Economic Evaluation Checklist - Mineral Projects
The economic evaluation of a mineral project requires a great deal of diverse information to be brought together in one place. The greatest concern is that there will be an error by omission, so it is useful to have a detailed list of what one needs to know in order to make a thorough evaluation. The list that is presented below is intended to act as a checklist for the person who develops and reviews an evaluation, and as a shopping list for the persons gathering data at the project site.
There are varying degrees of detail required at the different stages of evaluation in a project, from the "quick and dirty" overview, to the pre-feasibility study, to a full detailed feasibility study, to a due diligence review. This list addresses most of the economic variables in a project and can be used for all levels of studies. Its purpose is to identify a variable or issue and to raise a question, which the reviewer can then pursue in more detail using increasingly more comprehensive checklists for each topic. While developed from the point of view of a new project, this list is equally valid for an ongoing operation.
- 1 Ownership
- 2 Ore Reserves
- 3 Production Schedules
- 4 Units of Measurement
- 5 Mining
- 6 Processing
- 7 Environmental
- 8 Capital Costs
- 9 Operating Costs
- 10 Revenue
- 11 Currency and Exchange Rates
- 12 Royalties
- 13 Corporate Taxes
- 14 Financing and Funding
- 15 Evaluation Method
- 16 Non-cash Data
- 17 Data Sources
- 18 Management and Personnel
- 19 Conclusion
- 20 REFERENCES
The ownership of the ore reserve is a critical matter. What one must determine is whether there are any terms or conditions to the ownership of the ore reserve or the project that will influence the duration of the project or the owner's claim to the revenue from the operation. The project may have more than one owner, for example in a joint venture, and the rights and obligations of each participant should be known. Many good projects have failed because of difficulties among the owners.
1. Who is the "owner" of the project? If there are a number of partners is a signed joint venture agreement in place? Can you get a copy of it?
2. Does the ownership change as the project achieves certain milestones, or as certain obligations are met?
3. Can all of the "owners" meet their individual financial obligations? Is an adequate structure in place in the event that one or more participants defaults?
4. In terms of control of the natural resources:
- Does the "owner" actually own the ore reserve? If not, who does?
- Does the "owner" have an option on the property?
- Does the "owner" have a mineral concession?
- Does the "owner" have the mineral rights to the ore reserve?
- Does the "owner" have title to the ore reserve over the full period of the mine life?
- Does the "owner" have the water rights for the operation?
The ore reserve is the most significant factor in the development of a mineral project. A project will not proceed without a valid ore reserve. This information must be confirmed before any other work is done. In this paper, the terminology set out in the Guidelines For The Australasian Code For Reporting OJ Identified Mineral Resources And are Reserves (September, 1992) is used (Table 1)
The significant distinction is between Identified Mineral Resources (or Mineral Resources) and Ore Reserves, and the subcategories within these two which reflect the level of confidence in the estimate. Mineral Resources can be estimated mainly by a geologist on the basis of geoscientific information. are Reserves are a modified subset of the Mineral Resources which require consideration and application of all mining factors (including mining recovery, dilution, cut-off grade) and which can be mined, processed, and sold at a profit after taking into account all relevant metallurgical, marketing, environmental, legal, social, and governmental factors.
- Has the existence of a mineral resource been demonstrated?
- Are core samples and core logs available? Can you get a copy of the logs?
- Was enough core drilling done to define the resource adequately?
- Was the core sampling done properly?
- Are assay results available? Were the assay techniques appropriate for the minerals involved? Were the assays performed by qualified persons? How were unusual results treated?
- Are cross sections available? Can you get a copy?
- Has a mineral resource calculation been made? Can you get a copy of it?
- If the ore resource calculations were done by computer, have they been checked manually? Were the programming assumptions appropriate?
- Has a qualified person (usually a geologist) reviewed the assumptions used in the resource calculations? These include:
- classification of mineralization,
- continuity of mineralized zones,
- quantity and quality of sampling
- What is the mining recovery?
- What is the mining dilution?
- What is the cut-off grade? How was it calculated? What metal prices were used? Is it still valid?
- What specific gravity was assumed for the ore and waste rock? Is the value appropriate?
- Has an ore reserve calculation been made? Can you get a copy of it?
