business / Areas
Portfolio Management Balance of Portfolio
Rationalization of Assets
Prospect Definition Rationalization of Assets
Development Project Execution
Start Up / Ramp Up Production On Stream
Expansion Project Optimization and
Planning
Production Volumes, Rates, OPEX,
Product Slate and Quality
Abandonment Long Term Liabilities, Closure
CSC
Excellence In Risk Management
Key Uncertainties
Market conditions
Political & Social Risk
Market conditions
Political & Social Risk
Geological Potential
Resource Quality / Quantity
Estimate of Potential Value
Capital Cost, Schedule
Technology
Quality of Execution, Technology
and Regulatory Issues
Capital Cost, Schedule
Technology, Interference
Ore grade, Plant operability, Operating
team performance, Regulatory Issues
Cumulative Impact of Operating
Decisions, Environmental and
Social Issues
April 2005
 Presentation Agenda

(1) Mining Issues and Problems

• Mining Activities – Life Cycle
• Key Uncertainties

(2) Introduction to Risk Management

• Risk Management
• Risk Identification and Quantification

(3) Risk Analysis and the Risk Management Process

• Quantitative Risk Management Tools

(4) Specific Application Examples

• Portfolio Management
• Mine Development

(5) Summary

CSC
Excellence In Risk Management April 2005
 Project Management Mantras

Traditional Risk Optimized

Project + Management = Value

Time Fit for

Purpose

+ =
Continuous Breakthrough
Cost Quality Improvement Thinking

“Pick any Two”

Risk Management is used to maximize the Project value by testing

strategies to find the optimum.

CSC
Excellence In Risk Management April 2005
 Three Techniques are available that address different levels of
Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Calculate Appropriate Optimize project configuration
Contingency Targets and shareholder value.

CSC
Excellence In Risk Management
Objective April 2005
 Three Techniques are available that address different levels of
Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Calculate Appropriate Optimize project configuration and
Contingency Targets shareholder value.

Large Group – Consensus Based Small group Consensus based Broad Expert Group with
or individual interviews judgment based assessment.
(Template driven).

CSC
Excellence In Risk Management
Assessment April 2005
 Three Techniques are available that address different levels of
Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Calculate Appropriate Optimize project configuration and
Contingency Targets shareholder value.

Large Group – Consensus Based Small group Consensus based or Broad Expert Group with judgment
individual interviews (Template based assessment.
driven).

Considers the fixed execution Considers the project execution Considers all strategic options,
plan, assumptions and some plan and assumptions. execution plans and external
risks.
external risks.

CSC
Excellence In Risk Management
Scope April 2005
 Three Techniques are available that address different levels of
Risk Management
Qualitative Range Estimating
Identify key project risks Calculate Appropriate
Contingency Targets
Large Group – Consensus Based Small group Consensus based or
individual interviews (Template
driven).
Considers the fixed execution Considers the project execution
plan, assumptions and some plan and assumptions.
external risks.
No Modeling Tool-Driven Modeling focusing
on one aspect of project (Cost,
Schedule or Economics).
CSC
Excellence In Risk Management
Modeling
Quantitative Analysis
Optimize project configuration and
shareholder value.
Broad Expert Group with judgment
based assessment.
Considers all strategic options,
execution plans and external risks.
Custom Integrated modeling
highlighting cross impacts from
project areas.
April 2005
 Three Techniques are available that address different levels of
Risk Management
Qualitative
Identify key project risks
Large Group – Consensus Based
Considers the fixed execution
plan, assumptions and some
external risks.
No Modeling
No Correlation
CSC
Excellence In Risk Management
Range Estimating
Calculate Appropriate
Contingency Targets
Small group Consensus based or
individual interviews (Template
driven).
Considers the project execution
plan and assumptions.
Tool-Driven Modeling focusing
on one aspect of project (Cost,
Schedule or Economics).
Tool-Driven based on
distribution, determined by risk
analyst
Correlation
Quantitative Analysis
Optimize project configuration and
shareholder value.
Broad Expert Group with judgment
based assessment.
Considers all strategic options,
execution plans and external risks.
Custom Integrated modeling
highlighting cross impacts from
project areas.
Conditioning Variables to capture
underlying risks & correlation,
determined by project team.
April 2005
 Three Techniques are available that address different levels of
Risk Management
Qualitative
Identify key project risks
Large Group – Consensus Based
Considers the fixed execution
plan, assumptions and some
external risks.
No Modeling
No Correlation
Project Team, Constructors, and
EPCM Contractors.
CSC
Excellence In Risk Management
Range Estimating
Calculate Appropriate
Contingency Targets
Small group Consensus based or
individual interviews (Template
driven).
Considers the project execution
plan and assumptions.
Tool-Driven Modeling focusing
on one aspect of project (Cost,
Schedule or Economics).
Tool-Driven based on
distribution, determined by risk
analyst
Project Team, Constructors, and
EPCM Contractors
Audience
Quantitative Analysis
Optimize project configuration and
shareholder value.
Broad Expert Group with judgment
based assessment.
Considers all strategic options,
execution plans and external risks.
Custom Integrated modeling
highlighting cross impacts from
project areas.
Conditioning Variables to capture
underlying risks & correlation,
determined by project team.
Project Team, Owners,
Stakeholders, Constructors &
EPCM Contractors.
April 2005
 Properly conducted risk analysis builds on the early tools used for
qualitative analysis (KT, SWOT) and range estimation to include all the
risk and opportunity impacts on a project or decision.
Qualitative Range Quantitative
Comprehensive Risk Envelope for decision making

