Negatively Geared Ore Reserves - A Major Peril of the Break-Even Cut Off Grade Julian Poniewierski

Transcription

1 Negatively Geared Ore Reserves - A Major Peril of the Break-Even Cut Off Grade Julian Poniewierski March 2016 AusIMM Project Evaluation 2016, Adelaide.

2 Hands Up - What would you prefer: Of following Ore Reserve options: (both profitable) (a) % Cu (900 Mlb copper) (b) % Cu (600 Mlb copper) It appears that most CEOs choose (a) 2

3 Hands Up - What would you prefer: Of following Project options: NPV = 152 M$ or 77 M$ 3

4 Hands Up - What would you prefer: Of following Ore Reserve/Project options: (a) % Cu NPV = 77 M$ (b) % Cu NPV = 152 M$ Same project, different cut-off grade. 250 Mt total material, $3/lb Cu, typical OP costs, i=8%, pre-tax 4

5 My Proposition: Significant negative value tonnages in Ore Reserves have compounded Mining Company financial problems. Like a negatively geared investment house, in a falling property market, negatively geared ore reserves have magnified the loss when commodity prices have dropped. 5

6 Introduction Break-even Cut-Off Grade Usually excludes costs NOT associated with processing decision ( ore not rock costs) Excluded costs have to be covered by difference between break-even grade and actual value of a mined grade. If accepted definition is material that pays for itself, then it should pay for itself when it is by itself 6

7 Introduction Break-even Cut-Off Grade Inherent Risk in break-even COG Ore Reserves Risk magnified when negative value tonnages included Ken Lane s theories of COG selection for NPV maximisation, now 52 years old (published 1964 ). Brian Hall s Hill of Value now 13 years old. (2003) Industry still stuck on BE-COG; so let s - at least - get it right 7

8 Distribution of Value In a typical ore reserve using a break-even cut-off grade, a lot of ore is marginal. Data from real example open pit. Typical. 8

9 Distribution of Value Real Tonnage Distribution by $/t Value (typical): 9

10 Distribution of Value Value Proportion Distribution by $/t Value: 10

11 Distribution of Value Cumulative Tonnage vs. Cumulative Value: Bottom 27% of tonnes only 6% value Top 27% of tonnes 60% Value Same Tonnage, Same Work, 10 times the value A lot of material is mined & milled for Practice Bin Cum % Tonnes Cum % Value <0 0% 0% % 6% % 22% % 40% % 52% % 63% % 73% % 82% % 87% % 91% % 94% 11

12 Implication of an Error Tonnage Distribution Change in with a 5$/t Error: 55% of material ΣValue = 0 Non break-even calculation costs to still be paid for 12

13 What a $5/t Error Looks Like Gold: 1600 A$/oz: 0.10 g Au recovered /tonne (1150 US$/ oz and 0.72 USD:AUD) Copper: 2.40 US$/lb: 0.10 % (recovered Cu) 4.50 US$/lb: 0.05 % (recovered Cu) Rounding Error 13

14 The Leverage Effect of an Error Consider following two ore reserves: A: -5 $/t COV B: +5 $/t COV 100 Mt 735 M$ 7.35 $/t 45 Mt 735 M$ 16.3 $/t NPV of A: 77 M$ NPV of B: 152 M$ Pre-tax; 8%; 250 Mt TMM; 5 Mtpa Mill, Typical OP mining, processing & treatment costs

15 The Leverage Effect of an Error After a 15$/t equivalent price fall: A: -5 $/t COV B: +5 $/t COV 100 Mt -765 M$ $/t 45 Mt 60 M$ 1.34 $/t A fell 2.2 times more in value than B M$ 1500 vs M$ 634

16 Types of $5/t Errors Recovery Errors Fixed Recovery Lab Data vs. Real Data. Ignoring Data Median vs. the Mean Cost Omissions & Errors 16

17 Fixed Recovery Error Fixed Recovery = Using Project Average Recovery for Average Head Grade for all Tonnes down to BEG: e.g. 1.5 g/t & 0.3 g/t Example Gold Mine #1 (real): Reserve Head Grade = 2.2 g/t Au Mill Recovery = 94.0% COG = 0.9 g/t (controlled by a physical limit) 17

