GLOBAL MINERALS ADVISERS

Technical Due Diligence

in Mining
Andrew J Vigar

March 2013
26F, 414-424 Jaffe Rd, Wan Chai, Hong Kong SAR | Phone: +852 8198 8451|
www.miningassociates.com
 Independent Report needed ?
Stock Exchange investors require specialist advice
in mining
Keep the market informed
Capital raisings for development
Capital raisings for exploration
Fraud and misleading promotions forced
exchanges to regulate
Internally, e.g. to assist in valuing of assets
Need to be completed by a respected consulting
firm

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Methodology

Review previous audit material.

Site based audit:
- Collect and review site data
- Selected audit of key data
- Answers to prepared questions
- Interviews with Mine Staff
Evaluate and compare data.
Complete report draft for company review of
factual content.

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 Agreed Scope

Purpose of the report.

Extent of responsibility of the Specialist.
Clearly understood and agreed by both parties
in writing.
Scope and budget reflect the purpose.
Team of suitable standard and approved.
Variations agreed at the time in writing.

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 Attitude
Determine the purpose for which the resource
estimates have been made.
- Estimates made for short-term planning in a
long established mine are often conservative.
- Estimates in a feasibility study for a green-
fields operation are often optimistic.
A touch of cynicism is recommended as a
survival instinct during the Due Diligence
process.

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Technical Due Diligence Topics
Geological Setting
Mineralisation Styles, Ore Types and Controls
Resource Estimates
Mine Design, Production Schedule & Reserves
Metallurgical Testwork
Capital and Operating Costs
Cash Flow Projections, NPV and IRR
Social and Environmental
Government and Right to Operate

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 Mine Site Review
Staffing & technical support
Deposit geology
Exploration programs
Estimated deposit estimation
Reserve conversion & estimates
Grade & blend control
Plant performance
Reconciliation & closure

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Check List

- Checklist of technical issues to be addressed.

- Agreed between the Financier and Specialist as
part of the initial project brief.
- Forwarded to the Miner well in advance of the
site visit.
- Miner has time to prepare the technical
supporting information for examination.
- Give examples of the required data and format.

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Background
- Project history, location
- Regional & deposit geology
- Deposit style, similar deposits local & world-
wide
- Likely ore controls, Genesis concepts

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Example of Site Plans

GUIZHOU No1 MINE

Yinchangpo

Jiujialu

Doufution LEGEND
Powerline

Roadway

Crusher Waterway
Bauxite deposits
Cable way
well outside existing
Mining Right Bauxite outcrop
Moshipo
Mining Right boundary
Wulongsi
Segment boundary
Jinlangsi Blending Area Existing pit
Magazine
Planned pit

Existing waste dump

Zhubatui Planned waste dump

Office or workshop
Shenjiagou
Blending, crushing,
loading area
Wanikeng Blast area

Trejiango
Bauxite deposits
well outside existing 0 0.5 1km
Mining Right
Cableway to Plant SCALE
Dazhushan

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Project Staff
- Levels, management, documentation, overlap
- Live models, rock boards/specimens, academic
back-up
- Experience, contacts, depth, enthusiasm,
thinking

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Procedures & Records
- Documentation, execution, QA & ISO, audit trail
- Grids, surface samples, drill collars & down-hole
- Notebooks, maps, date/time, location, persons
- Exposure, lithology, structure, oxidation,
alteration, mineralisation, structure.

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Clear Procedures
Logistics
Logistics
Support for 5 day field program
Liaison with local community
Collection drill samples
Road freight to Brisbane
Logistics
Support for 30 day field program
Liaison with local community
Collection drill samples
Road freight to Brisbane
Geology Model
Seam model based on geology
Grades and tonnage's
AurukunExploration
Bauxite Project Flow
Project
ChartFlow Chart
Project design in conjunction with Client Budgeting
Preliminary Study
Program Analysis PIMA trail Attrition trial
Location of survey control & pits Primary analysis 30 samples all samples Attrition tests 200 samples
Reconnaissance geology XRD clay analysis 20 samples PIMA analysis at each step
Prepare base plans Mineralogy formulas XRD clay analysis if no PIMA
Collection bulk samples
Reporting Preliminary report, results of trials, Presentation, Final Desi
gn of Field Program
Field Program
Survey Analysis PIMA Attrition tests
clear access & mark drill holes washing @ screening all samples Attrition tests 200 samples
ICP multi-element scan (if results of PIMA analysis at each step
storage for future use trial are good) XRD clay analysis if no PIMA
(if results of trial are good)
Drilling Data Management
mobilization/demobilization iPAQ Handheld Computers
drilling Design of Data Collection forms
geology logging Database setup
sample selection Ongoing data management
rehab. of drill holes Website setup (interactive GIS)
Resource Estimation & Reporting
Economic Model Reporting
Seam model based on geology Final report
Overlay based on cut-off criteria All data in digital interactive form
Grades and tonnage's Presentation
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Drilling and Sampling 1
- Procedures, documentation, responsibility
- Planning, authorisation, team activity
- Drilling conditions, companies, sample/core
handling
- Types, hole sizes, drill campaigns
- Sample storage, documentation, security
- Sample recovery, loss and voids
- Lithology, alteration, mineralisation
- Structure

