Importance of Independent Due Diligence in Mining IPMI Conference Presentation June 2013

International Precious Metals Institute Annual Meeting – 25 June 2013 – Phoenix

The Importance of Independent, Qualified, Technical Due Diligence in

Mining for Investors, Owners, & Managers

Tim AlchV.P & Senior Minerals Business AnalystBehre Dolbear & Company (USA), Inc.

+1.845.480.1434

BEHRE DOLBEARfounded 1911 MINERALS INDUSTRY ADVISORS

Overview - What to Look For When Evaluating Mining Projects

• Recent and current trends • All resources are not golden• Issues to examine and consider • Prepare for the best and worst


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Nominal Industrial Metal Average Prices 1970 – 2012

Aluminum Copper Lead Zinc Nickel

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Recent Years Have Been Good, Relative to Price Cycles of the Past 40 Years

Data Source: USGS and LME

Capital Destruction

Capital Creation

Capital Destruction?


Metals Demand Has Grown, Sentiment Now Is Cautious

• Urbanization, industrialization continues in China, SE Asia, India, parts of LatAm, MENA driving industrial metals and energy demand

• Security & stability of supply are a concern in China, Korea, Japan, Middle East, etc. and select co.s e.g., fuel (coal, uranium), fertilizer minerals, technology/critical metals, etc.

• Economic growth in China, EU, etc. is slower• Metals prices and valuations are down• Risk-off attitude is plaguing sector

NRice

Have no clue what this means or if it is correct


China’s Population Continues to Urbanize


Largest Mass Migration in History Sets Theme for World’s Rising Middle Class

• In the next 20 years, ~325 million people to move to urban areas in China • China’s middle class may to double to 600+ million by 2020• A similar shift is occurring elsewhere around the world


China Consumes About Half the World’s Metals, Energy, etc.

Source: UBS


China’s Share of Global Metals Consumption May Level Off

Source: The Economist and UBS


Cautious Now; Long Term Demand Positive

• Mining companies have reduced spending• Investors and lenders are very cautious• Cash is king, may be primed for M&A • Many ‘Juniors’ are short of capital • Tough markets may go into 2014 • Longer term - supply may struggle to meet demand• Sporadic price spikes in metals markets can occur • Constraining new supply are: Declining ore grades;

Higher costs; Fewer large deposits; Larger ‘takes’ by Governments; Changing political winds; etc.


Gold <$1,300/oz Is Well Below Recent Highs, Narrowing Margins - How Low Can It Go?

Source: BMO Research


Since Sept 2011 Metals Equities Fell Disappointed Investors Flock to S&P

Source: Cowen Securities

-

50%

100%

150%

Sep-11 Nov-11 J an-12 Mar-12 May-12 J ul-12 Sep-12 Nov-12 J an-13 Mar-13

GDXJ Coal I ndex Copper I ndex S&P 500

Source: Capital IQ. Data as of April 26, 2013.Note: Coal Index represents Dow Jones U.S. Coal Index. Copper Index based on Cowen Securities Investment Banking coverage database.


Cautious, Deliberate, Long Term View Is Core to Cyclical Mining Business

• You can lose a fortune being optimistic about the near term future – some have already

• As a legendary analyst said “Be careful about looking to mountain tops as paths through valley floors can be treacherous”

• Behre Dolbear focuses on geo-technical, operating, business & financial issues that impact exploration, development, operations

• We do not forecast metals prices


When To Call Independent Experts

• It is best to get Qualified expert advice early on whether you are an owner, investor, etc.

• All too often experts are called when:The company is out of moneyLenders are out of patienceDespair has set in

• Caveat Emptor – Buyer Beware• Profitable projects are few


The Business Goal Is To Realize Value: How? When?


Finding A Gold Mine Is Costly and Risky It All Starts With Exploration


Exploration Is Core to Mining What To Look For

Mining companies and management feel obliged to find and develop new competitive, low costresources, i.e., their Life Blood – to replace

existing reserves – that are diminishing assets –

and to Stay Competitive

MANAGEMENT & INVESTORS BEWARE!