18 Fixed Recovery Error Example Gold Mine #1 (real): Recovery varies by Head Grade Fixed Tails Grade often a better Estimate of Recovery 94.0% of 2.2 g/t Au tails grade = 0.13 g/t JV partner wanted to Increase Ore Reserves (market value perception) 18

19 Fixed Recovery Error Example Gold Mine #1 (real): New Ore Reserve with 0.4 g/t & 94% recovery: 94% 0.4 g/t Tails grade = 0.02 g/t (Note world s best gold plant has a tails grade around g/t) [NB: implies 0.38 g/t recovered] 0.13 g/t Tails grade for 0.4 g/t 67% Recovery. If Require 0.38 g/t recovered gold for break-even then at 0.13 g/t tails grade, break-even COG = 0.5 g/t (not 0.4) Remember: 0.1 g/t; $5/t maybe 20-30% of Ore Reserve with negative value 19

20 Fixed Recovery Error OK Fixed Tail may underestimate true recovery. Nobody goes broke making more money than they thought 20

21 Reality Bites (Laboratory vs. Real Mill Performance) Example Gold Mine #1 again: 21

22 Reality Bites (Laboratory vs. Real Mill Performance) Example Gold Mine #1 again: Actual average = 0.25 g/t break-even of 0.6 g/t 0.2 g/t error: Now maybe 40-60% of Ore Reserve negative value 22

23 Ignoring Data Error More common than you would (should) think: 23

24 Ignoring Data Error Gold Mine #2: Using 0.11 g/t Fixed Tail for Ore Reserves No-one had analysed the available data: Remember: 0.1 g/t; $5/t maybe 20-30% of Ore Reserve with negative value 24

25 Means, Medians & Modes The FLAW of Averages : 25

26 Means, Medians & Modes Common Error: Assuming Modal or Median Value as the Correct value; rather than the Mean value Distributions of Values are usually Skewed 26

27 Chapter navigator (to add Insert, Header & Footer, Footer and apply) Means, Medians & Modes Example Raisebore drill & move time data (Kidd Creek) Median = 11.5 Mean = 13.6 (18% ) so fixed costs (labour) 18% higher & stope turn over slower. 27

28 Means, Medians & Modes Common Error is Assuming Modal or Median Value as the Correct value; rather than the Mean value Distributions of Values are usually Skewed Imagine a project made up of dozens (hundreds?) of such errors? Skewed distributions: Mean of Sum Sum of Means 28

29 Simple Cost Errors & Omissions More common than you would (should) think: Real Data OP Gold mine #3: Reasons for increase included: Logistics: Access Road Mill Parts Cyanide underestimated Power cost increases Year X Year X+1 G&A 5$Mpa 12$Mpa % Increase 1.28 $/t 3.56 $/t 178% Mining 2.24 $/t 2.28 $/t 2% Milling 8.92 $/t $/t 33% Total: $/t $/t 43% Remember: $5/t, maybe 20-30% of Ore Reserve with negative value 29

30 Simple Cost Errors & Omissions Nothing is ever wrong in the design is it? 30

31 Simple Cost Errors & Omissions And some-times things can get worse: 31

32 Clues to Look For Discussed issues. Things don t gel: Historical Quarterly Total Costs vs. Head Grade 32

33 Clues to Look For Discussed issues. Things don t gel: Historical Trend 33

34 Clues to Look For Discussed issues. Things don t gel: Ore Reserve Grade 34

35 Clues to Look For Discussed issues. Things don t gel: Most Likely Total Costs from Historical Trends 35

36 Clues to Look For Discussed issues. Things don t gel: Ore Reserve Price 36

37 Clues to Look For Discussed issues. Things don t gel: Historical Trend Total Costs for Ore Reserve Grade >> Ore Reserve Price 37

38 Other Clues to Look For Misaligned Executive KPIs e.g. Size of Reserves Management Strong on spin Low on technical detail 38

39 Other Clues to Look For Corners Cut: 39

40 Conclusions Errors/Omissions in Break-Even COG calculation Negative geared ore reserves Increased project/company risk profile Experience can avoid some of errors: Benchmarking of Data Don t ignore data; Don t ignore experience "A conclusion is the place where you got tired of thinking." Steven Wright 40

41 Thank you