The role of the independent engineer in project finance


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Mining On Top: Stockholm 2013
26-27 Nov 2013

The role of the independent engineer in project finance – Dr Iestyn Humphreys, SRK Consulting; Managing Director of the UK office

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The role of the independent engineer in project finance

  2. 2. COPYRIGHT AND DISCLAIMER Copyright (and any other applicable intellectual property rights) in this document and any accompanying data or models which are created by SRK Consulting (UK) Limited (“SRK”) is reserved by SRK and is protected by international copyright and other laws. Copyright in any component parts of this document such as images is owned and reserved by the copyright owner so noted within the document. © SRK Consulting (UK) Ltd 2013. All rights reserved. This document may not be utilised or relied upon for any purpose other than that for which it is stated within and SRK shall not be liable for any loss or damage caused by such use or reliance. In the event that the recipient of this document wishes to use the content of this document in support of any purpose beyond or outside that which it is expressly stated or for the raising of any finance from a third party where the document is not being utilised in its full form for this purpose, the recipient shall, prior to such use, present a draft of any report or document produced by it that may incorporate any of the content of this document to SRK for review so that SRK may ensure that this is presented in a manner which accurately and reasonably reflects any results or conclusions produced by SRK. The use of this document is strictly subject to terms licensed by SRK to its Client as the recipient of this document and unless otherwise agreed by SRK, this does not grant rights to any third party. This document shall only be distributed to any third party in full as provided by SRK and may not be reproduced or circulated in the public domain (in whole or in part) or in any edited, abridged or otherwise amended form unless expressly agreed in writing by SRK. Any other copyright owner’s work may not be separated from this document, used or reproduced for any other purpose other than with the document in full as licensed by SRK. In the event that this document is disclosed or distributed to any third party, no such third party shall be entitled to place reliance upon any information, warranties or representations which may be contained within this document and the recipient of this document shall indemnify SRK against all and any claims, losses and costs which may be incurred by SRK relating to such third parties. © SRK Consulting (UK) Limited 2013 BACK NEXT SLIDE 2
  4. 4. 1 INTRODUCTION TO SRK © SRK Consulting (UK) Ltd 2013. All rights reserved. ● ● ● ● Mining and Metals Consultancy Operating since 1974 Employee owned organisation Consulting Services • Exploration • Feasibility Studies • ESIAs • Acquisition/Vendor Due Diligence • Independent Engineers Reports • CPRs • 43-101 Technical Reports • Mineral Asset Valuations BACK NEXT SLIDE 4
  5. 5. © SRK Consulting (UK) Ltd 2013. All rights reserved. SRK OFFICE LOCATIONS BACK NEXT SLIDE 5
  6. 6. ORGANIC GROWTH TO MEET DEMAND KPIs ● ● ● ● ● © SRK Consulting (UK) Ltd 2013. All rights reserved. ● ● Sales doubled to >US$200m over the past five years One year growth (12%) Five year growth (average of 16%) Country presence 22 50 operating consulting practices 40 year milestone in 2014 5 year milestone for SRK Sweden in 2014 • Argentina: 35 • Australia: 157 • Brazil: 16 • Congo: 12 • Ghana: 5 • Hong Kong: 1 • Mexico: 10 • Mongolia: 10 • Peru: 134 • Turkey: 19 • United States: 127 • United Kingdom: 159 • Canada:162 • Chile: 137 • China: 74 • India: 15 • Indonesia: 22 • Kazakhstan: 27 • Russia: 53 • South Africa: 441 • Sweden: 8 • UK-ES: 25 • Zimbabwe: 7 BACK NEXT SLIDE 6
  7. 7. 2 THE OPERATING ENVIRONMENT The Ingredients ● ● ● ● The super-cycle and high commodity prices Capital intensive marginal Mineral Assets Growth focused strategy Integration is the only way – let us go fishing downstream © SRK Consulting (UK) Ltd 2013. All rights reserved. The Approach ● Due-diligence light aka the “RBS Way” ● The view from the top: “those technical people are really conservative” The Results ● The perfect storm BACK NEXT SLIDE 7
  8. 8. 2 THE OPERATING ENVIRONMENT © SRK Consulting (UK) Ltd 2013. All rights reserved. The Outcome BACK NEXT SLIDE 8