- If the ore reserve calculations were done by computer, have they been checked manually? Were the programming assumptions appropriate? In the block model, does the block size match the bench height (open pit mines) or the mining width (underground mines)?
Obtain a map of the project area. Locate all of the ore deposits, waste areas, facilities, and infrastructure. Do the locations make sense? Does any topographic, cultural, social or structural feature interfere with the development of the ore reserve? Would potential extensions of the ore reserve change the location of facilities?
Once the ore reserve has been established, the next step is the development of a production schedule that is appropriate for the ore reserve and for the market which must consume the product. Because the timing of costs and revenues is crucial, the accurate scheduling of events over the project life is a necessity. All of the data gathered for an evaluation will eventually be placed into a cash flow model which will require production data on a year-by-year basis. It is easier for persons gathering or developing data to know this in advance so they can prepare their information accordingly.
1. The selection of the production rate is one of the most significant factors in a project evaluation. It will determine mine life, capital costs, and operating costs.
- Is the production rate appropriate for the ore reserve?
- Is the production rate appropriate for the market which must consume the product?
2. The different participants in a new project tend to use different schedules for their work, and these schedules seldom coincide with each other. The first time all of these diverse schedules will be presented in one place is in the economic evaluation, so it will usually fall to the person preparing the evaluation to make all of these schedules relate to each other in time.
- Construction schedules tend to measure time in weeks or months, beginning with the award of the contract and working toward start-up.
- Mining schedules tend to measure time in months or years, beginning with the first mining activity, usually pre-stripping for open pit mines, or collaring the shaft for underground mines.
- Production schedules tend to measure time in years, beginning at start-up.
- Head offices and banks tend to measure time in fiscal years, by quarters.
Obtain a copy of each schedule, and plot them on a common scale. The use of calendar years is strongly suggested where possible. They are easily understood by all parties and, if each participant can tie his own schedule to a particular date, the relative positions of the other activities will fall into place.
3. It is extremely unusual that a project will begin operation at full capacity on the first day of operation and continue at full capacity for years. There is always a learning curve in the first months which results in some loss of efficiency in the beginning of a new operation. Some mines and mills take several years to reach full capacity and some never do. A range between 75ffJo and 95ffJo of full capacity is generally expected in the first year. Remember that labour costs will be at least l00ffJo in that year.
4. The timing delays caused by the requirements of environmental permitting are significant and cannot be assumed away. Is the environmental permitting in place? How much more time is needed?
5. Some owners require the first years to be expressed in quarters for the purpose of scheduling funds. In studies prior to the feasibility level, there is not much purpose in doing this because the data available are usually not well enough defined.
Units of Measurement
It may appear self-evident that one should use the same system of measurement for all aspects of a project. However consistency cannot be assumed. A project may very easily mine in cubic yards, process in dry tons, sell concentrate in wet tonnes, and be paid in dollars per pound. The potential for confusion is substantial. Additionally, in some metric countries the word "ton" is used to mean "metric tonne"; it appears to be merely a spelling convention, but for the 10% difference it could make in production, it is worth checking.
1. What are the production units: tonnes, short tons, long tons, wet, dry?
2. What are the sales units: tonnes, tons, ounces, pounds, grams?
3. What are the correct conversion factors? Are they applied properly?
It is necessary to match a particular mining method or methods to an ore reserve to ensure that the deposit will be mined effectively. The method selected and the parameters assumed will determine the cost and rate of mining, as well as how much of the ore reserve will eventually be recovered. The questions below assume that the mine is operated by the owner, although the data requested will also be needed if the operation is contract mined.
1. What is the mining method?
2. Is the mining method appropriate for the ore reserve?
3. Does the tonnage in the mining plan match the tonnage in the ore reserve? It is not unusual, especially in operating mines, for the ore reserve estimate and the mining plan to be out of agreement because they are not always updated with the same frequency.
4. What is the mining recovery? Is it appropriate for the mining method?
5. What is the mining dilution? Is it appropriate for the mining method?
6. Is there an annual mining schedule (ore, waste, overburden) including:
- tonnes ore mined (open pit, underground)?
- tonnes waste mined?
- ore grades?