Analysis Estimation Analysis

Outcome Uncertainty
(Cost, Schedule or Economic)

Risk Variable Correlations

Integrated Modeling
(Cost & Schedule)

External / Event Driven Risk Impacts

Outside the Box Risks
(Project Assumptions)

Strategic and Tactical Alternatives Review

Full Cycle Analysis

(Production / Revenue / Finance / Returns)

Underlying Risk Drivers

(Corporate / Economic / Regulatory / Political Environment)

CSC
Excellence In Risk Management April 2005
 Five Levels of Risk Management Maturity*

Risk Management is used to base both individual

decisions and strategic planning on quantified values Level 5:
Comprehensive
Risk Management Standard
Level 4: and defined processes used
Managed across the organization
(Quantitative Risk Analysis)

Level 3: Risk Management has been implemented

into routine business processes.
Repeatable (Risk Register, Range Estimating, Real Options)

Level 2: Risk awareness, but no precedents, structures

or drive in place for consistent application.
Initial (Qualitative, KT Analysis SWOT)

Level 1:
Success depends on the competencies and heroics of individuals
Ad Hoc

CSC * Modified from PMI Risk Management Group, 2002

Excellence In Risk Management April 2005
 Quantitative Risk Analysis is a rigorous and comprehensive
process that:

• Frames the decision problem and documents a consistent set of

assumptions, limitations and constraints ...
• Allows all strategies to be tested in an uncertain environment and
compared in a quantified manner…
• Identifies all sources of uncertainty and assesses the probability of
occurrence and impact on the results ...
• Provides an effective communication tool so that the assumptions and
uncertainties are clearly communicated to stakeholders…
• Uses conditioning variables to model the underlying uncertainties to
ensure the project/activity performs in a logical manner...
• Assists in mitigation planning, implementation tactics, and identifies
opportunities to enhance project/activity value.

CSC
Excellence In Risk Management April 2005
 A rigorous process is applied consistently to evaluate all projects

Recycle to Focus on
Most Important Risks

Frame Develop Evaluate Interpret Risk

The 1 Analysis 2 The 3 The 4 Management 5
Problem Basis Risks Results

Develop Model how Identify the Calculate the Identify

Alternative underlying Experts in each uncertainty in preemptive
Strategies. uncertainties of the uncertain the key result actions.
interact to variables. measures.
Identify all influence Develop
Important outcomes Assess the Quantify the contingency
Sources of on the Project. impact and the risk & return plans.
Uncertainty. probability of for each scenario.
occurrence for Recommended
each uncertain Analyze and actions.
variable. document the
results.
CSC
Excellence In Risk Management April 2005
 Risk Management Process
An effective Risk Management plan must re-evaluate the risks on the project
and their impacts throughout the project life cycle. Each phase of the risk
analysis involves a different focus and a different mix of disciplines.

Tactical
Strategic

Strategic Project Project Project Mid- Project Year 1

Planning Definition Financing Execution Construction Start Up Full
Operations

Corporate Project Team Operations Team

Planning Involvement Involvement
Involvement

Cold Eyes Review Risk Contractor

Team Involvement Involvement

CSC
Excellence In Risk Management April 2005
 Presentation Agenda

(1) Mining Issues and Problems

• Mining Activities – Life Cycle
• Key Uncertainties

(2) Introduction to Risk Management

• Risk Management
• Risk Identification and Quantification

(3) Risk Analysis and the Risk Management Process

• Quantitative Risk Management Tools

(4) Specific Application Examples

• Portfolio Management
• Mine Development

(5) Summary

CSC
Excellence In Risk Management April 2005
 Risk Analysis is the centerpiece of a Risk Management Process

Base Design
& Operating Plans

Scheduled, Formal Reviews

Updated Model Results
Risk Analysis (Probabilities, Tornados, Steps)
Management Risk Reporting

Risk
Monitoring
System

Tornado Diagrams
Probability Step Diagrams
Distributions Interview Issues Model and Test Options
Project Targets Immediate Risk Contingency Plans
Control Measures

There are four key outputs from a comprehensive Risk Analysis

CSC
Excellence In Risk Management April 2005
 Project Targets
The probability distribution illustrates the full
range of project uncertainty and is used to set the
project targets at appropriate confidence levels.

