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The bankable feasibility study is not a guarantee that a mining project will produce a

planned outcome. Further independent review is advisable, i f not necessary, to test

and val idate strategic targets, direct ions and goals. Quant i tat ive r isk analysis can not

only p lay a key role in the making of qu al ity decis ion s for pro ject appro val , but w i l lalso provide groun ded measures for project execut ion r isk m anagement.

D. S. Evan s, PhD, PGeol.

Sr. Partner

CSC Project Management Serv icesCalgary

403-233-7994, d ave@cscp roject.com

Bankable feasibi l i ty studies for m ining p rojects

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Statements, other than statements of h istor ical fact , may c onst i tuteforward-look inginform at ion and inclu de, withou t l imi tat ion, t iming and con tent of

upc om ing feasib i l ity stud ies and other econom ic or f inancia l analyses;

ant ic ipated avai labi l i ty and terms of future f inancing; future produ ct ion,

operat ing and capi ta l costs; and o perat ing o r f inancia l performance.

-OR-

Forward- lookinginformat ion invo lves var ious r isks and unc ertaint ies. There can

be no assurance that such info rmat ion w i l l prove to beaccurate, and actual

resul ts and future events cou ld di f fer mater ia lly from those ant ic ipated in s uch

inform at ion. Important factors that cou ld cause actual resul ts to d i f fer m ater ia lly

include:f luctuat ions in commodity pr ices and currency exchange rates; the

need for co-operation o f governm ent agencies in the issuanc e of requiredpermits and approv als; the possib i l i ty of delay in development work o r in

con struct ion and uncerta inty of meet ing ant ic ipated mi lestones; and other r isks

and u ncerta int ies.

There are more risks to mining than just commodity price fluctuations.

Limitation Statements define some uncertainties, but not all of them..

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Corporate

Performance

Explorat ion

Performance

Development

Performance

Mining

Performance

Processing

Performance

Market ing

Performance

LocationUncertainty

MiningComplexity

Social &Environmental

Uncertainty

ConstructionUncertainty

MiningUncertainty

MetallurgicalUncertainty

Market &Commodity

PricingUncertainty

Financial &Economic

Uncertainty

GeologicalUncertainty

Science &TechnologyUncertainty

Mining is a r isky business and each stage is impacted by uncertaint ies

InvestorUncertainty

Social &Environmental

Uncertainty

Social &Environmental

Uncertainty

Social &Environmental

Uncertainty

Social &Environmental

Uncertainty

Social &Environmental

Uncertainty

PoliticalUncertainty

PoliticalUncertainty

InvestorUncertainty

Pervasive,Largely

UncontrollableRisks

Poorly Definedand somewhatControllable

Risks

Direct

ControllableRisks

Global Financial &Economic Risks

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Risk Categories

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Defini t ions & Basis

Typical ly, a bankable feasibi l i ty stu dy is a comprehensive

forward analysis of a projects economics (+/-15% p recisio n) to

be used by f inanc ial inst i tut ion s to assess the credit-

wo r th iness for p ro ject f inancing.

The feasibi l i ty part is gu ided by a set of assumption s, astrategy, development cond it ions and a planned ou tcom e. The

outcome is u ncer tain and targets and ob ject ives may not b e

achievable.

The bankable part relates to the basis and cond it ions fo r a

future f inancial agreement to col lateral ize m ining assets for a

project loan, to set a premium and a repayment schedu le, with

approp r iate r isk/reward factors .

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What do others say about m ining

feasibility studies

The mining industry has had a spotty record in the area ofest imating ini t ia l capital cos t and operat ional performances,even though the standard of feasibi l i ty studies has impro ved inthe last decade. Third party reviews rarely have t ime and fund s

for due diligencetaken from Shillabeer and Gypton, MiningRisk Management , 2003, Au str al ian IMM Proceeding s

Project Evaluation 2007 contains an article entitled The Useand Abuse of (Mining) Feasibility Studies by Mackenzie andCusw orth who s tate that mos t feasibi l i ty examples areunbalanced, or pro vide inaccurate views o f one or both

technical and business aspects. The authors subsc r ibe to apro ject management framework (to include r isk analysis) toovercome strategic and execut ion fai lures that often occurfol low ing feasibi l i ty stud ies

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So what does +/- 15% really mean?