  9. 9. 3 TECHNICAL FOUNDATIONS Mineral Asset Development Stages ● Exploration Property; ● Advanced Exploration Property; ● Pre-Development Property ● Development Property ● Operating Mines © SRK Consulting (UK) Ltd 2013. All rights reserved. [PROJECT TITLE - RHH] – [Report Title] SRK Consulting (UK) Limited  Exploration Property: properties where mineralisation may or may not have been identified, but where a Mineral Resource has not been identified;  Advanced Exploration Property: properties where considerable exploration has been undertaken and specific targets have been identified that warrant further detailed evaluation, usually by drill testing, trenching or some other form of detailed geological sampling. A Mineral Resource estimate may or may not have been made, but sufficient work will have been undertaken on at least one prospect to provide both a good understanding of the type of mineralisation present and encouragement that further work will elevate one or more of the prospects to the resource category;  Pre-Development Property: properties where Mineral Resources have been identified and their extent estimated (possibly incompletely) but where a decision to proceed with development has not been made. Properties at the early assessment stage, properties for which a decision has been made not to proceed with development, properties on care and maintenance and properties held on retention titles are included in this category if Mineral Resources have been identified, even if no further Valuation, Technical Assessment, delineation or advanced exploration is being undertaken;  Development Property: properties for which a decision has been made to proceed with construction and/or production, but which are not yet commissioned or are not yet operating at design levels; and  Operating Mines: mineral properties, particularly mines and processing plants that have been commissioned and are in production. BACK NEXT SLIDE 9
  10. 10. 3 TECHNICAL FOUNDATIONS Reporting Standards: Mapping to the CRIRSCO Template International Reporting Template key concepts: Definition of a competent person and/or qualified person ● Membership of recognised professional institutions (enforceable Code of Ethics) ● Reciprocity “recognised overseas professional organisations” ● © SRK Consulting (UK) Ltd 2013. All rights reserved. ● Quality: competency, transparency and materiality. International Reporting Codes: CRIRSCOs International Reporting Template for the Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves (2006)” ● JORC Code (2012) ● SAMREC Code (2007) ● PERC Code (2013) ● CIM Guidelines (2010) ● NAEN Code (2011) Combined Reserves International Reporting Standards Committee ● SME Code (2007) ● Peru cCode (2003) ( ) BACK NEXT SLIDE 10
  11. 11. 3 TECHNICAL FOUNDATIONS © SRK Consulting (UK) Ltd 2013. All rights reserved. Technical Studies: Key Criteria ● ● ● ● ● ● ● Classification of Mineral Resources Study objectives Site specific technical information Degree of engineering completed (%) Design basis; cost estimation methodology Cost estimation accuracy (capex and opex) Level of contingency BACK NEXT SLIDE 11
  12. 12. 3 TECHNICAL FOUNDATIONS [PROJECT TITLE - RHH] – [Report Title] SRK Consulting (UK) Limited Technical Study Standards Scoping/Conceptual Prefeasibility Study Study Feasibility Study Project Execution Classification Study Objectives Indicated/Inferred Generate a range of options. Provide information to justify a decision to proceed to a prefeasibility study, continue further data collection and assessments, or abandon the project. Measured/Indicated Examine options and select the preferred option. Provide information to justify a decision to proceed to a feasibility study, continue with further data collection and assessments, or abandon the project. Ore Reserves Maximize the ‘value’ of the preferred option. Provide information to justify a decision to proceed to detailed design and construction, continue with further data collection and assessments, or abandon the project. Ore Reserves Percent Engineering 2% to 5% Complete Quotations/Tenders None – Benchmark Supporting the Estimates Data from other projects and operations. © SRK Consulting (UK) Ltd 2013. All rights reserved. Item 5% to15% 25% to 50% 100% Equipment Quotes and benchmark material supply and construction rates. Contracts factorized from existing arrangements with preliminary negotiations as to the likely differences. Multiple firm equipment quotes. Multiple material supply and construction quote and rates checked. Contracts negotiated to binding heads of agreement or near final agreements specific to the business case. Cost estimate accuracy In the order of ±50% Contingency >30% Typical time required to 3 - 6 months submit draft report In the order of ±30% 20% to 25% 6 - 12 months In the order of ±10% - ±20% 10% to 15% ±18 months Equipment on order, tendered or firm quotes available. Tenders for equipment, material, supply and construction costs. Some contracts awarded. Completed and executed mine, rail and port contracts specific to the project. In the order of ±10% 5% to 10% n/a 4.0% to 8% of project value n/a Typical cost to complete 0.2% of project value 0.5% to 2.0% of project value report BACK NEXT SLIDE 12
