Basics of Mining Mining and Money[1]

7/27/2019 Basics of Mining Mining and Money[1]

http://slidepdf.com/reader/full/basics-of-mining-mining-and-money1 1/71

The 13th Annual

Americas School of Mines

Basics of Mining and Mineral

Processing

Part E: Mining and Money

Vancouver Instructor: W. Scott Dunbar



PricewaterhouseCoopers

W. Scott Dunbar

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Slide 2




W. Scott Dunbar

Mining and Money: The Topics

Metal markets

and prices

Mine project cash

flows, costs

Resources and

reserves

Mineral and metal

products, metal contracts

Reportingstandards

Click on any of the topic icons below to view the slides on that topic

Things

accountants do

Slide 3




W. Scott Dunbar

Metal and Mineral Production

ore direct to

buyer

Smelter/

refinery

Buyers

refinery

smelter

contract

refinery

contract

flotationconcentrate

precious

metals

impure metalleaching

crushing

sorting

separation

iron ore, coal, potashindustrial minerals

delivery

contract

Mine

base

metals

leachingoxides

sulfides

electro-

winning

Slide 4




W. Scott Dunbar

Notes: Metals and Mineral Production

A mill at a base metal mine typically uses flotation to produce a concentrate that has a concentration of 20-40% of a

primary metal. Copper concentrates are typically 25-30%. The concentrate is transported to a smelter/refinery

complex. Unless the mining company owns the smelter/refinery, the sale of concentrate is governed by a smelter

contract.

The situation for a precious metal mine is similar. The mill at the mine uses leaching to produce an impure metal

product which must be refined to produce pure metal (99.99% pure) The impure metal at a gold mine is called doré,

a mixture of 60-90% gold and other metals, often silver. Unless the mining company owns the refinery, the sale of

the impure metal is governed by a refinery contract.Iron ore, potash and industrial minerals typically require some form of separation technology to produce a desired

product. Flotation is used to obtain fertilizer grade potassium chloride and to separate coal from stones. Grinders

and cyclones are used to produce iron ore products. The processed ore is shipped to a buyer under terms of a

delivery contract which specifies the delivery times of required quantities and the required grades.

In some rare cases, the ore from a mine is so rich, it is shipped directly to a smelter or refinery. For some time the ore

from the Eskay Creek mine in British Columbia was shipped by train to smelter/refineries in Quebec or Japan. Eskay

Creek currently sells concentrate and doré.

Slide 5




W. Scott Dunbar

Smelter contracts

Concentrate

25-30% Cu

Freight costs,

insurance ,etc

Orebody

<1% CuAnode copper

95-98% Cu

Treatment

charges (TC)

and penalties

Cathode

copper

>99.9% Cu

Refinery

charges (RC)

At Mine Return

(AMR)Net Smelter

Return (NSR)

Credits forprecious and

other metals

Slide 6




W. Scott Dunbar

Notes: Smelter contracts

A smelter contract contains details concerning:•how the mine will be paid for the principal metal in its concentrate,

•how the mine will be credited for other desirable metals in the concentrate (e.g., by-products

such as gold),

•what penalties will be applied for materials that affect the performance of the smelter (e.g.,

antimony, bismuth, moisture)

•how the delivery is to be made, and

•the manner in which check assays of the concentrate will be done.

The payment received by the mine is often called the Net Smelter Return (NSR). The mine is usually

responsible for transportation, insurance, and agents’ costs (realization costs). These costs are

subtracted from the net smelter return to obtain the At Mine Return (AMR). The AMR can be as little

as 60% of the value of the metal shipped to the smelter.

A simple mass balance between ore and concentrate can be used to determine how many tons of ore

are needed to produce one ton of concentrate:

K tons grade g recovery r = 1 ton grade G

Given the concentrate grade G, the ore grade g, and the metal recovery r, K can be computed. For

example: g = 0.5%, r = 92%, G = 28% gives K = 60.9 tons.

Slide 7




W. Scott Dunbar

Refinery contracts

Orebody

0.0003-0.0008%MineralProcessing Doré60-90% Au

For precious metals

RefineryMine

Larger mining operations have their own refineries

Gold bars

>99.5% Au

~25 kg ~13.4 kg

Slide 8




W. Scott Dunbar

Notes: Refinery contracts

Typical terms of a gold refinery contract are:

A treatment charge of $0.80 to $1.20 per oz, depending on current market conditions

The refinery typically pays the mine for 98% to 99.95% of the gold contained in the doré,

depending on market conditions.

Penalties are applied for deleterious elements such as iron, lead, tellurium and nickel.

The refinery will pay between 95% and 99% of the silver content of the doré.

The complexity of refinery contracts lies in the procedures established for weighing and assaying.

Security measures, delivery dates, disposition of refinery waste, and transportation of the gold are all

dealt with in a refinery contract.