A +/-15% est imate is somewhere between th e def in i t ion o f aClass 5 and Class 2 est imate. Class has to do w ith both thecon tent and qual i ty of the est imate and th e est imatingcon f idence (precision ).

Well, doesnt contingency cover estimate shortfalls (+15%)?Conting ency is a separate decisionin sup por t of the est imateto resolv e cost uncertainty precision . Current think ing is thatcontingency will be used up for some, but not all costcategories. Contingency does NOT make the estimate moreaccurate.

Quanti tat ive Risk Analysis is a process to assess and quant i fythe po tent ial var iances around pro ject dr ivers. When keyproject d r ivers ( i .e. r isks ) become quant i f ied, co rrect ivemeasures and act ion s can be taken, w ith conf idence, in themaking of q uali ty decis ions aboutprecis ion and accuracy.

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Normal ly, a feasibi l i ty stud y is prepared b y a qual i f iedengineer or est imator. It is a forward-look ing document thatcaptures aprecis ionlevel but no t necessar ily an acceptable*level ofaccuracy.

So, what does bankable feasibility really mean in terms ofaccuracyfor owner and investor conf idence in thedevelopment and c onstruc t ion of a min ing p ro ject?

And how does r isk analysis captureprecis ion and accuracyfor better decisio n-making and execu t ing a transparent,accountable and d efensib le execut ion p lan?

The bankable feasibi l i ty stu dy as a comprehensive engineer ing

study , cos t est imate and m ining development plan

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* As known or required by the project owner

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The hierarchy o f Capital Cost est im ates

Conceptual (Class 10 Estim ate)

Class 5 (also cal led DBM Estim ate)

Pre-Feasib i l i ty (Class 3 or 5, dependin g)

Class 2 or 3 (+/-15% has now gained accep tance as abankable feasib i li ty s tudy )

AFE Estim ate, may be a Class 1 or Class 2 and isdesigned to go for pro ject sanct ion & EPC bids. Itshould be the mos t accu rate and the most precise

est imate obtainable given circumstances andcondi t ions; and, is normal ly accompanied by a PEP.

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Precision and accuracy are separate variables in the Cost Est imate

Precision Accuracy

Precis ion is the abi l i ty to reprod uce a resul t ;

Acc uracy is a conf idence in the abso lute resul t or outc ome.

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The Defini t ion of Estim ate Classes

The Study or Class 5 est imate is prepared in conju nct ion with the Design

Basis Memorandum phase of the pro ject. At th is po int al l cr i t ical design

alternatives have been examined and th e prel imin ary project executio n

plan has been established. This type of estimate is defined as an estimate,

inc ludin g con t ingency, that has a probabi l i ty of o verrun by mo re than 10%,

1 time in 3.

The AFE or Class 2 est imate is prepared in con junct ion with the Basic

Engineer ing ph ase of a project. At this p oint, al l key design documents

such as P&IDs, layouts and electrical single lines have been established.

The project execut ion plan, con struct ion plan, and schedule have also

been established. This type of estimate is defined as where the final cost

of th e project wi l l be with in plus or m inus 10% of the est imated value, 80%

of the time.

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Class II Accuracy Class V Accuracy

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

180 200 240

Probability

$MM

Base estimate plus contingency200 $MM

P50 = 200 $MM

P10 =180 $MM-10%

P90 =220 $MM+10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

180 200 220

Probability

$MM

P50 = 200 $MM

P10 =168 $MM-19%

P90 =237 $MM+19%

160 240

Final cost wi l l be within

+/- 10% of the est im ate, 80% of the t im e

Est imate inc luding c ont ingenc y,

has a prob abi l i ty of 10% overrun, 1 time in 3.