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 Drilling and Sampling 2
- Weathering & oxidation, original vs post collection
- Tonnage factors, voids, core loss
- Metallurgical characterisation
- Geotechnical, RQD, fractures, point load, hardness
- Geophysics, down-hole, MagSus
- Sampling methods, data collection, validation, box
marks
- Field records, thought & not just codes, team
access

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Examples of Core Storage

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Database 1
- Field data to DB, methods, validation, authority
- Updates, audit trail, authority
- Types, access, KISS, back-ups, multiple
locations, hard copy
- Map data
- Drill data

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Database 2
- Sample data, sample security, prep., analysis
methods, lab independence, duplicates &
standards, data transfer
- Interpretations, knowledge capture, data is not
knowledge
- Plans & sections

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Data Verification
- Surface & underground type mapping
- Selected drill hole re-logs, sampling & assay if
required

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Geology Models
- Fact vs Interp, Maps & sections, 3D thought
- Lithology, alteration, mineralisation, structure,
oxidation, Met
- Regional context but local detail
- Concept of key mineralisation controls and
sequence

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Resource & Reserves 1
- Procedures, documentation, responsibility
- Staff, mine/project experience
- Updates, audit trail, authority
- Data used, mixed types, data density & spatial
variations, support
- Methods used, full documentation sufficient to
reproduce
- Data projection, volume variance, smoothing,
blanks
- Spatial changes in levels of data & knowledge
-
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Resource & Reserves 2
- Based on coherent geology model
- Geological/structural controls honoured,
domains, constraints
- Other factors, eg Metallurgical, blasting, waste
types
- Mining & treatment methods and costs
- Validation, checks with other methods, global
estimates
- Plans & sections showing raw data, geology
models & estimates

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Resource & Reserves 3
- Raw data vs estimates, against geology models,
realistic
- Grade tonnage variations, spatial variations,
weathering
- Resource categories, why, support, makes
sense

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Grade Control & Reconciliation
- Similar issues to resource estimation
- vs production, vs other estimates, vs previous
estimates
- Grade control vs resource estimates
- Trends, projections, changes in geology

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Environment
- Impact, closure & rehabilitation

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 Resource estimate is the key
The Resource base is often stated at a lower cut-
off than the reserve.
The resource is largely fixed by the Feasibility
Study stage, yet this has the largest impact.
There is considerable scope with the advanced
computer techniques currently available to
seriously distort the grade/tonnage profile of a
deposit, just are there powerful techniques
available to get it right.

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International Systems
Australian JORC
Australian Valmin Code
Canadian NI43-101
SAMREC
CRIRSCO
UN UNFC
General agreement on Resources, Reserves and
Competent Person
US SEC Guide7 Reserves only

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JORC Code Requires
Minimum for reporting Resources & Reserves
Transparency
Data and Assumptions
Missing or inadequate data
Resource has reasonable expectation of
eventual economic exploitation
Conversion of Resource to Reserves
Personal responsibility - Competent Person
Has some Limitations

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JORC Code & Beyond

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 Estimation Issues
A poor understanding of the geological controls
will always lead to a poor resource estimate.
Simple techniques such a polygonal estimation
may highlight the strength of underlying geology
knowledge.
The over-estimation of grade is worse for the
project than under-estimation but both are bad in
that neither truly reflect the actual cash-flows.
Have multiple methods been used and compared.

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 Cut-off Grade
Should be realistic and achievable
The sensitivity of the estimates to changes
- grade/tonnage curves
- plans and sections of changes
The Specialist will be required to comment
whether the chosen mining method and costs
reflect the chosen mining method.

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 Reserves with time
Variation of the resources and reserves with time
Major milestones of the project
Use a time-line chart
- major changes in all areas the project milieu
- not just the hard technical issues of the mine
production team.