Slide 9




W. Scott Dunbar

By-products and Co-products

By-product

• secondary metal produced in the mining and processing of another metal

• usually not important to the viability of mine

• e.g. gold/silver in copper concentrate, copper/molybdenum

Co-products

• metals that are mined and produced together

• important to the viability of a mine

• e.g. gold and silver in lead/zinc mines

From an accounting perspective, this distinction does not exist.

Slide 10




W. Scott Dunbar

Notes: By-products and Co-products

Prices can determine whether a metal is a by-product or co-product. For example, in a period of high

metal prices, each metal could be considered a co-product (or simply a product). During periods of low

metal prices, the gold in a copper concentrate may be important to the viability of the mine. Mines

with poly-metallic ores (e.g., Myra Falls, Eskay Creek) sometimes call themselves different types of

mine depending on prices.

Current accounting rules (GAAP) specify that revenue from by-products and co-products be stated as a

line item for each individual product. Costs for production of a particular by-product or co-product

cannot be used to reduce overall operating costs. Thus, by-product gold credit for a copper

concentrate cannot be used to reduce the operating cost of a copper mine.

Before the current accounting rules were established, in some cases the high prices of a by-product

caused operating costs to become negative, clearly not representative of the actual conditions.

Essentially the new accounting rules eliminate the distinction between by-products and co-products.

Slide 11




W. Scott Dunbar

How metal prices are determined

Producer Prices

• producers set price

• common for industrial minerals

Independent Pricing• pricing determined by independent bodies

• eg Platts, London bullion dealers, Uranium: Ux, Trade Tech, Nukem

Negotiated Prices

• pricing determined by direct negotiation between buyer and seller

• long-term contracts for metals or concentratesCommodity Exchanges

• London Metals Exchange (LME)

• New York Mercantile Exchange (NYMEX)

Slide 12




W. Scott Dunbar

Notes: How metal prices are determined

Producer Prices

Producer(s) set price taking into account costs, potential markets, and levels of competition

Was common in aluminum, molybdenum and nickel industries

Common for industrial minerals where transportation costs are high

Independent Pricing

Pricing determined by sources that are neither buyer nor seller of metals

Prices are averages of prices of actual transactions between producers, consumers, and metals traders

Metals include: magnesium, titanium, iridium, aluminum

Examples: Platts, Metal Bulletin, Handy and Harman, London bullion dealers

Negotiated Prices

Pricing determined by direct negotiation between buyer and seller

Common in long-term contracts for ore, metal concentrates or metal products

Examples:

iron ore to steel mill

base metal concentrate to smelter (smelter contract)

Slide 13




W. Scott Dunbar

Commodity Exchange Pricing

Prices determined by transactions by dealers on an exchangesuch as the LME or NYMEX

Spot (present) or forward (in future) prices

LME trades in Al, Cu, Pb, Ni, Sn, Zn

NYMEX trades in Al, Cu, Au, Ag, Pt, Pa

Slide 14




W. Scott Dunbar

Notes: Commodity Exchange Pricing

Base metals: Al – Aluminum, Cu – Copper, Pb – Lead, Ni – Nickel, Sn – Tin, Zn – Zinc,

Precious metals: Au – Gold, Pt – Platinum, Pa – Palladium

LME – London Metal Exchange www.lme.co.uk

NYMEX – New York Commodity Exchange www.nymex.com

Prices at these exchanges are determined by a continuous auction carried between member dealers acting on behalf

of their customers, the companies they represent, or themselves. The auction is done by open outcry.

See www.lme.co.uk/pricing.asp

www.nymex.com/how_exchang_works.aspx has a more descriptive explanation.

Both NYMEX and LME engage in e-trading of metals. There are other sites where e-trading of metals is done, e.g.,

www.suppliersonline.com

The Shanghai Futures Exchange (www.shfe.com.cn/Ehome/index.jsp) provides services for trading futures contractsin commodities such as copper, aluminum, natural rubber and fuel oil.

Slide 15




W. Scott Dunbar

Precious Metals Markets

London Bullion Market Association:

• Members meet twice daily to review offers from worldwide sourcesto buy and sell gold and silver

• Results averaged and announced as the official AM and PM“fixings” for each of the two metals.

London Platinum and Palladium Market

• Similar to London Bullion Market

Since mid-70s, gold fixings made in Tokyo, Singapore and Zurichhave become important

Slide 16






W. Scott Dunbar

Gold Prices and Inflation?

0

100

200

300

400

500

600

700

800

900

1 9 7 0

1 9 7 5

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

0

2

4

6

8

10

12

14

16

Annual change in CPI

A n n u a l c h a n g e i n C P I ( % )

Oil price

increases

Central bank

gold sales

Gold Price

G o l d P r i c e ( U S $ / o

z )

Recession

Market

uncertainty

Terrorism, War

Gold prices: www.lbma.org.uk

CPI indices: http://stats.bls.gov/cpi/#tables

Slide 18




W. Scott Dunbar

Notes: Gold Prices and Inflation?

