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Financial Innovation on renewables

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During the commodity boom, mining companies were focused on ramping up production and investing in new capital projects to expand supply. It was a time when the income statement was the key management paradigm in mining economics. Now, however, the global mining industry has refocused on cost control and capital discipline. Investors today value firms based less on how much they mine and more on how efficiently they do so, and how well they mitigate risk. In this new scenario, nonconventional renewable energy (NCRE) sources such as biomass crops, smallhydro, geothermal plants, concentrated solar power mirrors, wind turbines or solar panels can lower energy risks in mining. Why? Because renewable facilities act as mining assets whereas business as usual (BAU) energy options such as coal, diesel and gas, and even conventional hydro, become mining liabilities.

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Financial Innovation on renewables

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  2. 2. 8 Editor’s letter 10 President’s notes tools of the trade 12 The best in new technology compiled by Kelsey Rolfe and Chris Balcom news 14 Industry at a glance 28 Alternative energy sources are playing a larger role in miners’ strategies By Kelsey Rolfe 32 The Quebec government moves forward with its revamped northern development program By Antoine Dion-Ortega columns 38 Where did all the gold money go? By Doug Pollitt 40 Financial innovation on renewables By Arnoldus Mateo van den Hurk 42 The safety to speak out By Esther Ewing upfront: metallurgy 44 A new chloride segregation process could open up oolitic iron reserves globally By Chris Balcom 46 Will technological step change or operational excellence make mines more profitable? By Ian Ewing 50 Terry McNulty is a metallurgical mastermind with a keen sense of what makes projects succeed By Correy Baldwin travel 80 Polkowice, Poland By Chris Balcom cim community 82 CIM news from Canada and beyond 85 Obituaries 87 2015 Calendar of CIM events mining lore 130 The Elsa silver heist: a daring mining theft in a small Yukon town By Alicia Priest 129 Professional directory contenu francophone 6 | CIM Magazine | Vol. 9, No. 9 32 La version française intégrale du CIM Magazine est disponible en ligne : magazine.CIM.org/fr-CA 35 article de fond 68 2015 : pleins feux sur les marchandises Nous examinons 30 métaux et minéraux différents, vous offrons une rétrospective de ce qui a marqué l’année qui vient de s’écouler, notamment les tendances de plus en plus répandues et les événements imprévus, et explorons ce qui se profile à l’horizon. 10 Mot du président 35 Le gouvernement provincial relance son plan de développement nordique Par Antoine Dion-Ortega 87 Calendrier des événements de l’ICM 91 Répertoire des membres corporatifs de l’ICM 44
  3. 3. accounting principles) to better comprehend the real value of NCREs for the mining industry. This new vision shifts accounting priorities away from analyzing the value of NCREs using the income statement (and the focus on prof- its and losses) and instead toward the balance sheet. Simi- larly, the focus should shift towards “cumulative savings” by viewing BAU energy as a long-term liability and NCRE as a long-term asset. Therefore I propose the industry adopt new energy metrics and key performance indicators (KPIs) linked to balance sheets and mining business valuation. If you propose an NCRE project to many experienced mining managers or NCRE developers, often the first thing they will turn to is the income statement. Most operational managers know the income statement is where their per- formance is ultimately recorded in profits and losses. Here they look for any potential savings from an NCRE project and may argue that the large upfront capital investment will negatively affect the company’s credit rating. D uring the commodity boom, mining companies were focused on ramping up production and investing in new capital projects to expand supply. It was a time when the income statement was the key management para- digm in mining economics. Now, however, the global min- ing industry has refocused on cost control and capital discipline. Investors today value firms based less on how much they mine and more on how efficiently they do so, and how well they mitigate risk. In this new scenario, non- conventional renewable energy (NCRE) sources such as biomass crops, small-hydro, geothermal plants, concen- trated solar power mirrors, wind turbines or solar panels can lower energy risks in mining. Why? Because renewable facilities act as mining assets whereas business as usual (BAU) energy options such as coal, diesel and gas, and even conventional hydro, become mining liabilities. Proponents of NCRE projects need to develop new financial intelligence (i.e. knowledge of finance and Financial innovation on renewables BY ARNOLDUS M. VAN DEN HURK 40 | CIM Magazine | Vol. 9, No. 9 R E N E W A B L E E N E R G Y ON BUDGET. AHEAD OF SCHEDULE. WORLD-CLASS SAFETY. Mining | Processing | Infrastructure | Environment www.snclavalin.com Together with our partners, SNC-Lavalin is the proud recipient of the Project Management Institute’s 2014 Project of the Year Award. Rio Tinto Alcan AP60 Phase 1 Aluminum Smelter Project, Quebec
  4. 4. December/Décembre 2014 • January/Janvier 2015 | 41 – transforms threats into opportunities and perceived liabil- ities into mining assets. CIM However, if you try giving the same set of NCRE project financials to an experienced Toronto fund investor or a vet- eran board member of a mining company, the first state- ment they will turn to is usually the balance sheet. Here they look for figures that might prove the value of renew- able facilities as long-term assets (which in turn could increase company value), how these numbers may lead to a fall in the weighted average cost of capital, and how the projected value of the business shows an upwards trend to eventually improve a company’s credit rating. If the projections are promising, they will allocate the upfront capex due to the attractive return on investment and the building of long-term share- holder equity. Nevertheless, at present, many NCRE project promoters at mining companies do not analyze investment opportunities using a balance sheet. Therefore they see the large initial cost and want to avoid financing the upfront investment counterbalance; consequently the projects end up being