Once a Fido = Dog, Always a Phydeaux

= A Higher Class Dog is Still A Dog!


Why Trained, Qualified Eyes Are Needed

• Best properties are low cost, in stable jurisdictions & likely expansions/extensions of existing mines

• Top rate management always essential• Understanding terms and markets critical • ‘Resources’ are concentrations or occurrences of

minerals in such form and quantity and of such grade or quality that they have reasonable prospects for economic extraction

• Terms, definitions, methods used to evaluate a property can vary by user & jurisdiction BEWARE


In the Best Case: Accepted Resource-Reserve Classification Systems are Used

Australia JORC Code Canada CIM 2000 / NI 43-101 Europe PERC South Africa SAMREC Code United States SME / SEC Industry Guide

7 Russia A, B, C, D, E China Traditional and New

(1999)


In the Worst Case: Beware of Fraud

• If it sounds too good, it likely is

• Look for misleading statements

• Know who you are dealing with, etc.

• Evaluate circumstances relative to history

• There is no good substitute for an Independent, Qualified Expert review – too many variables and too long a period of time are involved

• Being diligent using Rules of Thumb, Common Sense, etc. are not good enough


Economic Worthiness of a Property Is Impacted By Many, Many Variables

Study these and many other items with discerning, trained eye:• Property Information and Stable Regulatory Environment • Geology and Resources• Mining• Mineral Processing and Metallurgy• Infrastructure• Products, Markets and Sales• Environmental and Permitting• Financial Issues• Development Costs and Schedule• Political and Social Considerations• Market• Project Economics – Opex and Capex


From Discovery To Start Up = ~17 Years


Three Levels of Engineering Studies Used to Define Economic Worthiness

Conceptual Study/Scoping StudyPre-feasibility StudyFeasibility Study


Engineering Studies – Scoping Study

• aka Conceptual Study, Preliminary Economic Analysis

• First engineering study to compile all elements of a project into one evaluation and apply economic tests

• Its accuracy is based on first principles, knowledge, and experience and is generally +50% / -25%

• This is the least expensive engineering study and is usually completed in 90 days or less


Engineering Studies – Pre Feasibility Study

• aka PFS or Pre-Feasibility Study

• Accurate to +25% / -15%

• May take 6 to 18 months to complete

• Engineering evaluation applied to key elements, such as• The caliber of the resource estimate• The mine design• The process design• Mineralogical analysis• Metallurgical testing• Soil and rock engineering tests• Smelting/refining and marketing• Environmental work – the EIA is completed during the PFS• Cash flow analysis, sensitivity analyses, and economic tests


Engineering Studies – Feasibility Study

• Feasibility Study or Definitive Study• The document upon which mine is approved by the

Board of the mining company developing the mine• If financing is required, this is the document evaluated

by financial institutions in their decision-making process• The Feasibility Study is also the document to which the

completed and commissioned mine plan is compared to determine its commercial status


Definition – 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.”

- Canadian National Instrument 43-101


© 2011 Behre Dolbear Group Inc. All Rights Reserved

Major Risk Categories To Look For

• ProjectAs defined by engineering studies (or lack thereof)

• Company Its experience at building and operating mines in the

same commodity• Country

Reference Behre Dolbear’s Country Risk Survey• Financial Institution

Experience in mining, the region, the country, and the commodity in question



Ten Types of Project Risk: Some Issues to Look For

• Geological • Mining• Metallurgical/processing• Environmental and social issues• Human resource issues• Market• Operating and capital costs• Company• Country • Financial Institution



1. Geological

• Geological Risk

ReservesReserves

Reserves



2. Mining

• Mining RisksSurface versus undergroundDrilling/blastingRock hardnessDilutionMine planCut-off grade



3. Metallurgical Processing

• Metallurgical/Processing RiskRecovery methodAdequacy of testingRepresentativeness of samplesContractor/mill constructor