  13. 13. 3 TECHNICAL FOUNDATIONS [PROJECT TITLE - RHH] – [Report Title] RK Consulting (UK) Limited Valuation Standards Approach Method Income Discounted Cash Flow Monte Carlo Analysis Option Pricing Probabilistic Methods Comparable Transactions Option Agreement Terms Gross “in-situ” Metal Value Net Metal Value or Value per unit of metal Value per Unit Area Primary Primary Primary Secondary Primary Primary Secondary Secondary Secondary Market Capitalization Secondary Market Method Ranking Cost Appraised Value RK Consulting (UK) Limited Multiple of Exploration Expenditure Primary Primary Secondary © SRK Consulting (UK) Ltd 2013. All rights reserved. Geoscience Factor Valuation Approach Comments Very widely used Less widely used Not widely used and not widely understood Not widely used, not much accepted Widely used with variations Widely used but option aspect commonly not discounted Not acceptable Widely used rule of thumb Used for large Exploration Properties More applicable to Valuation of single property asset junior companies than to properties Widely used but not accepted by all regulators [PROJECT TITLE - RHH] – [Report Title] Similar to the Appraised Value Method but includes a multiplier factor Not widely used Exploration Property Advanced Exploration Property Development Property Operating Property No Yes Yes In some cases Yes In some cases Yes Yes No Yes Yes No Income Market Cost International Valuation Standards: ● Valmin Code (2005) ● Samval Code (2007) ● Cimval Code (2003) BACK NEXT SLIDE 13
  14. 14. 3 TECHNICAL FOUNDATIONS Environmental and Social National legislation and international standards require that an environmental and social impact assessment (“ESIA”) is © SRK Consulting (UK) Ltd 2013. All rights reserved. undertaken for a mining project, during the planning of the project. Complemented by an environmental and social management plan (“ESMP”). The ESIA and ESMP are often used to set legally binding conditions of environmental approval. Implementation of ESMP/s requires an environmental and social management system (“ESMS”). ● The International Finance Corporation (“IFC”) Performance Standards on Social and Environmental Sustainability (2006; updated January 2012). ● The Equator Principles (“EPs”) is a risk management framework adopted by financial institutions. The IFC Performance Standards are complemented by the World Bank Group Environmental, Health and Safety (“EHS”) Guidelines (April 2007), comprising a series of General EHS Guidelines and Industry Sector EHS Guidelines. The EPs require that the mining projects (Category A projects) undertake an ESIA, produce an ESIA report, develop an ESMP, establish and maintain an ESMS and undertake effective stakeholder engagement. Address compliance with host country legislation and observe the relevant IFC Performance Standards and the World Bank Group EHS guidelines. BACK NEXT SLIDE 14
  15. 15. 4 COMMON THEMES © SRK Consulting (UK) Ltd 2013. All rights reserved. Classification: mathematical approach and the spotty dog effect BACK NEXT SLIDE 15
  16. 16. 4 COMMON THEMES Anecdotal Evidence ● “But those are not the forecasts which we used to agree the Transaction Basis” ● “It will take too long and it costs too much” ● “You would not believe what we had to do to convince non-execs to take the due-diligence light approach” ● The addiction to differentiation: Final Feasibility Study; Definitive Feasibility Study; Bankable Feasibility Study © SRK Consulting (UK) Ltd 2013. All rights reserved. ● Unrealistic expectations The Usual Suspects ● Mining Selectivity and dilution ● Too much factoring and not enough engineering based on site specific data ● Overly aggressive ramp up schedules to name plate capacity ● Non-representative samples for metallurgical test-work (sample grade vs RoM) ● Manufacturer operating efficiencies, not tempered for local environment ● From Concept to Front End Engineering Design BACK NEXT SLIDE 16
  17. 17. 5 CONLCUDING REMARKS © SRK Consulting (UK) Ltd 2013. All rights reserved. A Reflective Poem Some mines make me happy, Some mines make me blue; But the one that gave me the most joy. Was the one I sold to you. BACK NEXT SLIDE 17
  18. 18. 5 CONLCUDING REMARKS The Mining Finance Guide - 2014 © SRK Consulting (UK) Ltd 2013. All rights reserved. “The technical aspects a company needs to consider to meet the expectations of the mining finance community” Anonymous Quote “To make a friend of assumptions is to make an enemy of due diligence” BACK NEXT SLIDE 18