abandoned. In order to accurately communicate the value renewable facilities have, everyone must speak the same lan- guage. The first step toward accurately comparing BAU energy and NCRE is to keep other operational variables affecting the profitability of the mine constant (e.g. commodity prices, min- eral ore grade and any other expenses). The second is to account for the expected increase in price for the BAU model based on international standards set by the International Energy Agency. These are the funda- mentals of the methodology I employ for evaluating NCRE projects. These metrics are designed to help NCRE project proponents, mine managers, investors and directors of companies understand the projects they are working on from the same point of view. Renewable energy options in mining will grow along with the volatility of diesel prices. Demand for space and capex are the main handi- caps for renewables in other indus- tries. However, in mining, space is not an issue, and financial intelligence – by developing innovative financial models such as the one described here columns 800.263.7088 tsubaki.ca Trust the Tsubaki Advantage to solve your application challenges. Track cost savings and performance. Stay informed and up-to-date about planned maintenance. With over 500 unique and proven solutions, we’ll have the answer you’re looking for. 302 2,685,771The number of dollars we have saved Canadian companies with our innovative solutions. 1The number of companies that can deliver this kind of industry performance. The number of applications for Canadian Industry that are delivering cost savings. Arnoldus van den Hurk, PhD, is the founder and CEO of r4mining.com, an independent blog about financial innovation on renewable energy in the mining and oil and gas industry. Van den Hurk has extensive professional experience in geology, mining engineering, finance and renewable energies. He recently presented his r4mining methodology at the Renewables and Mining Summit and Exhibition in Toronto. Info @r4mining.com, www.r4mining.com.
  5. 5. 14/12/2014 Renewable Energy http://magazine.cim.org/en/2014/December-January/columns/Renewable-Energy.aspx 1/2 0 0 Dec '14/Jan '15 Renewable Energy Financial innovation on renewables By Arnoldus Mateo van den Hurk During the commodity boom, mining companies were focused on ramping up production and investing in new capital projects to expand supply. It was a time when the income statement was the key management paradigm in mining economics. Now, however, the global mining industry has refocused on cost control and capital discipline. Investors today value firms based less on how much they mine and more on how efficiently they do so, and how well they mitigate risk. In this new scenario, non­ conventional renewable energy (NCRE) sources such as biomass crops, small­hydro, geothermal plants, concentrated solar power mirrors, wind turbines or solar panels can lower energy risks in mining. Why? Because renewable facilities act as mining assets whereas business as usual (BAU) energy options such as coal, diesel and gas, and even conventional hydro, become mining liabilities. Proponents of NCRE projects need to develop new financial intelligence (i.e. knowledge of finance and accounting principles) to better comprehend the real value of NCREs for the mining industry. This new vision shifts accounting priorities away from analyzing the value of NCREs using the income statement (and the focus on profits and losses) and instead toward the balance sheet. Similarly, the focus should shift towards “cumulative savings” by viewing BAU energy as a long­term liability and NCRE as a long­term asset. Therefore I propose the industry adopt new energy metrics and key performance indicators (KPIs) linked to balance sheets and mining business valuation. If you propose an NCRE project to many experienced mining managers or NCRE developers, often the first thing they will turn to is the income statement. Most operational managers know the income statement is where their performance is ultimately recorded in profits and losses. Here they look for any potential savings from an NCRE project and may argue that the large upfront capital investment will negatively affect the company’s credit rating. However, if you try giving the same set of NCRE project financials to an experienced Toronto fund investor or a veteran board member of a mining company, the first statement they will turn to is usually the balance sheet. Here they look for figures that might prove the value of renewable facilities as long­term assets (which in turn could increase company value), how these numbers may lead to a fall in the weighted average cost of capital, and how the projected value of the business shows an upwards trend to eventually improve a company’s credit rating. If the projections are promising, they will allocate the upfront capex due to the attractive return on investment and the building of long­term shareholder equity. Nevertheless, at present, many NCRE project promoters at mining companies do not analyze investment opportunities using a balance sheet. Therefore they see the large initial cost and want to avoid financing the upfront investment counterbalance; consequently the projects end up being abandoned. In order to accurately communicate the value renewable facilities have, everyone must speak the same language. The first step toward accurately comparing BAU energy and NCRE is to keep other operational variables affecting the profitability of the mine constant (e.g. commodity prices, mineral ore grade and any other expenses). The second is to account for the expected increase in price for the BAU model based on international standards set by the International Energy Agency. These are the fundamentals of the methodology I employ for evaluating NCRE projects. These metrics are designed to help NCRE project proponents, mine managers, investors and directors of companies understand the projects they are working on from the same point of view. Renewable energy options in mining will grow along with the volatility of diesel prices. Demand for space and capex are the main handicaps for renewables in other industries. However, in mining, space is not an issue, and financial intelligence – by developing innovative financial models such as the one described here – transforms threats into opportunities and perceived liabilities into mining assets. Arnoldus van den Hurk, PhD, is the founder and CEO of r4mining.com, an independent blog about

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