Deeper Dive: Issues To Examine

• How much? What is head grade %• What is the valuable mineral?• What is the particle size of the mineral relative

to all of the other minerals in the ore?• What are the relative specific gravities of the

valuable minerals and gangue?• What is the overall competence or hardness of

the rock containing the ore?• Magnetism, radioactivity, electrostatic response• Color, reflectivity and UV response, chemistry



Where Is the Metal?How Hard Will it be to Separate?

po, pyrrhotite; py, pyrite; cpy, chalcopyrite)

Au – Gold; BI – Bismuth



Steps to Process Minerals

• Size Reduction: crushing and grinding• Sizing: screening• Classification: by gravity and size• Separation or Concentration: use any one or a

combination of mineral processing steps available to produce a concentrate

• Dewatering of Tailings or Concentrates: via settling, filtration, and drying, for example



Typical Gold Processing Circuit



Mills Are Large and Costly



5. Human Resources

• Human Resource IssuesManagementOrganizationUnion contractsPension liabilitiesSocial issues/local peoplesMIS/IT systems



6. Market

• Market RisksWho will buy product/marketabilitySmelter availabilityHow many smelters?Contract (Good for both parties)Hedging/forward sales



7. Operating & Capital Costs

• Operating and Capital CostsOperating Costs

− Dramatic recent increases due to higher fuel costs, higher wages, higher supply costs, and delays in deliveries of supplies

Capital Costs− Increases in steel and equipment costs have

affected all proposed operations and expansions of existing operations

− “Blowouts” are now frequent



8. Company Risk

• Financial strength• Mining experience• Management experience



9. Country Risk

• Political stability• Tax regime• Attitude toward mining• Nationalization/privatization history• Foreign exchange controls/currency stability



10. Financial Institution

• Experience in country• Presence in country• Experience in industry• Financing capability



Four Issues Impacting Project Success Today

• Social Issues/Social License to Operate• Costs Control• Higher Government Take/Resource Nationalism• Access to Capital


1. Social Issues/Social License to Operate

• Social, Economic, Regulatory issues are a leading cause of project delay & cost increases

• Striving to be compliant with regulations and NGO agitation, etc. are contributing to higher project costs and delays

• Gaining confidence for Social License to operate is essential


2. Costs Control Needed

• Capex rising through cycle• Capex lags rise in metal prices• Number of blow ups increasing• Long investment horizons• Project development• Reserve expansion

Per Unit of Annual Production (US$)

Gold $1,250 to $2,500 per oz of annual production

Copper $3.50 to $4.50 per lb of annual production

Capital Costs


Building Mines – Capital Costs

• Capital costs are primarily dependent onLocation, political situation, skilled labor availabilityDepth of ore zone and mining horizonsShaft or adit/ramp accessPlant size

− Shaft size and hoisting capacity− Equipment fleet size and material handling capacity− Processing plant capacity to match mining rate

Mining method− Level of mechanization and automation− Productivity per man shift


Different Geology; Different Economics

• Of the world’s gold production the bulk is from sulphide ore rather than oxide ore

• The project, operating economics are different• Representative indicative measures:

Sulphide Ore: Capex low grade $300 to $700+ million; minimum 2 to 5m oz

Oxide Ore: Capex is scalable with Opex =1/5 of Sulphide; minimum scale can be small


What Can Go Wrong: Issues To Look For Mine Operating Cost Estimation

• Fuel and electricity costs under estimated• VAT/sales tax, not included and import duties neglected• Improper cycle times & haulage distances used• Mining sequence and methods• Ground control under estimated• Inadequate pre-stripping• Poor haul road design• Pit slopes • Dilution • Poor waste dump design• Etc.