Until about 1990, there seems to be a correlation between inflation and gold price. However, after1990 the correlation is not as good. In the late 1990s, central banks began selling their gold supply so

that gold price decreased even though inflation increased. Hedging of gold by gold producers during

the same period effectively increased the supply because hedging is effectively selling gold that is not

yet mined; however, producers have decreased hedging activity since about 2000. Terrorist activities

in 2001-2002 may have caused investors to protect the value of their portfolios with gold causing an

increase in price. But the more recent price increase is large and cannot be explained by the increase

in inflation or by the need for portfolio protection. Other forces may be at work.

Slide 19




W. Scott Dunbar

The gold market is a paper market

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2,000

4,000

6,000

8,000

10,000

12,000

14,000

T o n n e s g

o l d

LBMA trading

Physical demand

Data sources:

www.lbma.org.uk

www.gold.org

Slide 20




W. Scott Dunbar

Notes: The gold market Is a paper market

Trading in physical gold is done for electronics fabrication, jewellery, dentistry, coin and medal makingand retail investment. The London Bullion Market trading volume is mainly composed of the purchase

of large lots of gold by central banks and financial institutions, a paper market.

It is evident from the graph that the paper market for gold is much larger than the physical market and

that trading in physical gold has remained relatively constant since about 2000. Transactions in the

paper market, a representation of the demand for investment in gold, affect the price of gold more

than physical transactions. The paper market for gold investment constitutes a fundamental aspect of

the gold market.

Slide 21




W. Scott Dunbar

September October 2008 gold

0 9 - S e p

1 0 - S e p

1 1 - S e p

1 2 - S e p

1 5 - S e p

1 6 - S e p

1 7 - S e p

1 8 - S e p

1 9 - S e p

2 2 - S e p

2 3 - S e p

2 4 - S e p

2 5 - S e p

2 6 - S e p

2 9 - S e p

3 0 - S e p

1 - O c t

2 - O c t

3 - O c t

6 - O c t

7 - O c t

8 - O c t

720

740

760

780

800

820

840

860

880

900

920

950

1000

1050

1100

1150

1200

1250

Gold

G o l d p r i c e ( $ U S / o z )

Lehman Bros

bankruptcy

The September 2008 credit crisis

S & P 5 0 0S&P 500

US govt announces

bank bailout Sep 19

Bailout rejected

Sep 29

Slide 22




W. Scott Dunbar

Copper Supply and Price

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

0

200

400

600

800

1,000

Source: www.lme.co.uk

S t o c k s ( k i l o t o n n e s )

Price

Copper: LME stocks vs price 1990-2008

P r i c e ( U S $ / t o n n

e )

Slide 23




W. Scott Dunbar

Notes: Copper Supply and Price

Commodity exchanges have warehouses where a physical supply of a metal is stored. In this case thecopper supply is the total available for purchase in these warehouses on a particular day. Traders know

this supply and also know of any constraints on supply (eg smelter or mine shutdowns) Thus they

know as much as possible about the market and bid or ask a price on that basis.

The correlation coefficient between copper stocks and price is -0.76, almost completely anti-

correlated. Similar results for other base metals.

From these data, an empirical relationship between supply and price can be determined. Predictions

of supply can be made using macro-economic factors. The empirical relationship between supply and

price can then be used to predict future price from future predicted supply. Results are generally good.

Slide 24




W. Scott Dunbar

Speculation in the copper market

0 4 - J a n - 0 0

0 4 - A u g - 0 0

0 8 - M a r - 0 1

1 1 - O c t - 0 1

2 1 - M a y - 0 2

2 0 - D e c - 0 2

3 0 - J u l - 0 3

0 2 - M a r - 0 4

0 5 - O c t - 0 4

1 1 - M a y - 0 5

0 9 - D e c - 0 5

1 8 - J u l - 0 6

1 9 - F e b - 0 7

2 4 - S e p - 0 7

2 9 - A p r - 0 8

2 8 - N o v - 0 8

-200

-100

0

100

200

300

S p o t P r i c e - 3 m o

F u t u r e s P r i c e ( $ U S / t )

Source: London Metals Exchange

Copper

Slide 25




W. Scott Dunbar

Notes: Speculation in the copper market

Backwardation is a situation in which the price of a commodity for future delivery is lower than thespot price or, more generally, a far future delivery price is lower than a nearer future delivery price.

Backwardation is a premium representing what a buyer is willing to pay for the immediate delivery of

the commodity.

The difference [Spot Price – 3 month Futures price] would be an indication of this premium. A plot of

this difference for copper between 2000 and 2008 is shown below. Until about the end of 2003 there

was little to no premium associated with immediate delivery of copper. Then there was a significant

premium and some rather wild changes.

The simple explanations for the increase in premium are the increase in demand for copper in China

and India and the supply interruptions caused by strikes at copper mines in Chile, Peru and Mexico.

The demand and the strikes put pressure on copper supplies so that manufacturers pay more to assure

delivery now rather than later when the price may increase.