90% Note:
Confidence Level 1. Each point on the curve is a result from
P80 (?)
a single Monte Carlo trial. The expected
value represents the average value of all
Probability

the trials.
Expected
50% Value * 2. The slope of the 10/90 range represents
Downside the uncertainty, the flatter the curve, the
Risk
Upside more uncertainty.
Opportunity
3. The curve below the expected value
indicates upside opportunity, the
10% portion above shows the downside risk.
10/90 Range

CAPEX, Schedule, OPEX, etc.

CSC
Excellence In Risk Management April 2005
 Project Targets
Probability distributions illustrate opportunity and risk trade-
offs, and can be used to select the best project option.
Option A

90%
Option B

Upside
Expected
Opportunity
Value
Probability

50% *
Option B has slightly more risk
Downside
Risk with a much greater upside
opportunity.
10%

Project Production (or NPV, ROCE, ROR)

CSC
Excellence In Risk Management April 2005
 Immediate Risk Control Measures
The tornado diagram identifies and ranks the key project
risks and is a tool that helps the project team to focus on the
most important drivers.

Days
Start Date -60 -40 -20 0 20 40 60
Road Preparation Duration 3 6
Labour Productivity Delays -1.25 1.75
Plant Pad Preparation Duration 3 6
Labour Unrest Delays 0 2.3
Execution Organization Performance Best Worst
Regulatory Duration 11.3 16.5
Competing Project Environment Low Heated
Start-up & Commissioning Duration (Early Steam) 1.5 2.4
Terms of Reference - Duration 3 4
Regulatory Environment Relaxed Stringent
Terms of Reference - Application Date 1-Aug-02 1-Oct-02
Labour Availability Delays 0 1.4
OTSG Manufacture & Delivery Duration 12 16
Weather Delays 0 0.5
Long Lead Equipment Delays -1 2

EV = 20-Dec-07

CSC
Excellence In Risk Management April 2005
 15-Aug-07

15-Nov-07
01-Dec-07
15-Dec-07
CSC

15-Sep-07

15-Oct-07

01-Jan-08
1-Nov-07
1-Sep-07

1-Oct-07
Excellence In Risk Management

+6
AFE Approval

Base= 03-Sep-07
+13
Engineering to 60%

+7
Preliminary Vendor Data

Module Steel Fabrication

0

base estimate to the Expected Value occurs, and identifies key

Module Pipe

The Step Diagram demonstrates where the growth from the

0
Fabrication Duration

Immediate Risk Control Measures

Rack/ Process
-3

Module Assembly
Last Process Area Module
0

On-site to Construction
Complete

Start Date
Evaporator Units
0

Vapour Compressors
0

factors impacting the cost.

+1

Site Prep Duration

-8

Piling
+14

Commissioning Duration
-3

Start-up Duration
+31

Construction Duration
+5

Materials Delivery
+5

Weather Delay
+12

Labour Issues
+14

Long Leads
EV= 20-Dec-07

Complete to MC
+5

Design definition Changes

+10

Labour Productivity
April 2005

+3

Reworks
 Immediate Risk Control Measures
A complete risk register considers all sources of information
available for the project uncertainties.

Project Qualitative Quantitative

Documentation Analysis Analysis

Risk Register
CSC
Excellence In Risk Management April 2005
 Contingency Plans
The analysis can be used to evaluate impacts of schedule
risks, and test mitigation steps to show the potential for
schedule advancement. Incremental mitigation can be
applied to reach an acceptable target date.
100%
90%
80% Mitigated
EV = 21-Feb-04
70%
Base
60% EV = 1-Nov-04

50%
40%
Unconstrained
30% Fix Filing Date (-120 days)
20% Early Application (-40 days)
10% No JV Delays (-60 days)
No Staffing Delays (-30 days)
0%
1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07

CSC
Excellence In Risk Management April 2005
 Risk Monitoring System
Use of risk analysis throughout the project life helps the
project team to focus on the most important risks for each
stage of development, resulting in a better defined project
(i.e. less risk).