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Ore Feed vs time
ROM Feed by Quarter with Tonnage by Category and Grade

250,000 2.50
Proved Reserve Probable Reserve
Other Measured & Indicated Resource Inferred Resource
225,000 2.25
Pre-Resource Mineralisation ROM Grade

200,000 2.00

175,000 1.75

150,000 1.50

Grade %
Tonnes

125,000 1.25

100,000 1.00

75,000 0.75

50,000 0.50

25,000 0.25

0 0.00
Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406

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 Sensitivity and Risk
Look at the likely range of values of the reserves
rather than just state a single figure.
The impact of variations to be tested, eg
- impact of high values are dealt with (eg top-
cutting)
- grade tonnage curves
- using different geological domains
- changing the estimation methods
- optimization of production plans

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 Start-up risk
A quick cash injection at the start from higher
grade or lower cost ore.
Small changes in the start-up period cash-flow can
have a dramatic impact
Negative impacts from which it will never be able
to recover
There are several recent major projects, which
have stumbled at this first hurdle and thus
completely removed their ability to ever repay the
original debt.

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 Sensitivity plot
R e c o ve ry
$ 6 0 ,0 0 0 ,0 0 0
G o ld P ric e
$ 5 0 ,0 0 0 ,0 0 0
P ro c e s s c o s t s

$ 4 0 ,0 0 0 ,0 0 0 Change DCF

$ 3 0 ,0 0 0 ,0 0 0 In c lu d e in fe rre d
re s o u rc e
P re -p ro d u c t io n c a p it a l
$ 2 0 ,0 0 0 ,0 0 0
Reduc ed
$ 1 0 ,0 0 0 ,0 0 0 e n viro n m e n t a l
c h a n g e in s t a rt -u p

$0
P ro d u c t io n c a p it a l
lo w base h ig h
5 y e a rs t a x fre e

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 Cash Flow Sensitivity with Time
Project Cash Flow Sensativity with Time
$80.00
Best Case Worst Case
$60.00

$40.00
Net Cash Flow $M

$20.00

$0.00
02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
-$20.00

-$40.00
Years
-$60.00

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A range of likely outcomes
Distribution for NPV1 (10%dcf) after tax

0.14
PROBABILITY

0.12
0.1
0.08
0.06
0.04
0.02
0
17.7

26.6

35.5

44.5

53.4

62.4

71.6

80.3
8.8
1

Values in A$ Millions

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 Risk is OK
The Financier is in the business of dealing with
risk
The expression of a reserve in terms of an
expected outcome with upper and lower limits is
quite acceptable
The old practice of giving just one number will
hide the risk factors
Risk is not bad, it just needs to be known

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Risk Matrix
# Risk Event Likelihood Consequence Risk Comment and Possible Mitigation

Correlation of veins where there are no old

Geology:
underground workings, in particular
1 Ore Body Possible Moderate High
California low grade open pit. Requires
Interpretation
closer spaced drilling within open pit.

Understand the geological controls of the ore

zone and its related mineralisation so that
Lack of
more accurate and precise modeling can be
understanding of
2 Possible Moderate High conducted. This can be done from detailed
Geological
logging which will then feed into the resource
Controls
estimate and ultimately mining targets and
ground support regimes.
Mineralisation may be restricted at depth
with a sudden drop in intensity and grade
Mineralisation may once below the boiling zone. Caution needs
3 not extend to Likely Moderate High to be exercised with projections at depth No
depth RL limit is placed on the current resource
estimates. MA would suggest a limit at 100m
rl.

Grade capping applied to informing sample

composites is too high in some domains,
4 Grade Capping Possible Minor Moderate
resulting in over-influence of high grade
samples on estimation. Review caps

Incorrect Resource Incorrect estimation methodology according

estimate to the geology and statistics can distort the
5 methodology Possible Major Extreme grade/tonnage curve and ultimate resource
distorts the grade numbers, hence affecting all subsequent
tonnage curve activities leading on to mine development.

Based on AS/NZS 4360:1999

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Margins in Mining Where are they
What is and is not included in C1 costs
The real cost of Capital and how to hide it
Overheads, R&D (incl. exploration) and core values
Why high commodity prices do not equal high
margins

Development
Production

Company

Company
Value Waves
Company

Exploration
Company
Examples

Exploration
Exploration Discovery

Exploration Discovery PEA Pre Feasibility Construction Production

Feasibility

Time

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Contact
Andrew J Vigar
Phone: +852 63815197
Benny Cha
26F, Chinaweal Centre, 414-424
Jaffe Rd, Wan Chai, Hong Kong SAR
Phone: +852 2430 7575

www.miningassociates.com

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