Breaking down the feasibility process: Should we wait until the final feasibility study to consider business factors?

So far we have looked at the scoping and the pre-feasibility phases of the feasibility process. Of all the possible scenarios considered during the pre-feasibility study, the best scenario is selected and only it is then taken forward as the foundation for the final (a.k.a. definitive) feasibility study. This scenario will include the best understanding of the geological model and the accompanying resource estimation, details around the mining and recovery method, to which then a more accurate costing estimation, market understanding and execution strategy is applied to answer the fundamental question: “What will it be?” What will this resource be? What will this investment be? This question is broad (covering all aspects of the project in as much depth as possible) yet singular in focus (all things considered, including unconsidered things!, is this a feasible investment?).

Sick wave!

It just seemed very feasible to include this awesome photo in this post!

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Breaking down the feasibility process: One simple graph that explains pre-feasibility

The feasibility study process is critical in mineral exploration as it is the best opportunity the project owner will have to define what the project could, should and will be. In my previous post, we looked at the scoping phase of the feasibility process and how it is responsible for answering the question: “What could the project be?”. The next phase of the process is known as the pre-feasibility study and addresses the question: “What should the project be?” This is arguably the most important study in the feasibility process for any organisation. I will explain why I hold this opinion, but let’s first define the practicalities of the pre-feasibility study.

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Breaking down the feasibility process: The Scoping Phase

The feasibility assessment process is important as it is the fundamental way in which project potential, and essentially, value is assessed and further more allows the quantification of risk associated with this value. Importantly, each step of the study process, from scoping and desk study phase through to final bankable feasibility, should incrementally and realistically add value to the project and so secure potential for return on investment. When the process is not well defined, adhered to, or critical decision gates held in low regard, value can either be destroyed or value can be misrepresented (inflated).

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Geological continuity vs. value continuity: Don’t mistake one for the other or assume the one equals the other

Geological continuity in the context of resource modeling and estimation usually refers to the lithological (sometimes structural) features that define the ore zone with a defined consistency. This might be defined, for example, by a particular sandstone unit which consistently hosts uranium mineralization over a certain area, a vein (ore shoot) hosting gold mineralization or even a contact area between to rock types (skarn deposit). Value continuity however, is defined as the degree of consistency with which the value of the mineralization itself is consistent within a particular deposit. This value speaks of grade, thickness and could even be extended to geo-metallurgical consistency (the continuity of similar mineralogy). But why do we need to differentiate between these two concepts as opposed to just pure continuity?

Image of the El Soldado pit from the viewing platform. This image from the mintecminesite blog

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Geology and feasibility: 50/50 or 50% better?

When talking about feasibility studies and more particularly their failures, it is important to define what exactly a failure is. It is important for a number of reason but a particular one that comes to mind is that not knowing about, or not admitting, a problem or failure almost certainly leads to cost escalation later down the road. So how do you know when your feasibility study has failed? I am aware of the fact that in some circumstances it might be difficult to distinguish between feasibility study failure and project implementation failure but often the implementation and execution has its roots in feasibility problems.

The massive landslide at Kennecott Utah Copper's Bingham Canyon Mine occurred on April 11, 2013. Image courtesy of KSL

The massive landslide at Kennecott Utah Copper’s Bingham Canyon Mine occurred on April 11, 2013. Image courtesy of KSL

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How geologists destroy shareholder value

Geologists are responsible for developing the primary assets (resources and reserve) of mining and exploration companies. So, if the fundamental resource is not accurate or if the resource during mining stage is not adequately managed, asset value is damaged and therefore the value a shareholder has in the resource or mine. That value can often not be recovered without spending a whole lot of money, which essentially becomes cash down the toilet. Let me give a couple of brief anonymous examples from a study done by a BHP resource geologist, Chris De-Vitry. These examples illustrate how bad geological practice destroys shareholder value.

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Beginning with the End in Mind

I think it was Stephen Covey that coined the phrase “to begin with the end in mind”. For the exploration geologists, the end in mind in many respects is the completion of a Feasibility Study, otherwise known as a Bankable Feasibility Study (BFS). A BFS is typically  a comprehensive forward analysis of a project’s economics to be used by financial institutions to assess the credit-worthiness for project financing. It is important as geologists that we produce sound technical data and interpretation for use in these key documents. What is just as important though is that we understand both economic criteria and factors as well as other broader technical factors that will eventually have an effect on the feasibility of a deposit.

The idea of starting with the end in mind speaks of clear goals, understanding direction and strategy, all which result in a well defined set of priorities. In the context of mineral projects and BFS this will eventually dictate what information, on both technical and business grounds cannot be compromised on and what should be discarded. So before we go any further, start to familiarize yourself with the “end”. Download a handful of Feasibility Studies, get comfortable with the terminology and study the different technical and economic factors which come into play.

Through the next couple of post I hope to explore and unpack some of the aspects of the BFS, from the simple but fundamentally important tasks of core logging all the way to Discounted Cash Flow assessments. What I will try and focus on is the bridge between the technical factors and economic factors.

Something to keep in mind:

In the 1970s, a study for the World Bank showed that in the first year of operation after
commissioning, 60% of the mines and 70% of the treatment plants surveyed achieved a production rate of less than 70% of design capacity.

In the 1980s, a study of 35 Australian gold mines found that 68% failed to deliver the planned head grade.

A similar review of nearly 50 North American projects showed that only 10% achieved their commercial aims with 38% failing within about one year.

So apart from highlighting the effect of bad execution, these studies demonstrate that many (up to 2/3) of BFS are a load of nonsense. Bare this in mind as you read through those Feasibility Studies and see if you can identify some thumb sucking. This will also challenge you to think of the practicalities of mining and how feasible plans are in the context of the understanding of a deposit.

So, let the games begin…