Mineral Resource Management introduction
- 2. Introduction to course Structure of course Objectives Backgrounds Limitations Study material
- 3. Programme/outline Day Broad topic Sub topics 1Mineral Resource Management Mineral Resource Management introduction 03 AugustWhat is the asset's capability? The changing environment Samrec compliance Mineral Asset management Translating top down goals Startegic Mine Planning 2What is the asset worth? Integrated Mine Planning 04 August Valuation and value metrics Value chains Exploration and development 3What is the asset availability? Optimisation 10 August Cutoff grades and optimisation Enterprise optimisation 4What is the asset performance? Process optimisation 11 August Mine Call factor Reconciliation Mine to mill optimisation Capacity utilisation 5What are the asset risks? Governance and compliance issues 11 August Risk in MAM
- 4. Course structure Test 17th August 20% Exam counts 60% Assignment 20%
- 5. The CEO’s nightmares Plans that don’t work Projects that don’t deliver Having to constantly think up new excuses for non- performance Analysts and investors who don’t believe you Having to make shock announcements about material changes The market discovers a non-compliance issue Share weakening to the extent you become subject to a hostile takeover Coming to the realisation that your assets are not what you thought they were Any examples?
- 6. The orebody dictates … what?
- 7. What are the five main things the CEO would like for Christmas? Better planning (design and schedule) Integrated and credible plans based on the right things, with confidence Improved NPV Better results Financial results that exceed the cost of capital, and market expectations, and are in line with plans Improved EBIT Better processes Improved throughput and quality ,that deliver consistent results Better reporting Compliant, credible, consistent Easier access to capital Competitive advantage and market credibility
- 8. The required focus of Mineral Resource Management Integration of (previously) functional disciplines Excellence in technical support Economic focus on maximising the value of the mineral asset Reducing the risks associated with planning and exploitation Unlocking value for the shareholder Key component of the value chain Optimisation of the value chain and mineral trhoughput An audit and quality assurance role Competent and credible reporting Due diligence, and the competent person
- 9. Companies that do MRM well Integrated planning cycle Defined planning levels Standardised group protocols Clear, managed career paths Appropriate MRM structure Easy and timeous consolidations Emphasis on strategic mine planning options Consistent and credible reporting 9
- 10. Common shortcomings Lack of appreciation of value chain activity Shortfall in knowledge of financial valuation and economics Inadequate optimisation Functional segregation Inadequate audit trails and quality assurance Black box syndrome Poor or inappropriate protocols and due diligence “Competent persons” by definition
- 11. What changed? Margin squeeze forcing better planning Internationalisation/globalisation : competing for capital Investor expectations : new wave of investors Level of M&A activity Information systems : quick response Law : national and international Disclosure : public reporting requirements Corporate governance : audit & due diligence International codes and protocols Bre-X : due diligence Organisational restructuring Change to process organisations
- 12. Margin squeezes and price changes Some downward trends in real prices Supply/demand drivers Escalating costs Increasing cutoff grades Decreasing payable reserves
- 13. Price risks
- 14. Quality deposits Lower grades Remote locations Higher risks Depletions of cash rich deposits Higher levels of technology, economies of scale Diversification Requires ingenuity and skill
- 15. Global competition • Steadily reducing costs • Desirable to be in lower quartile • Reflects strategy of growth
- 16. Investor profiles Move from gold fund managers to speculative investors Lack lustre performance of resource stock Dividend expectations Share value growth performance Align with share value growth determinants
- 17. What is MRM? “MRM is an integrated activity which identifies, evaluates and provides an optimal extraction plan of the mineral resource, to produce a quality product which satisfies the business objectives of the company, and the requirements of the customer, in a dynamic environment. It performs an audit and quality assurance function to ensure compliance to the business plan, and customer satisfaction in terms of quality and quantity Overall, effective MRM is an essential component of Operational Excellence along the value chain”. Lets get real : get maximum value from the resource at minimum risk! Fundamentally, a shift from a volume focus to a value and risk focus.
- 18. What MRM is not… Geology Survey Evaluation Planning + + + = MRM
- 19. A model for MRM Business environment Technology Markets Mineral Resource Legal framework Business strategy Organisational design Tactical actions Business performance
- 20. MRM involvement Structural model Geological model Project valuation Bankable project Ownership Extraction plan Production operation Dynamic business Titles, authorisations, valuations Structural interpretation Evaluation techniques Economic assessments Optimised schedule Risk analysis Monitoring and control Review and sensitivity
- 21. VIEW FROM THE MARKETS How well are companies managing their mineral assets?
- 23. What is important for the markets?