Base estimate plus contingency200 $MM

The defini t io n of estimate classes desc ribes the expected range of

uncerta inty around an est imate (in assessment and simu lation th is is

the slope of the probabi l i ty distr ibut ion)

P90-P10 = 80%

P67.7 crosses at 10% over estimate

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

120 160 200 240 280

Probability

$MM

Base = 160 $MM

P50 = 200 $MM

P10 =178 $MM-9%

P90 =222 $MM+11%

Quant i tat ive r isk analysis calculates the prob abi l i ty distr ibut ion o f a cost outcome

This distr ibut ion can be used to :

1. Determine the contin gency requ ired for any con fidence level (probabi l i ty ).

2. Compare the estimate uncertainty (slope) with o ther estimate class defini t ions .

Slope ofClass V Estimate

Slope ofClass 2 Estimate

40 $MMContingencyRequired forP50 Confidence

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A example of r isk analys is app l ied

to a mining capi tal cos t est imate

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Materials/

Est imate

Variance

TotalProject

CAPEX

$ 171,682k

Indi rects

$ 20,001k

Mil l

$58,387k

Mine

$ 53,635k

$ 38,215k

LevelExcavat ion

$ 3,799k

ShaftExcavat ion

$5,179k

Water

$ 1,270k

Roads

The CAPEX Inf luence Diagram for a UG Mining Constru ct ion Project

$ 11,121k

Miscel laneous

B id

Rate

Engineering

Cost

Variance

Organizat ion

Performance

Compet ingProjects

Labour

Product iv i ty

$22,088k

Cont ingency

@ 15%

$ 2,592k

Administ rat ion$ 17,409k

EPCM

Exchange

Rate

($ 1,602k/yr)

SustainingCapital

Local

Benef i tsCost

Variance

Subsur faceEquipment

$ 11,621k

$ 17,570k

Inf rast ructure

Used

Equipment

Labour

Rate

Scope

Variance

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From the probabi lis t ic simulat ion cond ucted dur ing the quant i tative r isk

analysis, the Expected Value ou tpu t of Total CAPEX is $ 181 MM, whic h

is $ 9 MM above the Base with co nt ingency.

Base Expected P10 P90

Mine CAPEX 53.6 66.6 49.1 85.7

Mi ll CAPEX 58.4 60.6 58.3 63.5

Infr ast ructur e 17.6 23.6 16.0 35.3

Ind irec ts 20.0 30.5 21.6 42.1

Con tingenc y 22.1 0.0 0.0 0.0

Total CAPEX 172 $MM 181 $MM 151 $MM 212 $MM

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Expected Value is P55 or abou t a 55% chanc e of happenin g

P10 & P90 are each abou t a 10% chanc e of happenin g and define the

range of this outc ome w hich is a measure of the accuracy of the est imate

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Total CAPEX

0

10

20

30

40

50

60

70

80

90

100

0 50 100 150 200 250

Pro

ba

bility

$MM

The Base Capit al Cos t estimate is $ 172 MM. The expected Total Capital Cost

is $ 181 MM. In this case there is on ly a 39% chance that the project w il l

achieve the CAPEX Base Case estim ate w ith contin gency

Mil l Base

58 $MM

Mine Base

54 $MM

Base with

cont ingency

( 172 $MM)