Recent Examples of Capital Costs Rising Above Plan (US$ Billions)

Project Original Current

Pueblo Viejo 2.5 3.5

Galore Creek 2 5+

Cerro Casale 2 6

Pascua Lama 3 8+


3. Increased Government Take

• Changing measures and Government ‘takes’ at local, state, and federal levels are today’s reality

• A global concern – Raises Project Uncertainty• In normal mining cycles, a project will fail if

Government take exceeds 50%• Mining companies take all the risk


4. Access to Capital

• Currently, equity and debt difficult to obtain

• New sources of funding need to be found

• Private Equity, State Owned Enterprises, etc. may play a larger role


Recent Capital Markets Trends

• Metals markets in 2012 & 1H13 are turbulent - at best• A long term perspective is needed in mining business • Banks, investors and operators are now risk adverse • Management, stakeholders, employees, partners &

customers need to be realistic about options• This uncertainty may continue well into 2014• Alternative and strategic investors, private equity, SWFs

and SOEs may opportunistically step in


More Consolidation in Mining is Likely

• Valuations are less expensive than greenfield investment

• Consolidation to form Super and Larger Majors is likely

• SOEs, SWFs e.g. Japan, Korea, India likely to continue to acquire strategic metals and energy fuel resources, etc.

• Strategic M&A may buoy mining assets and share prices


Of the Top Ten Commodities by Global Projects in 2011: Gold Was #1

• Investors, lenders, & speculators were attracted to precious metals • What will 2013/4 look like?

Source: Intierra


In 2011 China M&A Focused on Gold

Source: Ernst and Young


In 2012 Global Gold M&A Was High Again

21.4

17.9

14.2 13.4

7.3 5.3

4.0 3.9 3.6 2.3

10.6

0

5

10

15

20

25

$ Bi

llion

s

2012 M&A Activity by Target Commodity

Source: Ernst and Young


Recent China Acquisition Trend By Region – USA & Canada = Small Share

By Value 1st Half 2012


Prepare for the Best and Worst – Check and Double Check

• Mining has a favorable long term outlook• Have skilled, business savvy managers• Always best to be in first cost quartile• Understand and prepare for cycles • Be aware of jurisdictional risks• Always do due diligence • Consider all unknowns

THANK YOU


The Behre Dolbear Group

• Behre Dolbear has 12 offices in 8 countries and completed 210+ jobs in 55+ countries in each of the last 5 years using our global network of 125+ professionals in all major mining markets

• We perform studies and advise a wide range of entities in the mining, banking, investment, financial, legal and accounting sectors, and government agencies around the world

• Our evaluations span technical, operating, financial issues and valuations of base, precious and ferrous metals, coal, uranium, fertilizer & industrial minerals, gemstones, construction materials

Tim AlchV.P. & Senior Minerals Business AnalystBehre Dolbear & Company (USA), Inc. 100 Park Avenue, New York City 10017

+1.845.480.1434 [email protected]

mailto:[email protected]


The Behre Dolbear Group


Appendix

Characteristics of 3 levels of engineering studies – Not exhaustive, rather indicative checklists that require trained, qualified experts’ review:

Conceptual/Scoping StudyPre-feasibility StudyFeasibility Study


Characteristics of Scoping, Pre-Feasibility, and Feasibility Studies – A1

Potential Areas of Investigation for Proposed Mining Projects

PROPERTY INFORMATION

Location, topography and climate Land ownership and royalties Property history Current status

GEOLOGY AND RESOURCES

Geological description Mineralogy Drilling, sampling and assaying Evaluation techniques Mineral resource estimate

MINING

Ore reserve estimate Mining method and plans Mining equipment Material handing Material handling equipment Historical and forecast production Consumables Mining capital estimates Mining operating cost estimates

PROCESSING

Ore sampling and testwork Processing method Other required processes Process equipment Historical and forecast production Consumables Processing capital estimates Processing operating cost estimates

INFRASTRUCTURE

Industrial infrastructure facilities Social infrastructure facilities Utilities, power, water Infrastructure capital estimates Infrastructure operating cost estimates

MANAGEMENT AND LABOR

Management organization requirements Labor requirements

PRODUCTS, MARKETS AND SALES Products Markets Prices Sales

ENVIRONMENTAL AND PERMITTING Permit list Environmental impact Compliance costs Compliance cost timing Reclamation expenses

