processing fatal flaws in technical due diligences · processing fatal flaws in technical due...

Processing Fatal Flaws in Technical Due Diligences

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Andrew Newell Executive Processing Consultant

MetPlant 2015 Perth

‘Showstoppers’ and the ‘Devils that you don’t know’

Outline

• Background • Legal/Financial Due Diligence

o Example • Technical Due Diligence

o Personnel • Types of Assets • Feasibility Studies • Typical Flaws • Project Processing Flaws • Operating Asset Processing Flaws • ‘Show Stopper’ Processing Case Studies

• Case Study 1 • Case Study 2 • Case Study 3

• Conclusions

2 MetPlant 2015 Perth

Background • Due Diligences (DDs) are typically required when funding is sought

o Develop a new project

o Expand an existing operation

o Acquisition

o Merger • Two types of Due Diligences

o Legal/Financial

o Technical


Legal/Financial Due Diligence

• Equally, if not more important, than the Technical DD

• Identify current or legacy issues

o Financial commitments

o Legal and ownership arrangements

o Directors

• Typically conducted prior to the Technical DD

• Desirability for a merger or acquisition quickly evaporates with poor findings


Example • Proposed Industrial Minerals Company Merger

o Australian company intending to merge with a Chinese company operating in China

o Technical DD went fairly well – except that the resources were not JORC compliant

o Legal/Financial DD, conducted in parallel with the Technical DD, found that not all of the shareholders had been disclosed and that significant amount of monies were owed which had also not been disclosed

o Needless to say that the merger did not go ahead and the merger deposit made by the Australian company has yet to be returned (>12 months)


Technical Due Diligence


• Assesses the reasonableness of the technical and economic aspects of a project or operation in terms of : o Practically, viability and risks

• Examines the methodologies, supporting data and underlying assumptions used for evaluating a project or managing an operation

• Based on : o Supplied information o Technical and operating data from similar projects (‘benchmarking’) o Site visits o Interviews with key project or operating personnel

• Less intense variations on DDs : o Independent Technical Review (ITR) or Independent Engineer (IER)

Often to support an IPO (Initial Public Offering – stock market listing) o Fatal Flaw analysis

Technical Due Diligence continued

• Main purpose is to identify aspects of the asset that make it impractical or unviable – ‘Fatal Flaws’ or ‘Showstoppers’ – and thus protect the investor from losing money

• Often uncovers a raft of assumptions and unusual methodologies – ‘Devils that you don’t know’ – that can potentially undermine the viability of the asset

• Does not necessarily mean that there would be no investment : if the asset has significant potential (e.g. great orebody), usually encourages re-development

• Typically conducted at a High Level over a period of three to four weeks depending on project size and number of assets o Major acquisition may require 8 weeks o If no site visits are involved, considered a ‘desktop’ study

• A Detailed DD may take 6 months or longer


Personnel

• Experience o A background in project development and operations o American banks often require 30+years and the same team for successive DDs

• For a metallurgist o Competency in the processing technology associated with that commodity

Equipment and flowsheets Equipment limitations Typical metallurgical responses and issues

o Familiarity with capital and operating costs

o Understanding of other disciplines Geology : geo-metallurgical aspects e.g. ore types Mining : scheduling, potential for and nature of dilution

o Typically involved with site infrastructure and logistics (noting that power stations, tailings

storage facilities, rail and ports are the domain of infrastructure specialists)

o Often reviews the marketing arrangements and the nature of smelter/buyer contracts


Types of Assets • Most common asset is a project supported by a Feasibility Study (FS)

o To assess the likelihood of the project being technically and economically feasible, the main activities are based on examining : The reasonableness of the study The approach/methodologies Supporting data The assumptions Project potential/upside Risks and potential mitigations

• The other asset is an existing operation o Generally easier to undertake o Past the Feasibility Study stage o Body of industrial data and actual costs

If an expansion is envisaged, hopefully supported by a Feasibility Study o Operationally experienced personnel available for discussion


Feasibility Studies

• For projects, the success of a Technical DD depends entirely on the quality

and accuracy of the Feasibility Study (FS)