However, the wild changes in the premium suggest to some that the market is being influenced by

speculators who have the ability to enter and exit the copper market depending on their investmentgoals. Their trades typically involve large volumes of copper which have an influence on spot price.

(Note that the copper likely does not move to or from the warehouse – it is merely tagged as sold.)

Essentially the copper market is becoming a financial market, much like a stock exchange, which

introduces an unknown element to the market.

Slide 26




W. Scott Dunbar

Canadian Mineral Production

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

4

6

8

10

12

14

16

18

20

22

24

2628

Source: Natural Resources Canada

V a l u e ( C $ b i l l i o n )

Metallic

NonMetallic

Slide 27




W. Scott Dunbar

Notes: Canadian Mineral Production

The top ten industrial minerals ranked by value are shown in the following table:

Source: http://mmsd.mms.nrcan.gc.ca/stat-stat/prod-prod/ann-ann-eng.aspx

2008 Industrial mineral production ranked by value (preliminary)

Value Production Unit value

C$(thousands) kilotonnes $/t

1 Potash (K2O) 8,243,156 10,455 788.44

2 Diamonds 2,403,554 14,803 162.37 $/carat

3 Sulphur, elemental 2,388,537 7,971 299.65

4 Cement 1,792,110 14,028 127.75

5 Sand and gravel 1,496,100 239,646 6.24

6 Stone 1,373,088 145,825 9.42

7 Salt 537,780 14,168 37.96

8 Lime 273,576 2,069 132.23

9 Peat 215,636 1,151 187.35

10 Sulphur, in smelter gas 192,865 704 273.96

Ra nk Product

Slide 28




W. Scott Dunbar

The Project Cash Flow Machine

Mining Project

Revenue

Operating

Costs

K Loan

A = Principal +

Interest

Capital costs

K = E + LCash at time t:

f = -K (construction)

= R-C-T-A-Q (operation)

Royalties Q Taxes = (R-C-D-I-Q)

D = Depreciation

I = Interest

= tax rate

Equity

Slide 29




W. Scott Dunbar

Notes: The Project Cash Flow Machine

Equity comes from the owner of the mining project who may have the cash available or could issue

shares to obtain the cash. The loan may come directly from a commercial bank or the company may

issue bonds to obtain cash.

During the construction period a total K is spent to build the project. Alternatively K may be the cost

to buy the project from another company.

Assets such as equipment and buildings are depreciated by an amount D during the course of the

operation. Various depreciation schemes are used. Canada uses the double declining balance method

for mine equipment. The depreciation is tax-deductible.

The mine reserves are an asset but are usually depreciated in a different way depending on the

jurisdiction.

In general, a loan is paid off by means of a payment to principal and interest: A = P + I. The interest

payment is tax-deductible.

Royalties paid to private party are tax-deductible. In Canada, royalties are paid to the province inwhich the mine is located, but these are accounted for as a deduction from federal taxes.

Slide 30




W. Scott Dunbar

Typical Mining Project Cash Flow

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-60

-40

-20

0

20

C a s h f l o w f ( $ M )

End of Year

C o n s t r u c t i o n Operation

C l o s u r e

Slide 31




W. Scott Dunbar

Notes: Typical Mining Project Cash Flow

Cash flows are assumed to occur at the end of a period and are discounted to the beginning of the

first time period, t = 0. During construction, cash flow is negative. The cash flows f are

estimated for each year j of the project, N j 1 . The net present value of the cash flows is

given by

1 1

during construction

during operation

N j

j j

j j

j j j j j

f NP V

r

f K

R C T A Q

where r is the discount rate equal to the cost of capital for the owner of the project.

One goal of mine design is to establish a mining schedule that will lead to particular behavior of

the cash flows during operation, despite small price fluctuations. Examples include: large cash

flows at the beginning of the operation or minimal fluctuations of cash flow during later years.

Slide 32




W. Scott Dunbar

But all prices go up

1970 1975 1980 1985 1990 1995 2000 2005 2010

20

40

60

80

100

120

140

160

180

200

P r o d u c e r p r i c e i n d e x

Metals and metal products

Construction machinery and equipment

Source: www.bls.gov

Slide 33




W. Scott Dunbar

Cutoff Grade

Questions:

Effect of price and recovery variations

What costs should be included?

Reserves must be extracted economically:

Price Grade Recovery > Total Costs

For equality

Total costs usually include all the costs of mining, processing, and overheads. What

overheads and how to attribute them is an interesting question.

Total costsCutoff grade =Price Recovery

Slide 34




W. Scott Dunbar

The things accountants do (in their offices)

Inventory of metal available under leach

Stripping costs

Rehabilitation and reclamation costs

Assessment of asset impairment

Each involve uncertaintyEach depend on an estimate of available ore

Slide 35




W. Scott Dunbar

How much metal inventory is in this leach pad?