- 24. What is important for the markets? Resource and Reserve size Resource and Reserve growth Resource and Reserve utilisation Reserve value Management capability : getting value from the Reserve Transparency Strategic direction
- 25. Performance analysis Return on net assets 16.7% Increase in profit margin 17.5-24.5% Increase in asset value from $104m- $195m Increase in share value 100% dividend increase • significant cost reduction • lower cutoffs • increase in reserves • increase in output • capitalisation …through:
- 26. Comment from the capital markets You guys in South Africa can’t understand why the market places discounts on your shares. Its got nothing to do with political risk, but everything about technical risks, and capital management. You still have a big-mine, long life mentality. That is not what the shareholder wants. The shareholder wants returns on their investments, return on their capital. They want their capital to be managed properly. That means early returns, maximum returns, get the money out and move on to new investments.
- 27. Value and Risk based public reporting : desired position Report on the drivers of real value Make these KPI’s Define and declare value adding expenses Put market valuation on resources and reserves Define sensitivities and base plans on these ranges, to avoid sudden impairments Quantitative risk assessments of all value drivers Put monetary value to risks Establish confidence levels Engage the market : give them what they want to know about Define growth strategies Divest from loss makers Corporate governance
- 28. Levels of success South African companies lead the way Good progress on the development of integrated work systems Information systems often not fully utilised Drift between planning and production outcomes Narrow focus on risk Profit and DCF based approach to valuation History of non delivery on projects Inability to fund projects from cashflow Consistent market discounts Short term focus on earnings and profits at the expense of value Inability to adapt to changes in economic cycles, resulting in short term reaction Cross subsidisation Unexpected and surprise announcements Inconsistent public reporting Exchange rate as the mother of all evils
- 29. Market view of South Deep Governance issues Gold loan Lateness Successive reductions and mistakes on Resources Mining methods Shaft accidents
- 30. Have mining projects delivered? Of 18 projects analysed, 78% had problems of non-delivery 61% were in all areas of timing,overrun costs, production level & forecast cashflow 39% involved an aspect of mine design 67% had cost overruns 85% of these were overrun by more than 20% 67% did not meet projected cashflow This tends to verify that DCF analyses are over-optimistic in terms of input variables, but they do tend to under value in terms of available options. Source: CIM Bulletin, March 2000
- 31. Feasibility estimate performance 0 1 2 3 4 5 6 7 <(10% ) (10% )to (5% ) (5% )to 0% 0% to 5% 6% to 10% 11% to 15% 16% to 20% 21% to 25% 26% to 30% 31% to 35% 36% to 40% 41% to 45% 46% to 50% >50% Feasibility estimate overrun/(underrun) Number of projects • 60 projects since 1980 • Average overrun of 22% • Half had overruns of 20% or more Source: NW Mining Assn See article + Pincock
- 32. Resource estimation errors 0 5 10 15 20 25 30 35 40 Errors Grade Tonnage Technical No problems 55 projects analysed %
- 33. Grade errors 0 5 10 15 20 25 30 35 40 45 Errors Database Assaying Interpolation Dilution Source : CMMI 1998 %
- 36. Bre X No surface signs of a major deposit Hole position was decided before the results of previous holes were known Geologists did not go to drill sites Cores stored for weeks before going for assay No visible gold in cores even though nuggets were supposed to be a-plenty No reports of visible gold Sample bags routinely opened to check for bag breakage Staff were lying about sediment tests Could one deposit contain 8% of the world’s gold?
- 37. Controversy swirls around East Boulder New York – Stillwater’s East Boulder project carries the scent of fear as concern mounts about its viability. Consequently, recriminations are flowing within the professional investment community as an apparent prelude to assigning guilt in the event of an outright failure. There are also misgivings about the company’s accounting and operational disclosures, which have been described as legal, but aggressive and murky, something the company’s executives vehemently deny. Two independent sources have confirmed that Stillwater secured initial financing for East Boulder without conducting a definitive feasibility study. It is almost unheard of for a producer to land funding, especially on such a scale without a detailed investigation of the orebody and mining method.
- 38. East Boulder continued Higher grade assumptions prompted plans for mechanised mining, but second quarter conference call participants were stunned to hear board member Steve Kearney say East Boulder was being demechanised. One investor is adamant that Stillwater faces an inevitable confrontation with reality, which is a “mine that does not work”.
- 39. More decline
- 40. Effect on equity value
- 42. Market perceptions South African mining companies are particularly poor at managing capital Projects are typically focussed on long-life, unattractive returns Usually over-discounted by the project sponsors South African mining projects carry technical risk Country/political risk is a non-issue
- 43. Hypothesis : where we’re going wrong Mining companies do not maximise returns to shareholders, because they focus on the wrong metrics Companies report on short term earnings rather than long term value creation Inadequate risk analysis results in value loss Mining companies deal with cyclical changes in prices in a purely reactive mode : this is destructive to value Value creation activities are costed in a different accounting period to the realisation of value NPV is a useful measure of long term investment potential, but it has limitations Profit maximisation carries risk : it is only appropriate during harvesting phases NPV and profit are irreconcilable Flexibility, exploration, ore reserve development and R&D are seen as costs Value adding decisions are not rewarded : indeed they are penalised. A new metric is required!