• Needs to satisfactorily address : o Geology o Mining o Metallurgy o Infrastructure (off-site and on-site) o Environmental o Social/indigenous o Marketing o Financial evaluation o Project execution

• Culmination of a series of studies : Scoping, Pre-Feasibility (PFS) and Feasibility o PFS is a critical phase where a ‘single’ option is determined for mining, processing

and infrastructure (viz. trade-off studies)

• Decreasing project risk by conducting increasingly thorough technical studies (‘stage gates’) that define an optimal project development with accurate costings supported by financial evaluation


Feasibility Studies continued • Requires competent and experienced personnel managing and conducting the study with a

proven track record o For both the owner and the consultants o A proposed expansion of an industrial mineral operation revealed a poor quality FS that had been

conducted by a fabricator Lacked metallurgical detail e.g. mass and water balances, design criteria, flowsheets (PFDs),

P&IDs Testwork was limited and based on samples from a nearby deposit

Testwork data did not support the processing numbers used in the financial model No breakdown of capital and operating costs – with poor methodology and supporting data

• Becoming common to by-pass a study stage o Typically moving from a Scoping Study to a Feasibility Study o Occasionally from a Conceptual Study to a Pre-Feasibility Study

Occurs due to a combination of the ‘rush to market’ – to lower project development time - and limited funds

• Often conducted in a haphazard fashion o Different groups of consultants working in isolation

Characterised by the presence of conflicting data in different parts of the study o Use of ‘adjectives’ – ‘Definitive’, ‘Bankable’, etc.

• Unduly optimistic o Recoveries, capital costs, metal prices, construction and ramp-up schedules, etc.


Feasibility Studies continued


Increasing accuracy / decreasing risk

Typical Flaws • Geology – significant potential for fatal flaws

o Needs to be a high level of certainty that an orebody exists that would support economic extraction and allow recovery of the project expenditures

o Typical fatal flaws encountered : Geological interpretation Incorporation of drilling core data into the model including S.G. poor QA/QC Basis for classification of resources (inferred and indicated) including cut-off grade

o For a metallurgist : Basis for ore type classification Location of samples used in testwork

• Mining – potential for fatal flaws, particularly underground mines o Optimum mining rate has not been determined o Limited supporting geotechnical and hydrogeological studies o Determination of reserves o Inappropriate underground mining method o Proposed levels of costing accuracy not achievable o Mine design and schedule

not as ore types (poor geological model) ‘lumpy’ – significant variations in ore grades, ore type blends and volumes


Typical Flaws continued • Metallurgy – often a multitude of minor flaws and occasionally fatal flaws

o Main issues are : Testwork and flowsheet Equipment selection and sizing Capital and operating costs

• Environmental – a potential ‘show stopper’ o Sufficient and suitable studies need to have been conducted o Permitting must be in place

• Infrastructure – a potential ‘show stopper’ o Particularly for larger projects in remote locations and typically for industrial

minerals Inadequate water and power supply studies Poor tailings disposal planning Trade-off studies have not been conducted Local climatic, seasonal or seismic conditions have not been fully considered Lack of or limited sterilisation drilling, geotechnical and hydrogeological studies

Location of processing plant and tailings storage facility Introduce unexpected costs and significantly delay construction or limit production

Construction of a copper-cobalt project in the DRC has lost at least 4 months due to inadequate geotechnical studies

Escondida – 200 million tonnes of 1% Cu located beneath one of the Los Colorados processing plants


Typical Flaws continued

• Social/Indigenous – a potential ‘show stopper’ o Local support for the project needs to be demonstrated

Garg Island (BHPB nickel laterite project in the Philippines) Tampakan (Glencore copper-gold project also in the Philippines)

• Marketing – occasionally a ‘show stopper’ o Product quality cf. graphite – difficulty in marketing ‘fines’ (<150 microns) and base and

precious metal concentrates with >0.25% As o Volumes not accepted by market or would flood market and thus affect prices

Not uncommon for the more ‘opaque’ markets associated with lower volume commodities Zircon – an operation wanted to produce 600,000+ tpa Potential graphite producers in Mozambique : more than 1 million tpa production (current market size)