7. Is the mining plan achievable?
8. Is there sufficient development work completed and planned to permit production to continue at the anticipated rate?
- Open Pit: stripping, benching, roads, waste dumps
- Underground: shafts, ramps, drifts, sublevels, ore/waste passes, raises, ventilation
9. Are there stockpiles? What is the flow in and out? What are the grades?
10. What is the specific gravity of the ore; of the waste rock? How was it determined?
11. Are there known relationships between tonnage, grade, recovery, etc., which can be built into the calculations?
The selection of an appropriate processing method for the minerals in the ore is a critical decision. It depends on an adequate and representative sample being taken, and adequate and appropriate testing being completed. The questions below assume that the process facility is operated by the owner, although the data requested will also be needed if the ore is custom milled.
1. Is the milling method appropriate for the ore?
2. What is the metallurgical recovery?
3. Is there metallurgical testwork? Is it adequate and appropriate?
4. Is the metallurgical ore sample fully representative of the ore to be processed? Is the sample large enough for proper test work?
5. Oxidized surface material is often mined in the early years of an open pit operation and it may differ considerably from the underlying portion of the ore body. Does the metallurgical testing and design accommodate this?
6. Is there an annual milling schedule including:
- ore tonnage?
- head grade?
- mill recovery?
7. Are there stockpiles? What is the flow in and out? What is the grade? What is the recovery?
8. Are there known relationships between tonnage, grade, recovery, etc., that can be built into the calculations?
Environmental issues are significant at a number of levels. Approvals impact the timing of a project. Capital and operating costs are influenced. Decommissioning costs and ongoing liabilities are determined by environmental standards. Lending institutions are increasingly concerned that projects in which they are involved are environmentally responsible, and do not just aspire to the standards of the host country, but to the highest international standards, because most countries are moving toward these standards at a rapid rate.
1. What are the environmental standards that will be required to be met by:
- the host jurisdiction?
- the owner?
- financial institutions?
2. What reclamation commitments are currently required? What reclamation commitments will be required at the end of the project life?
3. Has an environmental impact study been completed? Have baseline studies been completed? Can you get copies of them?
4. What are the potential environmental impacts associated with the project:
5. What are the possible process effluents (water) or emissions (air)?
- What quality and quantity?
- How will they be treated?
- What are the effluent limits?
6. Tailings and waste rock disposal:
- What quantity of tailings and waste rock will require disposal?
- What methods will be used for disposal; tailings pond? Backfill? other?
- Is the disposal area adequately sized? Is it stable?
- Is acid generation a consideration?
- Is groundwater contamination a consideration?
7. Is there a decommissioning plan? Obtain a copy.
- Is it comprehensive? What period does it cover?
- Is it approved by: the owner? the appropriate government bodies?
- Are capital costs included for decommissioning? How much? When? Do they have to be set aside at the beginning of the project? Are they treated as a separate, interest earning investment? Are they tax deductible? Does a bond have to be provided?
- Are operating costs included for decommissioning? How much? Are they accumulated in a sinking fund? Are they enough by today's and future environmental standards? Are they tax deductible?
Initial capital costs are a major focus of attention in an evaluation. They account for most of the owner's investment and they determine the amount to be borrowed from the banks. Capital costs are also a critical factor in the rate of return calculation.
1. Obtain a copy of the capital cost estimate. Obtain a copy of the basis of the estimate.
2. Is inflation included in the cost estimate?
3. What currencies are used in the cost estimate? Are they converted to the evaluation currency correctly?
4. Qualified persons (including: mining engineers, metallurgists, estimators) must review the capital cost estimate.
5. Capital costs are normally calculated as total costs and are not usually allocated year by year.
- Obtain a copy of the construction schedule.
- Is the construction schedule achievable?
- Use the construction schedule to allocate capital costs over time.
6. The scope of work for an estimate may exclude certain items. They may not be part of the estimate but they will likely be part of the evaluation. These can include:
- construction indirect costs (including temporary buildings, roads and facilities; licenses, permits, security, erection cranes, testing, progress photographs, site cleanup, winterworks, etc.);
- engineering, procurement, and construction management (EPCM);
- contingency allowance;
- freight, sales taxes, and duties;
- other consultants;
- soils investigations;
- mapping, aerial surveys;
- environmental baseline and impact studies;
- legal costs;
- marketing studies;
- owner's costs;
- start-up costs;
- hiring and training of personnel before start-up (These are actually preproduction operating costs and may be estimated as operating costs. They are typically costed as capital.)
