Beating the NPV discount rate by applying classical economics and optimal cut-off grades. Stockpiling low grade ores provides marginal economic optionality at end of life of mine

1. Real Mining Economics
Real Mining Economics 1

2. Northern Miner & PwC Round Table 2015
2Real Mining Economics
Mining Weekly April 2014
Article: Mining majors prioritizing value over volume as profits,
valuations sag
Are Miners as Profitable as they Could Be?

3. Chasing ones Tail or Delivering Value
• Volume over Value
3Real Mining Economics
• Value over Volume
Root Cause
Mining Weekly April 2014
Article: Mining majors prioritizing value over volume as profits,
valuations sag

4. Portfolio Orebodies
Failing to Understand your Ore Bodies Economic Potential can be Fatal
4Real Mining Economics
Project 1
Project 2
Project 5

5. Understanding your Orebodies
5Real Mining Economics
Project 01
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Project 01
Project 02
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Different Economic Signatures Provide Different Economic Outcomes

6. Basic Modelling Philosophy
• Objective
• Maximize the NPV over the Life of Mine
• Determination of the longest Life of Mine at the highest average grade
• Operate at optimal economic scale
• Method
• Determine the optimal economic rate of production
• Determine the optimal cut-off grade
6Real Mining Economics
Orebody dictates mining footprint

7. Basic Philosophy
7Real Mining Economics
The Orebody
The Orebody
The Orebody
Cash Flow maximization must be the
preoccupation
Cash is Fact
Profit is Opinion
Cash Margin is KING
Often Preached Rarely Practiced

8. Choice of Mineral Resource Exploitation
Focus on Volume & Output
8Real Mining Economics
60 ktpa
Targeted
Average Grade
Significant Determinant
of Plant Size which
Determines Capital
Plant Size
determines
Pit Size
Copper Output Target
Determinant of Plant
Size
Pit Size Determine
Capital Expenditure
$$
“Forcing the lizard to confess it is a crocodile”

9. Choice of Mineral Resource Exploitation
Focus on Orebody Capacity and Cash Generation
9Real Mining Economics
XX ktpa to
Maximize Cash
Flow and ROI
Optimal Throughput
Determines Plant Size
and Capital Expenditure
Optimal Cut-off and
Optimal Production
Rate Determines Pit Size
and Capital Expenditure
$$
“Allowing the Orebody to dictate”

10. Production
Rate
Capex
Opex
Optimal Grade
TAC
TVC
TFC
MC
Dollars
Tonnes
Construction
Time
LoM
Tonnes
C/O Grade
Avg Grade
Optimal
Production Rate
OBJECTIVES
• Cash Maximization
• Highest Discounted Cash
Flow
• Highest IRR
• Quickest Payback
• Lowest Peak Funding
• Lowest Risk
Dollars
Years - LoM
C/O Grade
Dollars
Dynamic Economic Modelling
Integrating orebody signature, economic cost curves and capital expenditure curves

11. Capex
Opex
Production
Rate
Construction
Time
LoM
2
1
3
4
5
2. Development Period
& Payback
• Scale of operation
1. Capital Investment
• Scale of operation
• Project delays
• Inflation
3. Production build-up
• Mine planning &
Schedule
• Mining grades
5. Steady State Cash Flows
• Commodity prices
• Rates of production
• Mined grades
• Recovery factors
• Mining costs
• Inflation
4. Life of Mine
• Ore resource
• Ore reserve
• Commodity cycle
Metal(s)
Price
Recovered
Grade
Cash-flow Elements
Dynamic modelling allows mines to test these elements in real time

12. Single Integrated Economic Model
Executives have Line of Sight of Orebody Engineering well in advance of costly feasibility studies
Benefits of Live Integrated Modelling
• Executives have real time line of sight on
assumptions applied and impact analysis
• Multiple scenarios can be quickly
generated
• Orebody dictates optimal economic
footprint
• Optimal capital allocation
• Focal point for executives and technicians
to maximize value
12Real Mining Economics

13. Maximizing Cash-flow
Grade Tonnage Curve Optimiser
13Real Mining Economics
Tonnes
C/O Grade
Avg Grade
C/O Grade
Dollars
Traditional
Approach
Optimized
Approach
Traditional Approach
Cash Flow not
Maximized
Old paradigm (Volume focus) versus new paradigm (Value focus)

14. Maximizing Cash-flow
Traditional Approach - Long Life, lowest possible cut-off to
pass investment hurdles
14Real Mining Economics
Tonnes
C/O Grade
Avg Grade
Traditional
Approach
Optimized
Approach
Marginal
economics
Volume Maximization
Value Maximization
Volume maximization
- 99% of Metal Extraction
- 85% of Ore Extraction
- Time value of money risk
Value maximization
- 65% of Metal Extraction prioritized
- 30% of Ore Extraction prioritized
- Remaining ore scheduled after high
grade stockpiles processed
- Time value of money maximized,
risk minimized
- Full exploitation still possible
Value Maximization does
not exclude full exploitation
of a Mineral Resource, it is
just smart business for all
stakeholders
Beating
Discounting

15. Stockpiles
Maximum Metal Processed in Shortest Time
Ore Stockpile Metal Stockpile
15Real Mining Economics
New paradigm
• Maximize metal extraction in
shortest possible time
• Maximize cashflow
• Avoid detrimental effects of
compounding discounting factor
• Process lower grade stockpiled
ores at tail end of operations
• Keep optionality open and war
chest cash positive for commodity
down turns

16. Determining the Optimal Rate of Production
Minimizing Costs
Cost Profiles Unit Cost Profiles
16Real Mining Economics
TVC
TFC
MC
AR
USD
Production Rate Production Rate
USD/t
Break even
Shut down
TAC
Fixed Costs
RevenueVariable Costs
• Increased development
• Increased Overtime
• Higher Bonuses
• Increased Consumables
Consumption
• Increased Power Consumption
• Increased Logistic Costs
• Increased Storage Costs
• Increased Transport Costs
• etc.

17. Determining the Optimal Rate of Production
Real World Modelling
17Real Mining Economics

18. Capital Expenditure
Prudent Allocation of Capital Investment – Right Economic Size Optimal Investment Quantum
18Real Mining Economics

19. Cash Maximising Paradigm
Results
• Optimal Cut-off Grade
• Maximum Long life of mine to Maximise Cash
• Optimal Mining Footprint
• Optimal Capital Allocation
• Optimal Lead Time to Production
• NPV Maximised
Risks
• NPV discount Risk Minimized
• Commodity Price- cycle Managed
• Uncertainties Across Entire Value Proposition
Reduced
• Cash-flows Maximised
19Real Mining Economics

20. Modelling Operations
Real World Econometric Modelling
20Real Mining Economics
y = 0.000000017612x2 - 0.003765194208x + 251.725828733775
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Unit Cost Data Plots
2 year data set Mining Unit Costs - normalized

21. Modelling Operations
Real World Foxed and Variable Cost Curves
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Production Rates
Revenue and Total Costs
Short Run Costs
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22. Modelling Operations
Real World Unit Cost Curves
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Generate Best Fit Curve
Short Run Average Cost Curve
Marginal Costs
TVC
MC
TFC
Diseconomies of
Scale
Economies of
Scale

23. Modelling Operations
Determination of Operational Battery Limits
23Real Mining Economics
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Short Run Average Cost Curve vs Profitability
Marginal Costs
MC
Annual Profit
LoM Profit
Diseconomies of ScaleEconomies of Scale

24. Thank you
24Real Mining Economics