There is a common misconception surrounding feasibility studies. We know they’re important but their significance is commonly misconstrued. Make one mistake or skip one step of the process and it can have detrimental effects on a mining project.
A mining feasibility study, in short, is an evaluation of a proposed mining project to determine if the mineral resource can be mined economically. But there are many stages of this process before the actual feasibility study or report is finalized.
First off, there are three main feasibility studies: the scoping study, preliminary feasibility and detailed feasibility.
The first one is the order of magnitude, conceptual or what we investors generally call it, a scoping study.
This first step in the feasibility process is the initial financial appraisal of an indicated mineral resource (see last week’s newsletter). This study usually begins once a sufficient level of drilling and sampling to define a resource has been completed, such as a NI 43-101 in Canada. Scoping studies are developed by copying plans and factoring known costs from industry standards and comparable historical data.
It involves a preliminary mine plan, and is the basis for determining whether or not to proceed with an exploration program, and more detailed engineering work.
The end result of the study is a description of the general features and parameters of the project and an order of magnitude estimate of capital and operating costs. A study of this level is valid to determine whether a project is worth pursuing further but not enough data has been collected for reserve definition. This study is generally 35 -50% accurate.
But don’t mistake the term mineral reserves for mineral resources.
Mineral Resource is a guess of what’s in the ground such as the indicated and inferred resources found in NI 43-101’s. A Mineral Reserve, on the other hand, is the resource known to be economically feasible for extraction. Few projects survive this part of the study.
The next stage after this is the preliminary feasibility study or “pre-feasibility study.”
This study determines the mining and milling extraction methods and rates, the product recoveries, environmental and permitting issues, and preliminary capital and operating cost estimates. It also determines whether or not to proceed with a detailed feasibility study, which is very costly.
As part of this process, areas of concern that need further research during the feasibility stage need to be identified. These areas often include geotechnical studies for mine, waste dumps, and tailings facilities design, metallurgical testing for refining estimates of product recoveries, and waste characterization studies. Identifying these items at this stage can avoid costly delays during the feasibility stage – any additional delays and costs can be detrimental to a project which often translates to shareholders directly. Added costs mean further funding may be required and could add further dilution to shareholders.
Depending upon the level of detail in these studies, and the securities exchange that is involved, reserves can, in some cases, be declared at this point.
This preliminary feasibility study is usually 20-30% accurate and only 50% of the companies that go through this stage pass onto the final stage of the feasibility study or what many call the “bankable” study.
Detailed or “bankable” feasibility studies are the most detailed and usually determines whether or not to proceed with the project. General industry standards of this study results in estimates that are within 15 percent accurate.
In essence, this stage is simply a refinement of the pre-feasibility study, which evolved from the scoping study. Key components in the feasibility study are the mine design, production schedule, a detailed process flow sheet, product recoveries, a detailed plant design, consideration of the environmental issues, detailed capital and operating costs estimates, and an economic model of the project. Each of these components is EXTREMELY important.
If a company can make it this far and is feasible after this stage, they can generally take this study to the “bank” for financing purposes.
At this point there is sufficient information to declare reserves, provided the project has positive economics and is noted as bankable. However investors always seem to forget that “bankable” describes only the level of accuracy of the analysis and not necessarily the outcome of the project.
As I said in last week’s newsletter, just because a project is feasible, doesn’t mean it will get the go ahead for production. Just because a feasible project can make money, the return on investment may not be enough for the company to advance the project.
For example, the profit from the mine may be $100 million but it may cost $95 million to build it out. So is it feasible? Yes. But does it make sense to spend $100 million to make $5 million? I doubt it.
If the benefits do not significantly outweigh the costs, not only may the government say deny you your permits, but your financiers may pull out.
At this feasibility level, roughly 20% of the companies will fail, and of these most fail as a result of either overly optimistic assumptions or skipped steps. For this step to be successful, the scoping study and the pre-feasibility study must be conducted at reasonable estimates.
I have seen companies shell out a lot more cash and time once they hit this stage because they over emphasized their scoping and pre-feasibility studies.
A great emphasis needs to be placed on each and every step with new rules and regulations constantly changing the way feasibilities are done.
Next week, we’ll go into more depth and discussion surrounding some extremely important factors in the mining feasibility study.
After that, we look forward to bringing you our much anticipated investment ideas before the year is over.
Until next week…
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