A lot, but it cannot all be recovered

Recovery is uncertain and varies over the life of the pile

Typical recoveries: 40-70% See notes for example

less consolidated

more flow

more consolidated

less flow

Note difference in color at

top of pad

mineral particle

Leach pad, Anchor Hill pit, South Dakota

Photo courtesy Robertson Geoconsultants

Slide 36




W. Scott Dunbar

Notes: How much metal inventory is in this leach pad?

Suppose Bagdad piled some oxide ore into a 200m 200m pile and suppose the pile was 10 m high.

Then there are 400,000 m3 of ore in the pile. The density of the ore might be 2.0 tonnes/m 3. That

means there are 800,000 tonnes of ore in the pile. In 2005 the oxide ore grade was approximately 0.1%

Cu [1] so that there are about 800 tonnes of copper in the pile. That’s 800,000 kg or about 1.76 million

pounds.

However, recovery of copper in a leach pad is typically 40-70%. Leach pad recovery (over multiple leach

cycles) at Bagdad averaged 43.3% in 2005 [2]. Thus for the hypothetical leach pad above, the expected

amount of recovered copper would be 800,0000.433 = 346,400 kg or 763,681 lb.

Recoveries from gold leach pads are similar. The reason for the low recoveries is that not all of the

leaching solution (acid in the case of copper, cyanide in the case of gold) can flow past the mineral

particles. Flow paths to the particles may be blocked. In addition, as more ore is placed on top of the

pad, the particles in the underlying ore become consolidated (closer together) and can block the flow

of the leaching solution. For this reason, a layer of ore is placed on top of a pad only after the recovery

from the lower layers begins to decrease.

[1] Phelps Dodge 2005 Annual Report, p. 9

[2] Phelps Dodge 2005 Annual Report, p. 16

Slide 37




W. Scott Dunbar

Is it development or is it production?

Development is depreciable, production is an expense, but …

Waste removal (stripping) occurs during development and production stages.

Is waste removal developing the future mine or is it part of production?

When does development end and the full production phase begin?

Slide 38




W. Scott Dunbar

Stripping Costs

During production, should they be capitalized or expensed?

Strip Ratio (= Waste/Ore) varies during mine life

amount of ore produced

changes

If expensed, production costs per

ton of ore vary over life of mine

If capitalized, amortization

schedule changes over life of mine0 5 10 15 20 25 30

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

S t r i p r a t i o

Year of production

Life of Mine strip ratio = 1.6

Seabridge Gold Inc

Kerr-Sulphurets-Mitchell Mine, BC

Source: Preliminary Economic Assessment, 2009

Slide 39




W. Scott Dunbar

Notes: Stripping CostsThe numbers shown on the graph are illustrative. The point is that the strip ratio may be high after production starts

and then decrease to a “life of mine” value.

Following commencement of commercial production, stripping costs are not generally capitalized, but are included as

a cost of production as incurred. However, Canadian GAAP permits capitalization of stripping activity, during

production, if the stripping allows access to additional ore (a betterment of an asset). Capitalized stripping costs are

amortized on a units-of-production basis over value of the additional ore (actually the proven and probable reserves –

see later). Under US GAAP, all stripping costs are treated as variable production costs of current production.

A pushback of the west wall of the Valley pit at Highland Valley, BC will provide access to additional ore. The pushback

could not have been done until some geotechnical issues had been resolved and is therefore considered abetterment. The waste stripping associated with the pushback will be capitalized and amortized based on the

estimated value of the additional ore. However, the amounts of waste and ore are subject to a number of

uncertainties and could change over time. (This manifests as changes in the strip ratio or the cutoff grade.) If the

amount and/or value of ore changes, the amortization schedule will have to be changed.

The cost of the north wall pushback at Bagdad is treated as a cost of current production and is not related to the ore

underlying the pushback. The cost per ton of ore will therefore change as the current strip ratio changes. In effect,

Bagdad is buying an option on the underlying ore, the value of which is uncertain.

See

EITF Issue No. 04-6 available at www.fasb.org/eitf/0406WGR1S2.pdf (p. 13)

CICA EIC-160, dated March 2006 (was available somewhere on CICA web site)

Teck Cominco Annual Report 2007, p. 112 (available at www.teckcominco.com)

Slide 40




W. Scott Dunbar

Is this ore or waste?

Bagdad Pit 2005 low grade waste pile

Slide 41




W. Scott Dunbar

Rehabilitation and Closure (R&C) Costs

On the balance sheet in the year of recognition:

Liability: PV(R&C costs)

Annually on the income statement:

Depreciation expense: PV(R&C costs) Mine Life

Several uncertainties in estimation of R&C costs

PV(R&C costs) a function of mine life. Mine life depends on oreavailable.

Slide 42




W. Scott Dunbar

Notes: Rehabilitation and Closure (R&C) Costs

The reclamation and closure costs might include:

Removal of plant and other facilities

Restoration, rehabilitation and other environmental liabilities

There are several uncertainties in the estimation of these costs:

Length of time required to treat acid drainage or mine waste water

Whether reclamation/rehabilitation methods will be effective

Changes to closure costs as a result of changes to an operation

Mine life depends on available ore which is also uncertain and may vary over time.