- initial fill or first charge of reagents and consumables (in the process circuits) initial inventories and spares (in the warehouse).
7. Some items are included in the capital cost estimate that should be itemized separately, because they will depend on other activities or assumptions. It is easier to exclude them from the capital cost estimate and address them in the economic evaluation. These can include:
- working capital;
- interest during construction;
- financing costs; and
8. Are funds set aside for decommissioning?
9. Is there any appreciable salvage value at the end of the project?
10. Are there any "sunk" costs? While these are real costs to the owner, sunk costs which were incurred in the past are not part of an economic evaluation (except when they create depreciation which is deductible for tax purposes).
11. Do labour installation costs reflect appropriate labour productivity rates?
12. Have the ongoing costs been estimated? These costs are often included as operating costs (this should be confirmed). These can include:
- cyclic replacement of mining equipment;
- periodic construction of tailings dams;
- additional mine development, especially if a mine is going to go from open pit to underground during its life; and
- environmental costs.
13. Working capital and initial inventories will be recovered in the last year of the project. This is usually shown as a credit in the economic evaluation. These items cannot usually be deducted for tax purposes, and so are not usually taxable when recaptured.
In feasibility studies, operating costs often do not draw as much attention as initial capital costs, but they should. Over the life of a mine the operating costs will account for many times the amount of the initial capital costs.
1. Obtain a copy of the operating cost estimate.
2. Is inflation used in the cost estimate?
3. What currencies are used in the cost estimate? Are they converted to the evaluation currency correctly?
4. Qualified persons (including: mining engineers, metallurgists, maintenance) must review the operating costs.
5. Operating costs will be required on a year-by-year basis. They can be provided in any number of formats, including:
- $ per year;
- $ per ton (tonne) mined;
- $ per ton (tonne) milled; and
- $ per ounce or pound or ton (gram or tonne) of product.
Wherever possible, express them in the units provided by the person who develops the costs (for ease of reference and adjustment) and convert them to consistent units for the evaluation.
6. Operating costs are usually a combination of fixed and variable costs. Where possible, determine these components so that the effect of varying the production rate can be found without having to reestimate the operating costs.
7. Are there management fees?
8. Are there municipal taxes?
9. Are there head office costs?
10. Are there camp costs? Fly-in-fly-out costs?
11. Are funds being set aside for decommissioning?
12. Costs for transporting, treating, and refining metals and concentrates are usually considered part of the revenue calculation. (See Revenue)
The calculation of revenue can be a complex process. Depending on the products produced, revenue may be impacted by sales contracts and transportation costs as much as by metal price, particularly in the case of base metals and industrial minerals.
1. Has a proper marketing study been done? Can you get a copy of it?
2. Is there a market for the mine's product?
3. What selling prices are to be used in the evaluation?
4. Do the selling prices include inflation?
5. What are the standard currencies and units for the selling prices:
- US$/troy ounce?
6. What are the currency exchange rates?
7. Are there sales contracts? Can you get copies of them? What are the terms of payment?
8. Are there marketing costs? How are they calculated?
9. Will the product be sold FOB mine, FOB ship, CIF, etc.?
10. Concentrate Smelter Contracts - If a mineral project produces a concentrate, then it sells the concentrate, not just the individual metals in it. The amount that a smelter will pay for a tonne of concentrate is based on the metal contained in the concentrate less the cost of processing and refining the metals, less any penalties for unwanted impurities. As a result, the revenue calculation for a concentrate appears to contain operating costs, but they are actually part of the smelter contract.
- Are there smelter contracts? Can you get copies of them?
- What are the terms of payment for:
- treatment charges?
- payable metals?
- metal deductions?
- refining costs?
- impurity penalties?
- by-product credits?
- price participation (the smelter receives some portion of
- While transportation costs are not usually included in the terms of a smelter contract, they are calculated on the same basis (tonnes of concentrate) and so are often included with the smelter contract calculations.
- What is the moisture content of the product? Most metallurgical material balances are expressed in dry units, but the material shipped will contain 8% to 14% water, which has to be transported, too.
- What are the transportation costs:
- from the mine to the port?
- truck haulage rates?
- rail freight rates?
- port handling costs?