90%

70%
Probability

Definition
EV = 528 $MM Project AFE
50% EV = 697 $MM
Planning
EV = 460 $MM
Mid-Construction
EV = 669 $MM
30%

Start Up
EV = 695 $MM
10%

-800 -400 0 400 800 1200 1600 2000

Project NPV ($MM)

CSC
Excellence In Risk Management April 2005
 Presentation Agenda

(1) Mining Issues and Problems

• Mining Activities – Life Cycle
• Key Uncertainties

(2) Introduction to Risk Management

• Risk Management
• Risk Identification and Quantification

(3) Risk Analysis and the Risk Management Process

• Quantitative Risk Management Tools

(4) Specific Application Examples

• Portfolio Management
• Mine Development

(5) Summary

CSC
Excellence In Risk Management April 2005
 Mining Issues and Problems – Key Uncertainties
Life Cycle Activity: Business Focus
Strategic Planning Stakeholder Value / Governance
Selection of Business / Areas
Portfolio Management Balance of Portfolio
Rationalization of Assets
Prospect Definition Rationalization of Assets
Development Project Execution
Start Up / Ramp Up Production On Stream
Expansion Project Optimization and
Planning
Production Volumes, Rates, OPEX,
Product Slate and Quality
Abandonment Long Term Liabilities, Closure
CSC
Excellence In Risk Management
Key Uncertainties
Market conditions
Political & Social Risk
Market conditions
Political & Social Risk
Geological Potential
Resource Quality / Quantity
Estimate of Potential Value
Capital Cost, Schedule
Technology
Quality of Execution, Technology
and Regulatory Issues
Capital Cost, Schedule
Technology, Interference
Ore grade, Plant operability, Operating
team performance, Regulatory Issues
Cumulative Impact of Operating
Decisions, Environmental and
Social Issues
April 2005
 Mining Issues and Problems
Early in the Project life cycle the analysis should be focused at a high level to level to
ensure that the right strategic decision is taken.

Activity: Business Focus Key Uncertainties

Strategic Planning Stakeholder Value / Governance Market conditions
Selection of Business / Areas Political & Social Risk

Portfolio Management Balance of Portfolio Market conditions

Rationalization of Assets Political & Social Risk
Geological Potential
Prospect Definition Rationalization of Assets Resource Quality / Quantity
Estimate of Potential Value

CSC
Excellence In Risk Management April 2005
 Strategy Table for Country Risk Analysis
Decisions
Strategy Country Commodities Mining Processing Smelting Markets
Extraction &
Refining
Increasing Canada Polymetallic Open Pit Heap Leach In Country
Reserves In Country:
onsite

Competitive Indonesia Precious Underground Standard Regional

Need Metals Flotation & In Country:
Concentration offsite

Competitive Russia Industrial InSitu Leach Solvex Out Of International

Advantage Minerals Country

Selected Strategy Options

CSC
Excellence In Risk Management April 2005
 Portfolio Management to select best mining project
Environmental
Performance
Exploration/ Mech.
Acquisition
AFE Duration Duration
Socio-Cultural Duration
Environment
Pre- Project First
Acquisition
Acquisition Execution Production

Discount
Political Local Labour
Extraordinary Rate
Climate Benefits Productivity
Costs CAPEX

Project
Infrastructure
Acquisition/ Labour NPV
Material Bulks Costs
Exploration & Equipment Costs
Costs Costs Fixed OPEX
Energy & Costs
Utility Costs
Smelting &
Refining Costs Variable Revenue
Chemical Costs
Environmental
Performance Costs
Commodity
Expropriate Price
Taxes & Fiscal Closure
Royalties Terms
Closure
Cost

CSC
Excellence In Risk Management April 2005
 Portfolio Management

NPV Country Case Comparison

100%
90%
80%
Canada
Probability

70% Russia
EV = $147 MM
EV = -$415 MM
60%
50%
40%
30% Indonesia
EV = $48 MM
20%
10%
0%
-1500 -1000 -500 0 500 1000 1500

$MM NPV @ 12%

CSC
Excellence In Risk Management April 2005
 Portfolio Management

Cumulative Cash Flow

1000
Indonesia Payout
EV = 2014

500 Canada Payout

EV = 2011
$MM

-500

-1000
2000 2005 2010 2015

Year Russia Payout

EV = Never

CSC
Excellence In Risk Management April 2005
 Portfolio Management

The Tornado Diagram highlights the key drivers for the option
and identifies areas to focus mitigation efforts to ensure success
$MM NPV @ 12%
-100 0 100 200 300 400