The relevant accounting standards are:

IAS 37 (1999): Provisions, Contingent Liabilities, and Contingent Assets (similar to UK standard FRS12)

SFAS 143 (2001): Accounting for Asset Retirement Obligations

CICA Handbook Section 3110 (2003): Asset Retirement Obligations

Slide 43




W. Scott Dunbar

Asset Impairment

For a mine, this inequality may be affected by:

changes in future costs

• difficult or unstable ground conditions

• damage such as flooding, tailings dam failure, etc.

• difficulties or delays with development or expansion

changes in estimated output changes in depreciation rate

• decreases in grade or amount of ore

• low metal prices what was ore becomes rock

A producing asset is impaired if

Future cash inflows < Undepreciated value of asset

Slide 44




W. Scott Dunbar

Notes: Asset Impairment

Considerable judgment and technical input often required to estimate the projected costs and the oreavailable. (reserves) Only proven and probable reserves (see later) are used in calculating depreciation

expense on a unit-of-production basis to measure impairments.

The undepreciated value is computed by subtracting the sum of annual depreciation expenses from

the original cost of the asset

Depreciation rate = (Acquisition cost – Residual value) Estimated production

Depreciation expense = Depreciation rate Units produced

Undepreciated value = Acquisition cost – Depreciation expense

The estimated production of a mine depends on the mine life which, in turn, depends on the estimates

of resources/reserves (higher reserves, longer life). This affects estimates of the depreciation rate.

The relevant standards are:

IAS 36 (1998, revised March 2004): Impairment of AssetsFASB 144 (2001): Accounting for the Impairment or Disposal of Long-Lived Assets

CICA Handbook, Section 3063 (2003): Impairment of Long-lived Assets

Slide 45




W. Scott Dunbar

How much is in the ground?

Resources - commercial extraction is potentially feasible

Reserves - can be extracted economically and legally

• reported in annual financial reports

Classifications of known mineral deposits:

Slide 46




W. Scott Dunbar

In 1989 the Australasian Joint Ore Reserves Committee (JORC) issued the Code for Reporting of Mineral Resources

and Ore Reserves following some notable “misstatements” in mineral property valuation reports in Australia. The

code can be downloaded from www.jorc.org. Various other codes based on JORC have since been developed and are

used by regulatory and legal authorities as standards for methods of reserve and resource estimation:

VALMIN: (1995, revised 2005), Australian Institute of Mining and Metallurgy (AusIMM). The VALMIN Code is

obligatory for reports relating to mineral and petroleum assets and is supported by other entities, including the

Australian Stock Exchange, the Australian Securities and Investment Commission, the Institute of Chartered

Accountants in Australia, and the Australian Institute of Company Directors. Download fromhttp://www.mica.org.au/ Click on codes link.

National Instrument 43-101: (Dec 30, 2005) NI 43-101 was formulated by the Canadian Securities Administrators

(CSA), an umbrella association of Provincial Securities Commissions across Canada. Download from

http://www.ccpg.ca/guidelines/index.html

CIMVAL: (February 2003) Standards and Guidelines for Valuation of Mineral Properties was formulated by a

special committee of the Canadian Institute of Mining and Metallurgy. This supplements NI 43-101. Download

from www.cim.org/committees/CIMVal_Final_standards.pdf

US Securities & Exchange Commission, 2007. Industry Guides, “Industry Guide 7”, available at

http://www.sec.gov/about/forms/industryguides.pdf , pp 34-37.

Notes: How much is in the ground?

Slide 47




W. Scott Dunbar

Resources to Reserves

Exploration

results

Mineral

Resources

Mineral

Reserves

Inferred

Indicated

Measured

Increasing level

of geological

knowledge and

confidence

Consideration of mining, metallurgical, economic,

marketing, legal, environmental, social and

government factors

(the “modifying factors")

Probable

Proven

Slide 48




W. Scott Dunbar

Notes: Resources to Reserves

One way to describe the difference between resources and reserves is

Resources are reported as in situ estimates of mineralization (e.g., “The grade in this drill core is x%.”)

Reserves are reported as masses with a particular grade distribution that can be mined (e.g., “There are X

tons of reserves with an average grade of y%”)

Note the need for geological knowledge to go from indicated to measured resources or from probable to proven

reserves. Several modifying factors cause resources to become reserves. Reserves cannot be estimated from

inferred resources.

Measured resources often become probable reserves even though geological knowledge does not decrease. For

example, the drill hole spacing may not be sufficient to classify the reserves as proven, but a few modifying factorsmay be established or assumed. For this reason, some think that probable reserves should be moved down to

become aligned with measured resources.

Estimation of reserves involves considerable technical difficulties and uncertainty. Among the considerations are:

the distribution of grade in the resource

the portion of the mineral resource that can be extracted when allowance is made for dilution and recovery

metal prices

production costschanges in technology

Information concerning the first two items tends to increase as the mine is developed. The last three items can

change during the life of the mine and it is not uncommon to see reserve estimates change as a result.