- 44. Conclusion The general conclusion must be that we are not managing our mineral assets very well.
- 45. SO, HOW CAN WE MAKE IT BETTER?
- 46. Focus required….. Treat the asset like an asset Focus on the radar screen Work within the context of business Focus on value and risk Align to the value chain Focus on the value drivers Integrate the dimensions of MRM
- 47. Best practice in MRM Value chain alignment Controls on value drivers Integrated structure and info flow Integrated and dynamic planning Asset management and control Dynamic reconciliation Quick response/flexibility Always, enough places to mine
- 48. COMPELLING REASONS TO IMPLEMENT AN MRM APPROACH
- 49. Compelling reasons Stated Company objectives in terms of growth Current and expected performance
- 50. Growth determinants Asset portfolio value of diverse mineral operations Track record of turning potential assets into real value Accuracy of reporting Transparency of information Quick response to changing economic circumstances Consistent delivery of results against targets Management capability demonstrated through results Risk/reward ratios matched Risk sharing and spreading
- 51. Particularly… Stated growth targets Business plans and feasibilities Criticism and scepticism in the market Mineable Resources, and the Bill Joint Ventures Keeping the gaps filled
- 52. Compelling reasons Stated Company objectives in terms of growth Current and expected performance Corporate Governance
- 53. Corporate Governance “Significant issues have arisen regarding the practice by some public Companies of publishing in press releases and other corporate disclosures company-specific measures of Earnings that do not conform to recognised accounting standards. The IOSCO Technical Committee issued during the conference a cautionary statement alerting public companies, investors and other users of financial information about this practice and advising them to use care when presenting and interpreting such measures.” - Press release, International Organisation of Securities Exchange Commissions, 5th August 2002 The market rewards good corporate governance
- 54. Corporate Governance in MRM Resource and Reserve statements Reconciliations Valuations Book values Metal accounting Metal in process Accounting versus cashflow value
- 55. Compelling reasons Stated Company objectives in terms of growth Current and expected performance Corporate Governance International alignment
- 56. International alignment Global reporting standards SAMREC SAMVAL JSE Listing Rules section 12 : Annual CPRs Securities and Exchange Commission IFRS IVS Need for common industry driven standards and competency Audits, audits and more audits
- 57. Compelling reasons Stated Company objectives in terms of growth Current and expected performance Corporate Governance International alignment Invested capital Market expectations
- 58. Invested capital : current and future operations R20 billion in new projects : need to get it right Capital expansions and improvements to existing operations Sunk investment in information systems Investment in training in MRM Investment in technology Investment in research The imperative is to ensure required returns on investment, through effective management of resources
- 59. Mineral Resource Management : a holistic approach Strategy Vision Competency Systems Protocols IS/IT Performance Management Delivery Structures Technical excellence
- 60. Applying MRM (generic) Mineral rights search and ownership Resource to Reserve engineering Short and long term planning Optimisation Cutoff grade policy Stockpiling policy Operating volumes Production monitoring and control Compliance QA/QC Product accounting and control Public reporting
- 61. MRM in gold… Geological models Evaluation models Resource and Reserve engineering Operating volumes Cutoff grade policy Quality assurance Mine Call Factor management Grade and stope width control NPV optimisation
- 62. MRM in diamonds… Physical orebody model Resource to Reserve engineering Geotechnical control Mine design Operating volume Draw control for dilution and recovery Replacement planning NPV optimisation
- 63. MRM in Coal… Resource and Reserve model: coal attributes Mining widths Strip ratios Environment LOM plans Adaptability/flexibility Beneficiation Product spread NPV optimisation
- 64. MRM in PGMs… • Geological models • Evaluation models • Resource and Reserve engineering • Operating volumes • Best cut optimisation • 4E optimisation • Dilution control • Quality assurance • Recovery management • NPV optimisation
- 65. MRM in base metals… Mineral rights ownership Resource to Reserve engineering Geotechnical database and engineering Selectivity and mineralogical mix Mining method selection Operating volumes Dilution control Cutoff grades Recoveries Optimal NPV profiles
- 66. MRM in ferro metals… Mineral rights ownership Market constraints Resource to Reserve engineering Short and long term planning balance Market forecasts Impurities Grade control and blending Quality control Optimisation within Logistics constraints Optimisation of NPV
- 67. MRM in opencast Mineral and surface rights ownership Resource to reserve engineering Block models SMU determination Geotechnical database Cutoff grade policy Stockpiling policy Ultimate pit design and limits Stripping ratios Operating volumes Pushback sequence Grade control NPV optimisation
- 68. IS THIS ENOUGH?