Political Climate
Daily Production
Socio-Cultural Environment
Taxes & Royalties
Au Grade
Cu Price
Acquisition / Exploration Costs
Environmental Performance
Au Price
Labour Costs
Zn Recovery Rate
Zn Grade
Chemical Costs
Ramp-up Duration
Local Benefits
EV = $147 MM

NPV Canadian Case

CSC
Excellence In Risk Management April 2005
 Mining Issues and Problems
During the Project Development phase the analysis should have more focus on the
tactical level to ensure that the project is executed well.
Activity: Business Focus Key Uncertainties

Development Project Execution Capital Cost, Schedule

Technology
Start Up / Ramp Up Production On Stream Quality of Execution, Technology
and Regulatory Issues
Expansion Project Optimization and Capital Cost, Schedule
Planning Technology, Interference

CSC
Excellence In Risk Management April 2005
 Development – capital cost for a mining project

Bid
Rate
$ 5 MM
Shaft
Excavation $ 60 MM
Competing
Materials/ Mine
Projects $ 40 MM
Estimate
Variance Level
Excavation
Labour $ 15 MM
Rate
Subsurface
Equipment

Scope
Variance $ 60 MM $ 160 MM
Used Mill Total
Equipment Project
Labour CAPEX
Productivity $ 5 MM
Roads $20 MM
Organization
Performance Infrastructure Exchange
Rate
Local
Benefits Water Miscellaneous
Cost
Variance $ 5 MM $ 10 MM

$1.5 MM/yr $3 MM
Engineering
Cost Sustaining
Capital Administration $ 20 MM
Variance $ 15 MM
EPCM Indirects

CSC
Excellence In Risk Management April 2005
 Development - CAPEX

The Cumulative Probability Distribution shows that $35 MM (16%)

contingency is required for a 70% confidence limit. The slope
(uncertainty) in the curve approximates a Class V Estimate.
Base Estimate
$160 MM
100%
90%
80% P90 = $220 MM
$35 MM
70%
Probability

Expected Value
60% CAPEX = $175 MM

50% Class V Estimate

+25%/-25%
40%
30%
P90 = $130 MM
20%
10%
0%
50 100 150 200 250 300

CAPEX ($MM)
CSC
Excellence In Risk Management April 2005
 Development - CAPEX

The range in in Capital Cost is largely due to uncertainty in Mine Unit

Cost Variance, Mine Quantities Variance and Level Development Scope
Variance.

Total Capital Expenditure $MM

-15 -10 -5 0 5 10 15 20

Mine Dev. Unit Cost Variance

Mine Dev. Quantities Variance
Competing Projects Environment
Level Excavation Dev. Scope Variance
Infrastructure Costs
Execution Organization Performance
Infrastructure Construction Duration
Regulatory Process Duration
Tailings Cost Variance
Roads Cost Variance
Subsurface Equipment Costs
Mine Construction Duration
EPCM Cost Variance -Base
Leaseholder Negotiations Duration
Water Cost Variance -Base

$175 MM

CSC
Excellence In Risk Management April 2005
 Presentation Agenda

(1) Mining Issues and Problems

• Mining Activities – Life Cycle
• Key Uncertainties

(2) Introduction to Risk Management

• Risk Management
• Risk Identification and Quantification

(3) Risk Analysis and the Risk Management Process

• Quantitative Risk Management Tools

(4) Specific Application Examples

• Portfolio Management
• Mine Development

(5) Summary

CSC
Excellence In Risk Management April 2005
 Modern Day Applications of Risk Analysis
to Mining Issues and Problems
• Risk management is fundamental for accountability on corporate
governance and on maximizing shareholder value.
It begins with strategic definition and continues in a consistent manner throughout
the project life cycle. The earlier risk management starts, the earlier you can avoid
or mitigate risks and capture opportunities.

• Risk Management ensures that there are no surprises.

Documentation of assumptions and all risks. Communication of risk analysis results
and the plan for managing those risks (avoid, accept, manage). The focus of efforts
is on the underlying project risks.

• Range Estimating is not Risk Analysis.

Fully accountable risk analysis considers the specific uncertainties of a project, and
incorporates these underlying risks into the project value. Processes that provide
single-point outcomes or risk distributions based on the probability of fixed outcomes
(decision trees, KT, range estimating) do not meet the definition of risk analysis.

• “Ignoring risks to a project is not an option; important decisions will be made

anyway, should they not be made with the best information available?”
(Project Manager Today, October 2000)

CSC
Excellence In Risk Management April 2005