Slide 49




W. Scott Dunbar

The call of the reserves

0 500 1000 1500 2000 2500 3000 3500

0.2

0.40.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

GrasbergNorthparkes

Palabora

Andina

El Teniente

Codelco Norte

Highland Valley

Antamina

Minto

BagdadCerro VerdeBingham CanyonMorenci

Resolution

Galore Creek

Oyu Tolgoi

New Afton

Fungurume

LegendProven + Probable Reserves

Measured + Indicated Resources

A v e r a g e C o p p e r G

r a d e ( % )

Reserves or Resources (Mt)

All near endof mine life

Slide 50




W. Scott Dunbar

Notes: The call of the reserves

To obtain reserves mining companies must take on some significant unsystematic risks (risks notrelated to market changes) associated with exploration, project feasibility and constructability of new

projects in places where there is little geological knowledge or infrastructure. One way to diversify

these risks and still attract investment is to have a steady flow of cash from existing operations, some

of which can be used to provide opportunities for development of new projects. If the unsystematic

risks cause the new projects to fail, the existing operations provide a “safety net”.

The large grades and/or resources of some copper deposits shown here attract large mining

companies, but there are significant unsystematic risks:

•Freeport McMoran: Fungurume in the Congo. Political risks as well as social and health issues

•Rio Tinto, Ivanhoe Mines: Oyu Tolgoi in Mongolia. No infrastructure and uncertainty about what

royalties the Mongolian government will charge

•Rio Tinto: Resolution project east of Phoenix. Orebody at a depth of 2 km in rock where the

temperatures are 80C. Feasibility of any mining method under these conditions is uncertain.

•Teck Cominco, Novagold: Galore Creek in northwestern BC. No roads, no power and significant watermanagement issues at the proposed mine.

Slide 51




W. Scott Dunbar

Which is a resource and which is a reserve?

Thunderbox gold projectLionore Mining International

2000 Annual Report

www.lionore.com

Slide 52




W. Scott Dunbar

Notes: Which is a resource and which is a reserve?

On the left is a measured resource because the outline of the orebody has been determined by estimation from

measurements (assays) in boreholes. On the right is an open pit mine design. If the design is feasible, then at least a

few of the modifying factors have been taken into account and the orebody is a reserve. Most likely it is a probable

reserve since there may not be enough drillhole data to prove that the orebody is as shown. A “bankable” feasibility

study would have to prove the reserves by means of further drilling on a finer grid (“infill drilling”)

The transition from probable to proven reserves depends on geological information obtained from drillholes. At

Bagdad Phelps Dodge uses different drillhole spacings to establish estimates of probable and proven reserves of

concentrator ore. For probable reserves, it is 440 ft whereas for proven reserves it is 190 ft. (Phelps Dodge 2005

Annual Report, p. 16) Different spacings are used for leach ore and the spacings change depending on the

characteristics of the orebody.

Quote from Teck Cominco 2006 Annual Report, p. 110 in reference to Highland Valley Copper:

Reserves have been drill defined at 60 to 115 metre [197-377 ft] centres and resources at 125 metre [410 ft]

centres.

Note that at Highland Valley, all reserves are proven and all resources are indicated.

For proven reserves the drill spacing to define reserves at Highland Valley is greater than that at Bagdad. No drill

spacing is specified to define reserves – it depends partly on the geological environment and partly on the physical

conditions at a mine.

Slide 53




W. Scott Dunbar

From paper to pit – Thunderbox pit in 2006

www.lionore.com

Slide 54




W. Scott Dunbar

How to estimate mineral resources

Map and sample deposit (e.g., drillholes)

Appropriate estimation technique determined by geologist

Geological interpretation done by geologist who

carries out the estimationdecides whether resource is inferred, indicated, or measured

Reporting standards (discussed later) do not specify the estimation

method

Slide 55




W. Scott Dunbar

Resource estimation – two examples

Possible

underestimation

Possible

overestimation

Drillholes

Assumecontinuity?

ignored

ignored

ignored

ignored

Slide 56






W. Scott Dunbar

Minto Project,

Yukon Territories

Capstone Mining Corporation

Chalcopyrite and bornite

mineralization

9 Mt ore with average grades:

1.78% copper

0.62 g/t gold

7.3 g/t silver

7 year mine life

Source: Technical Report (NI 43-101) for the Minto Project, Hatch

Associates, August 2006

Slide 58




W. Scott Dunbar

Minto Project: N-S Geological Cross-section

Continuity is assumed

between drillholes

Slide 59




W. Scott Dunbar

Minto Project

Resource Estimate

From inferred to indicated to

measured

Shape of resource dictated

by geological cross-section

Slide 60




W. Scott Dunbar

Notes: Minto Project Resource Estimate

The resource estimate is classified into inferred, indicated and measured. The measured resource is

the area where the most drill hole data are available while the inferred and indicated resources are in

areas with fewer drill holes.

