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

1. © SRK Consulting (UK) Ltd 2013. All rights reserved.
THE ROLE OF
TECHNICAL DUE
DILIGENCE IN MINING
FINANCE
PRESENTED:
Dr IESTYN HUMPHREYS
DATE:
27/11/2013
LOCATION:
OPERAKÄLLAREN, KARL XII’s TORG, S-111 86, STOCKHOLM, KINGDOM OF SWEDEN

2. COPYRIGHT AND DISCLAIMER
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within the document.
© SRK Consulting (UK) Ltd 2013. All rights reserved.
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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
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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
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3. Contents
Section
Page
INTRODUCTION TO SRK
4
2.
DUE DILIGENCE: THE OPERATING ENVIRONMENT
7
3.
TECHNICAL FOUNDATIONS
9
4.
COMMON THEMES
15
5.
CONCLUDING REMARKS
17
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1.
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SLIDE 3

4. 1 INTRODUCTION TO SRK
© SRK Consulting (UK) Ltd 2013. All rights reserved.
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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
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5. © SRK Consulting (UK) Ltd 2013. All rights reserved.
SRK OFFICE LOCATIONS
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6. ORGANIC GROWTH TO MEET DEMAND
KPIs
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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
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SLIDE 6

7. 2 THE OPERATING ENVIRONMENT
The Ingredients
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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
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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
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8. 2 THE OPERATING ENVIRONMENT
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The Outcome
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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.
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SLIDE 9

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
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Membership of recognised professional
institutions (enforceable Code of Ethics)
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Reciprocity “recognised overseas professional
organisations”
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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)”
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JORC Code (2012)
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SAMREC Code (2007)
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PERC Code (2013)
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CIM Guidelines (2010)
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NAEN Code (2011)
Combined Reserves International Reporting Standards Committee
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SME Code (2007)
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Peru cCode (2003)
(www.crirsco.com )
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11. 3 TECHNICAL FOUNDATIONS
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Technical Studies: Key Criteria
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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
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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.
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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
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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
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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:
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Valmin Code (2005)
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Samval Code (2007)
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Cimval Code (2003)
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SLIDE 13

14. 3 TECHNICAL FOUNDATIONS
Environmental and Social
National legislation and international standards require that an environmental and social impact assessment (“ESIA”) is
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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.
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15. 4 COMMON THEMES
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Classification: mathematical approach and the spotty dog effect
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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
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● 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
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17. 5 CONLCUDING REMARKS
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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.
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SLIDE 17

18. 5 CONLCUDING REMARKS
The Mining Finance Guide - 2014
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“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”
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SLIDE 18