EV = 181 $MM

Mill CAPEX EV = 61 $MM

Mine CAPEX EV = 67 $MM

Total CAPEX EV = 181 $MM

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-15 -10 -5 0 5 10 15 20

Mine Unit Cost Variance - Multiplier 1 1.5

Mine Quantities Variance - Multip lier 0.86 1.26

Competing Projects Environment Cool Heated

Level Excavation Scop e Variance- Multipli er 0.84 1.18

Infrastructure Costs 0.7 2

Execution Organizat ion Performance Excellent Poor

Infrastructure Construct ion Durat ion - Months 7 12

Regulatory Process Durat ion - Months 10 34

Tailings Cost Varianc e - Multipli er 0.8 6

Road Cost Variance -Base - 1.27 MM 2.5 7

Subsurface Equipment Costs 1.01 1.3

Mine Construct ion Durat ion - Months 18 28

EPCM Cos t Varian ce -Base - 9.6 + 6.7MM 15.5% 0.12 0.14

Community Negotiat ions & A greements Durat ion - Months 11 25

Water Cost Varianc e -Base - 5.2 MM 4.2 7

Total Capital Expenditure $MM

181 $MM

The Range in CAPEX is largely due to uncertainty in

Mine Unit Cos t Variance, Mine Quantit ies Variance and

Level Development Scope Variance.

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140

150

160

170

180

190

Sc

he

du

le

+7

Mine

Cos

ts

+12

MillCos

ts

+2

In

fras

truc

ture

Cos

ts

+9

La

bour

Cos

ts

0

In

direc

tCos

ts

-1

Total CAPEX

EV = 181 $MM

Base = 150 $MM

$MM

Expected increases to Con stru ct ion Costs add $ 23 MM to the

Base CAPEX Estim ate. Schedule Impact s add $ 7 MM.

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Strategy

Flawed Sound

Sound

Doomed

from theBeginning

A

BotchedJob

Flirt ing

withDisaster

A Pretty

GoodChance

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In absolut e terms, there

is about a one in four

chance of gett ing the

right strategy paired

with the right

execut ion plan for the

planned outcome

Flawed

.. .the idea is to get it app rox imately righ t rather than perfectly w rong...

A planned outcom e requires a sound s trategy and a sound execut ion plan

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Bankable Feasibility Studies for Mining Projects.things to remember.

Accuracy and precis ion are di f ferent.Accu rate estimates are precise, bu tprecise estimates are not necessari ly accurate.

Beware of the Halo Effect:the tendency to bel ieve and place faith thatyou r strategy and execut ion plan are sound, grou nded, etc.;

The Delusion of Abso lute Performance:any given formu la cannot ensure

high org anizational perform ance, etc.; The Delusion of Last ing Suc cess:endur ing su ccess is not su stainable;

Recogn ize the Role of Uncertainty :ad just your th ink ing to accommodateuncertainty (r isk & opp ortuni ty!) and make better decis ions;

See your Project th rough Probabi l i t ies:approach prob lems asinterlock ing internal and external pro babi l i t ies;

Separate Inpu ts from Outcom es:act ions and outc omes are imperfect ly

l inked. It is easy to infer that bad outcom es mu st mean somebody mademistakes, or a good o utcome must m ean somebody made good decis ions(or g ot luc ky!);

There are more things that can go w rong rather than r ight in execut ion :determine the pro ject d r ivers, assess & quant i fy r isk and develop a r iskmanagement plan to bui ld better valued projects;

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A Final Note.

We often hear the phrase We have to get cost certainty or

else) We are rarely told what the or else is, but it sounds

pretty awful . In these circumstances, CSC takes the posit ion

that owners, their cons ul tants and contractors to look for the

value propos i t ion in their developm ent and cons truct ion

pro jects. Should your pro ject go over budg et , or goes long ,

make sure that the project achieves value in the completed

cost . When the pro ject del ivers value that respects or jus t i f ies

the cost , then it is a goo d pro ject.

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Speci f ics:

Supports Owner Organizat ionsin major project development. Group formed in 1982, over 350 project assignments in 7 countries. Extensive and varied background in Project Plann ing and Management.

Specialt ies:

Risk & Decis ion Analysisfor a wide range of capital Projects. Strategic & Mitig ation Plann ingfor projects using risk models. Faci l i tat ionofProject Management, Business Planning, Environmental &

Safety Planning & Management and Team Building. Project ManagementEducat ion Workshops. Development ofContract Claimsand disputes and litigation support.

CSC

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