The extent and orientation of the inferred and indicated resources are suggested by the geological

cross-section which shows a northerly-southerly orientation of the mineralization. Thus, for example,

the inferred and indicated resources circled with the dashed red line is oriented as shown even though

there is only one drill hole at the center of the indicated resource. Note that no continuity is assumedbetween these resources and the other resources to the east.

Source: Technical Report (NI 43-101) for the Minto Project, Hatch Associates, August 2006

Slide 61




W. Scott Dunbar

National Instrument 43-101 (NI 43-101)

Rules developed by Canadian Securities Administrators (CSA) togovern how issuers of shares in a mining company disclose

scientific and technical information about mineral projects to the

public

Applies to:

oral statements

written documents (eg feasibility studies)

websites

Requires that all disclosure be supervised by or advised by a

“qualified person” (QP)

Slide 62




W. Scott Dunbar

Notes: National Instrument 43-101 (NI 43-101)

Copies of NI 43-101 can be found at

http://www.ccpg.ca/profprac/index.php?lang=en&subpg=natguidelines

A “qualified person” is responsible for the content of any technical report or disclosure of scientific

information concerning mineral projects. The QP must be independent of the owner of the mineral

project and must have demonstrable experience and competence in the preparation or evaluation of

information and data related to mineral projects.

A qualified person is an individual who

a) is an engineer or geoscientist with at least five years of experience in mineral exploration, mine

development or operation or mineral project assessment, or any combination of these;

b) has experience relevant to the subject matter of the mineral project and the technical report; and

c) is in good standing with a professional association and, in the case of a foreign association listed in

Appendix A, has the corresponding designation in Appendix A

See Appendix A in NI 43-101 for foreign designations recognized.

Slide 63




W. Scott Dunbar

Feasibility Studies

Comprehensive documents usually carried out by consulting

engineering companies

Cost: $100k to >$1M depending on level of detail

NI 43-101 defines two types:

Pre-feasibility study – makes reasonable assumptions about

relevant factors

Feasibility study – all factors considered in sufficient detail to

allow a decision on financing project

Slide 64




W. Scott Dunbar

Notes: Feasibility Studies

Pre-feasibility study (aka “Preliminary Feasibility Study”)

a comprehensive study of the viability of a mineral project that has advanced to a stage where the

mining method, in the case of underground mining, or the pit configuration, in the case of an open pit,

has been established and an effective method of mineral processing has been determined, and

includes a financial analysis based on reasonable assumptions of technical, engineering, legal,

operating, economic, social, and environmental factors and the evaluation of other relevant factors

which are sufficient for a qualified person, acting reasonably, to determine if all or part of the mineral

resource may be classified as a mineral reserve

Feasibility study

a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating,

economic, social, environmental and other relevant factors are considered in sufficient detail that it

could reasonably serve as the basis for a final decision by a financial institution to finance the

development of the deposit for mineral production

Note: financial institution or a mining company. Sometimes the adjective “bankable” is used but thiscan only be decided by a bank or lending institution.

See www.sedar.com to download copies of feasibility studies or technical reports from public

companies.

Slide 65




W. Scott Dunbar

The need for reporting standards

Actual conflicts and information withheld:

Direct conflict with NI 43-101 or similar:

• Significant parts of orebody are difficult to process – poor recovery

• Large water-bearing fault intersects orebody

Not in the spirit of NI 43-101 or simply unethical

• Local groups do not want mine

• Legislation may change economic viability

• 7% royalty paid to numbered company owned by CEO and threedirectors on board of six

Slide 66




W. Scott Dunbar

Palabora, South Africa – open pit to underground

Slide 67




W. Scott Dunbar

After startup of underground operation –

a 100 Mt slope failure

Slide 68




W. Scott Dunbar

Notes: 100 Mt slope failure

This slide occurred after underground operations began at Palabora. The slide extended some distance

from the pit rim. Movement and cracking occurred within 300 m from the pit rim and affected or

damaged the following facilities:

haul road and access road

tailings lines

water supply pipes and tans

water supply dam

railway line

44 KV power line

The slide is composed of waste material and some of it entered the underground and diluted the ore.

The mine nearly went out of business as a result of the loss of ore.

Slide 69




W. Scott Dunbar

But more importantly …

The slide caused a loss of ore reserves in the undergroundoperation. The slide might have been predicted had there been

sufficient geotechnical information.

Grade and tonnage of reserves and resources can be defined with

sufficient drillhole data. But reserves imply mining and othertechnical factors have been considered. This raises a question:

Can reserves be defined without geotechnical information?

Likely not, but no standard is available yet.

The Large Open Pit Project (http://www.lop.csiro.au/) has developed guidelines for dealing with uncertainty in

geotechnical data. It may take some time for these to be incorporated into a standard having the same authority as

NI 43-101.

Slide 70




W. Scott Dunbar

END OF PART E

© 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to

PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member

firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity.

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