FINANCIAL ISSUES Taxes Royalties Fees Licenses

DEVELOPMENT COSTS AND SCHEDULE Development cost estimate Development schedule Development methodology

POLITICAL & SOCIAL CONSIDERATIONS Economic benefits and costs Government considerations Other issues

PROJECT ECONOMICS Economic parameters Discount rate determination Cash flows Investor returns Debt analysis Sensitivities



(continued)

CATEGORY CONCEPTUAL STUDY/SCOPING STUDY PRE-FEASIBILITY STUDY FEASIBILITY STUDY

INTRODUCTIONLocation, Topography, and ClimateSite location mapOwnership and RoyaltiesClaims listClaims mapCurrent Status and HistoryHistorical chronologyInformation on past production, if any

•Yes

•NoNo

NoNo

•Yes

•NoYes

NoNo

•Yes

•YesYes

YesYes

GEOLOGY AND RESOURCESGeological DescriptionGeological mapGeological cross-sectionsDrilling, Sampling, and AssayingParametersDrill hole location mapSampling/assaying flow diagram and assessmentAssay check assessment and graphMineral Resource EstimateResource methodology determination and approachGeologic model limitsLithology/tonnage factors/codeCumulative frequency of samples verses gradeVariogramsResource Estimate

YesNo

YesYesNoNo

YesYesNoNoNo

Industry Standards (NI 43-101, JORC, etc.)

YesYes

YesYesYesYes

YesYesYesYesYes


YesYes

YesYesYesYes

YesYesYesYesYes




(continued)

CATEGORY CONCEPTUAL STUDY/SCOPING STUDY

PRE-FEASIBILITY STUDY FEASIBILITY STUDY

MININGOre Reserve Estimate

Reserve and resource calculation parameters

Cutoff grade equationsReserve and resource estimate

Mining Method and PlansMining parametersHydrology/geotechnical parametersMining equipment listConsumables listMaterial handling systemsMaterial handling equipmentPersonnel listSurface mining

Final pit and dump outlinesIncremental pit and dump outlines

Underground miningGeneral mine developmentMining approach (stoping, cut and fill, etc.)

Production ScheduleHistorical production, if anyAnnual ore and waste tonnage and grade

Mining Capital and Operating Cost EstimatesMining operating cost estimatesMining capital cost estimates

Assumed ValuesNo

Industry Standards

Yes, minimal engineering basisNoNoNoNoNoNoNo

Yes, simple outlineNo

Yes, general outlineYes, general approach

YesYes, division of total

Yes, factored ±45%Yes, factored ±45%

Test-Based ValuesYes

Industry Standards

Yes, some geotechnical dataYesYesYesYesYesYesYesYesYes

YesYes

YesYes

Yes, ±30%Yes, from engineering

manuals ±30%

Test-Based ValuesYes

Industry Standards

YesYesYesYesYesYesYesYesYesYes

YesYes

YesYes

Yes, ±15%Yes, from vendor quotes and

take-offs ±15%



(continued)


PROCESSINGOre Sampling and Test WorkTest work dataProcessing Methods and PlansProcessing methodsProcessing parametersEquipment listConsumables listPersonnel listMaterial balanceFlow diagramSite planGeneral arrangement drawingsProduction ScheduleHistorical production, if anyAnnual production tonnage and gradeOff-site Processing Cost EstimatesConcentration chargesSmelting and refining chargesOther chargesMaterial handling and transportInsurance and sales chargesProcessing Capital and Operating Cost EstimatesProcessing operating cost estimatesProcessing capital cost estimates

No, assumed values

Yes, general approachYes, minimal engineering

NoNoNoNoNo

Yes, simple block diagramNo

NoYes

Yes, division of totalNoNoNoNo


No, preliminary data

YesYesYesNoYesYesYesYesNo

YesYes

Yes, preliminary estimateYes, preliminary estimateYes, preliminary estimateYes, preliminary estimate

No

Yes, ±30%Yes, from engineering manuals

±30%

No, preliminary data

YesYesYesYesYesYesYesYesYes

YesYes

Yes, quoteYes, quoteYes, quoteYes, quoteYes, quote

Yes, ±15%Yes, from vendor quotes and

take-offs ±15%



(continued)