- container leases?
- ocean freight rates?
- inspection costs?
- Are there losses in transit? Losses can range from 0.5% to 1.0%, depending on the number of transfer points.
11. Precious Metals and Cathode Copper - If a mineral project produces its final product in the form of a metal (usually with impurities), the sales contracts do not generally include further significant treatment charges (as concentrate smelter contracts do) but involve refining charges to bring the product to a refined metal stage.
- What portion of the metal content is payable?
- What is the final product of the process? Gold/silver ore bars? Copper cathodes?
- What are the refining charges for these products?
- What are the transportation costs to the refinery?
Currency and Exchange Rates
The determination of what currency is to be used in an evaluation should be made early in the study. It is not unusual to have data in different currencies for metal prices, major equipment, operating supplies, and operating labour. These currencies must be determined, and the exchange rate between each confirmed It should be remembered that some countries have both an official exchange rate and a real exchange rate.
1. What is the currency of the final evaluation?
2. What is the currency of the metal price? What is the exchange rate?
3. What is the currency of the capital costs? What is the exchange rate?
4. What is the currency of the operating labour? What is the exchange rate?
5. What is the currency of the operating supplies? What is the exchange rate?
Royalties can take a number of forms, and can be payable to a number of persons, often at the same time. It is possible that some royalties will be payable even when the mine is not operating. A net smelter return royalty may be payable even though the mining operation is not making a profit. Royalties can create substantial liabilities, and should be well understood.
1. Are there mineral royalties payable to:
- land owners?
2. What is the form of the royalties:
- net smelter return?
- net profits interest?
- net income before taxes? after taxes?
- fixed annual payments?
- payments based on the number of tonnes, ounces, or pounds produced?
3. Are there any time restraints on the royalty:
- minimum payments each year?
- maximum accumulated payments?
- no payments before or after a certain date?
- changes in rates after a certain amount has been paid?
4. Are there process royalties payable? These can be initial licensing fees at the time of construction and/or ongoing fees for the use of a technology.
5. Get copies of the agreements.
6. What are the details of the royalty calculations?
7. What are the details of timing?
8. Are the royalties tax deductible?
In most jurisdictions, the various levels of government will receive from 20% to 50% of the before tax cash flow, and possibly more if withholding taxes are payable. Often governments get as much or more out of a project than the owner. Such a large component of cost warrants more than a passing glance.
1. What are the taxes which will apply to the project? What are the taxes which will apply to the owner:
- federal income tax?
- provincial/state income tax?
- provincial/state mining taxes?
- mineral royalties?
- capital tax?
- municipal tax (usually included in capital and operating costs)?
- sales and value added taxes (usually included in operating capital and supply costs)?
2. Are there any planned changes in the current tax structure or tax rates?
3. What are the details of the tax calculations:
- tax rate?
- depreciation methods?
- processing allowances?
- minimum taxes?
- are other taxes allowed as deductions?
- special incentives (tax holiday, etc)?
4. Are there existing depreciation pools that can be used? Do these pools have an existing depreciation schedule?
5. Are there withholding taxes? Can all profits be taken out of the country?
6. In some developing countries the government demands a carried interest in the project (an unpaid equity portion). What are the extent and terms of this payment?
Financing and Funding
It is important to distinguish between an economic evaluation and a financial evaluation. An economic evaluation assesses the inherent technical viability of the project, without considering debt.
A financial evaluation determines the impact of debt on the project, and the project's ability to support and repay a debt structure. Many owners wish to include financing in their evaluations. If this is required, a version of the Base Case should be calculated without debt, to confirm that the project is viable on its own without the leverage of debt.
1. How is the project being financed?
2. Who is borrowing:
- How much?
- From whom?
- At what interest rate?
- With what repayment schedule?
3. Is there more than one debt?
4. Is there a carried interest? Some land owners receive a share of the profits without providing any equity. This is often true of governments in developing countries.
5. Is there any government support? Is it repayable? How does it affect taxes?
6. Is flow-through funding available? How does it affect taxes?
The most common presentation of the results of an evaluation is a year-by-year cash flow calculation plus some measure of the project's viability (DCFROR, NPV, Payback Period). Any other requirements should be determined.
1. How does the owner want the project evaluated:
- Discounted cash flow rate of return (DCF ROR)?
