October 2013

Finance

Reliable feasibility studies key amid gold price volatility

By Stephen Mlot

While the stated aim of mining companies is to maximize shareholder value, many recent projects have failed to live up to the expectations of their feasibility studies and have not delivered value to the shareholders. To change this situation, mining executives must commit the necessary time and resources to planning and strategy optimization and devote more attention to using the right benchmarking data. The costs associated with this effort will be paid back many times over.

In theory, a comprehensive feasibility study is intended to demonstrate a project’s technical and economic viability at a level of accuracy sufficient to justify the decision to proceed. If the study results are positive, the identified plan will be implemented quickly. Yet, the failure rate for achieving results predicted by feasibility studies of gold projects is approaching 70 per cent.

Many of the new gold mine project feasibility studies have operating cost projections in the lowest quartile of global gold production costs. This seems to illustrate what has become an all too common practice: the overuse of expanding production rates to gain economies of scale. Mines and process plants have become ever larger, mining and processing lower grade material. To achieve the required tonnage throughput, which is beyond what the viable part of the mineralization can sustain, lower-grade material is used to supplement the plant feed. In these circumstances, the high production rate can push down revenue faster than economies of scale can reduce costs. This truly exposes the mine to the negative side of price volatility, since it does not have a grade-based strategy to fall back on when prices drop significantly.

A recent study of feasibility inadequacies, including 105 examples over a 10-year period, showed that up to 70 per cent of the negative issues were caused by controllable factors, not by price assumptions or resource estimates. Particularly troublesome areas were mine and plant design, equipment selection, and costing and scheduling. In order to provide certainty, predictability of results, and insulation against the erratic nature of the gold market, it is important to get the costs and schedules correct, and to optimize the overall mining plan in terms of production rates and cut-off grade policy. This should be done at the prefeasibility stage to ensure only a factually supported and optimized solution is advanced to the feasibility stage. Optimization studies are sometimes done after a major feasibility study in order to “de-risk” the project, but often these studies investigate methods of reducing costs or maximizing the efficiencies of the selected strategy with a view to improving the project’s net present value, rather than looking for better strategies.

A benchmarking study is intended to identify performance and productivity. It is part of a larger strategy for operational improvement through measurement, comparative analysis, identification of performance gaps, development and implementation of solutions, and ongoing monitoring. Benchmarking information is indispensable for project evaluation practices because it provides a database of actual operating results from comparable operations. These can be used to validate project inputs and outcomes, and to determine whether they are realistic and achievable. Benchmarking also provides unbiased statistical support for sound investment decision-making and ensures well-considered decisions are made. The result is a more efficient study process. Benchmarking is not only about costs but about what drives the costs and what drives the value generated.

The strategic optimization process considers a variety of operating strategies, including production rates and processing feed grades, and is used to identify the set of operating parameters that maximize value return, usually measured by net present value. This set of operating parameters will generate optimum value at any gold price, and operating at this point ensures the greatest buffer against the vagaries of the gold market, which is something shareholders would certainly find valuable.


Stephen_MlotStephen G. Mlot, P.Eng., principal mining engineer, has a broad range of experience in mine design and planning.

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