INFRASTRUCTUREIndustrial Infrastructure FacilitiesFacilities listPower and water parametersFull site planSocial Infrastructure FacilitiesFacilities listHousingSchoolsHospitalsOtherInfrastructure Capital and Operating Cost EstimatesConsumables listPersonnel listInfrastructure operating cost estimatesInfrastructure capital cost estimates

Yes, with minimum detailYes, preliminary

No

Yes, with minimum detailNoNoNoNo

NoNo


YesYesYes

YesYes, preliminaryYes, preliminaryYes, preliminary Yes, preliminary

YesYes

Yes, ±30%Yes, from engineering manuals

±30%

YesYesYes

YesYesYesYesYes

YesYes

Yes, ±15%Yes, from vendor quotes &

take-offs ±15%

MANAGEMENT, LABOR & ADMINISTRATION

PersonnelPersonnel listsTraining requirementsPersonnel Capital & Operating Cost EstimatesConsumables listPersonnel operating cost estimatesPersonnel capital cost

NoNo

NoYes, factored ±45%Yes, factored ±45%

YesYes

NoYes, ±30%Yes, ±30%

YesYes

•YesYes, ±15%Yes, ±15%



(continued)

CATEGORY

CONCEPTUAL STUDY/SCOPING STUDY

PRE-FEASIBILITY STUDY FEASIBILITY STUDY

MARKETS, PRODUCTS AND SALES

Markets, Products and SalesProductsVolumePricesSales organizationSales Related Capital and Operating Cost EstimatesPersonnel listConsumables listSales related operating cost estimatesSales related capital cost estimates

Yes, preliminaryYes, preliminaryYes, preliminary

No

NoNo


YesYesYes

Yes, preliminary

YesNo

Yes, ±30%Yes, ±30%

YesYesYes

Yes, preliminary

YesNo

Yes, ±15%•Yes, ±15%

ENVIRONMENTAL AND PERMITTING

EnvironmentalPermit listEnvironmental ImpactsEnvironmental Compliance Cost EstimatesPersonnel listEnvironmental related operating cost estimatesEnvironmental related capital cost estimates

NoYes, preliminary

NoYes, factored ±45%Yes, factored ±45%

YesYes

YesYes, ±30%Yes, ±30%

YesYes




(continued)


DEVELOPMENT SCHEDULE AND COSTS Development ScheduleDevelopment methodologyDevelopment scheduleDevelopment CostsPersonnel listDevelopment related operating cost estimatesDevelopment related capital cost estimates

•Yes, preliminaryYes, preliminary

NoNoNo

•YesYes


•YesYes

YesYes, ±15%

Yes, from vendor quotes & take-offs ±15%

PROJECT ECONOMICS

Financial IssuesTaxesRoyaltiesFeesLicensesEconomic IssuesEconomic parametersDiscount rate determinationCash flowsInvestor returnsDebt analysis

1.Sensitivities

Yes, preliminary Yes, preliminaryYes, preliminaryYes, preliminary

Yes, preliminaryYes, preliminaryYes, preliminaryYes, preliminary

NoNo

Yes YesYesYes

YesYesYes YesNo

Yes, preliminary

Yes YesYesYes

YesYesYes YesYesYes



(continued)


SUMMARY AND RECOMMENDATIONSOperational ParametersTitle and ownershipGeologyOre reservesMining and processing ratesDevelopment period and mine lifeMetal/mineral recoveriesSalesOperating cost estimatesCapital cost estimatesFinancial ParametersCash FlowsNPV, IRR, and ROI

Mostly assumed and factoredYesYesYesYesYesYesYesYesYes

YesYes

Some engineering basisYesYesYesYesYesYesYesYesYes

YesYes

Some engineering basisYesYesYesYesYesYesYesYesYes

YesYes

Economy & Finance

Importance of Independent Due Diligence in Mining IPMI Conference Presentation June 2013