- Net present value (NPV)? At what discount rate?
- Discrete or continuous discounting? Mid-year or end-of-year convention?
- Payback Period? Measured from first production?
2. Are pro forma accounting reports required in addition to the cash flow?
3. Will the evaluation include inflation?
- At what rates?
- Over what period?
4. Are there any revenues, costs, or circumstances peculiar to this particular project which would affect the outcome or interpretation of the evaluation results?
5. What are the dividend payments?
The premise for this list is that a detailed economic model of the project will be developed, with a cash flow analysis being the final product of this work. Therefore, the items in the list have focused on cash costs, and have not addressed book or accounting items such as depreciation and depletion. However, if the final evaluation will entail accounting calculations, these items should be gathered if they are available.
It is often easier to find data and assumptions and back-up calculations in a feasibility study than in an operating mine's records. This is because the feasibility work is all projection, and the individual assumptions and criteria must be spelled out. Therefore, if one is reviewing a project at the feasibility stage, or even the startup stage, the feasibility study will probably provide the greatest insight into the project.
Once a project is in operation, historical records and "life of mine" plans will provide the most significant data. The assumptions are not always clearly set out, usually because the documents are for internal use and everyone knows what the assumptions are. You may have to dig around to find what the basic assumptions are.
For operating mines the sources of data can include monthly, quarterly, and annual operating reports. Corporate annual reports are another source of data, particularly in terms of over-all strategic planning. The notes to the annual report's audited financial statements are often a source of information on potential problems and liabilities. Reports to and from government departments can also be informative.
It has been assumed in the preceding discussions that all data is available in English. In today's international market, this may not always be the case, so it is important to recognize the need for translation:
- Engage a translator who is familiar with the specific technical terms associated with mining and metallurgy. Translators are often non-technical persons.
- Allow adequate time in your schedule, and funds in your budget, for translation both into English for your use and back into the host language for the owner.
Management and Personnel
The management and personnel associated with an operation will often determine how successful that operation will be. It is a critical factor to assess in the over-all evaluation.
1. Obtain a complete organization chart, from the first level of operator to the highest executive, including the owners of the corporate entity.
2. Is the management adequate and appropriate for the operation?
3. Are the personnel adequate and appropriate for the operation?
4. Do management and personnel work well together?
5. Are there management or personnel problems that work against the success of the project?
6. Are there management and personnel characteristics that contribute to the success of the operation?
This checklist addresses most of the economic variables in a project but it should not be construed as a full and comprehensive list of all variables. Its purpose is to raise questions about variables or issues which the reviewer will then pursue in more detail using increasingly more comprehensive checklists for each topic.
The correct interpretation of evaluation results will depend on all relevant information being included in the evaluation of the project. If specific items are included or excluded in the evaluation, these items should be noted clearly, right up front. An evaluation report should include a complete listing of all of the evaluation criteria.
1. State all of your assumptions clearly. Whenever possible, obtain copies of contracts, estimates, schedules, and costs. Decisions to invest large sums of money will depend on your assumptions. Be sure to document them all.
2. If something is being specifically excluded from the evaluation, state what it is and try to give an assessment of the impact of the item's exclusion.
3. Problems often happen at the interface between two disciplines. When reviewing a project, make certain that the assumptions used by each discipline match those used by the others. Some of the common problems (which could be avoided if the disciplines would talk to each other)are listed below:
- The geologists tend not to talk to the miners (no one tells the miners the ore reserves have changed).
- The miners tend not to talk to the mill people (no one mentions there will be a week of oxide ore coming from the mine).
- Capital cost estimators tend not to talk to the metallurgists (no one tells the estimators the processing rate has doubled).
- Process people tend not to talk to the structural people (no one tells the designer that the ball mill has moved).
4. The greatest danger in an evaluation is omission. Did you forget anything? It is often useful to take a site map of the project and draw a line around the entire operation. Ask yourself two questions:
- What materials, equipment, labour, utilities, and final products cross this line to enter or leave the project?
- Have I accounted for all of these items as costs or revenues in the evaluation?
Guidelines To The Australasian Code For Reporting Of Identified Mineral Resources And Ore Reserves, prepared by the Joint Commission of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists, and Australian Mining Industry Council, published as an attachment to the September 1992 Code.