• Financial Evaluation – a potential ‘show stopper’ o Dependent on quality and reliability of the inputs

NPV must be based on at least Indicated Reserves if a public document Financiers generally like to see at least six years of reserves for a FS

• Project Execution – potential flaws o Optimistic assumptions

Construction schedules (impact of climate, seasons or logistics not fully considered) Equipment delivery schedules Production ramp-up times

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MetPlant 2015 Perth

Project Processing Flaws

• Most commonly encountered flaws are associated with the flowsheet o Basis foundation for the processing plant design

Mass and water balance Design criteria Equipment sizing and selection Determination of consumable and labour requirements Operating and capital costs

o Flowsheet is based on testwork samples, mineralogy and the testwork program

If any of these aspects are poorly executed, then the flowsheet may be fatally compromised

As a consequence, so will the process design and processing costs



Project Processing Flaws continued • Testwork sample issues

o Representativity of samples or blends for separation testwork including dewatering (if ‘dry stacking’ of tailings is being considered)

o Testwork sample locations : benchscale, locked cycle and pilot plant testwork o Limited range of samples used to conduct comminution testing

• Limited mineralogical studies o Particularly for more complex ores and ore types o Intermediate products and tailings

• Limited comminution testwork o None - common in Russian and Chinese testwork o Only BBMWi and Ai o Poor understanding of liberation requirements

• No pre-concentration testwork o Potential not identified

• Limited amount of materials handling studies o Ore recovery from bins and stockpiles (e.g. TUNRA)


Project Processing Flaws continued • Limited amount of separation testwork

o Insufficient amount of testwork to convincingly support flowsheet interpretation and metallurgical response

o Bench scale flotation testwork – no Locked Cycle Testwork (LCT) o Not conducted with ‘site’ water o No reproducibility studies – particularly when results are variable

Testwork and thus flowsheet decisions are being made on ‘one’ result o No establishment of feed grade-recovery relationships

Important for production schedule and financial evaluation

• Poor understanding of metallurgical losses

• Limited amount of dewatering testwork o Insufficient body of data to convincingly select dewatering flowsheet and size and select

equipment o Where concentrates are produced, no Transportable Moisture Limit (TML) studies o Where ‘dry stacking’ is selected for the tailings, separation tailings samples reflecting the

likely range in the quantity of fines


Project Processing Flaws continued

• Flowsheet o Not finalised o Unresolved technical issues o Insufficient testwork to support flowsheet selection o Not suitable for all ore types/blends that would be presented to the plant o Insufficient flexibility o ‘Novel’ flowsheet

Not proven on a demonstration scale (cf. pilot plant and bench scale tests)

• Other areas o Metallurgical recoveries

Limited understanding of sample or testwork error Effect of feed grade-recovery relationships No allowance for scale-up

o Plant design Design criteria do not allow for the full range of processing requirements over Life of Mine (LOM) Equipment selection and/or sizing

Unsatisfactory and not well supported Particularly for milling circuits SAG/Ball mill transfer sizing

o Operating costs Consumable estimates not based on ‘first’ principles

Testwork or simulation results - benchmarking an acceptable compromise No current consumable unit cost quotations including power Proposed levels of accuracy not achieved No personnel list – employees and on-site contractors


Operating Asset Processing Flaws • Generally relatively straight forward

o Operating, technical, cost and marketing records are available Throughputs, product quantities and quality, metal recoveries, availabilities,

o Ore type and feed grade effects o Reconciliations between the mine and plant o Inspection of the plant

How the plant is being operated Review sample collection, assay facility, laboratory (routine and future ore testing) Condition of the plant

Need for equipment replacement Nature and magnitude of maintenance costs

o Tailings storage facility capacity Need for additional capacity

o Discuss the operation with technical staff o Future power and water supplies – quantities, availability and supply agreements o Directly understand the basis for sustaining capital costs, capital upgrades/expansions,

supporting studies, production and revenue forecasts, etcetera

• Potential processing flaws (rarely fatal) o Current or future bottlenecks o Poor equipment, circuit or plant availabilities o Condition of the plant o Ability of the plant to handle future ore types o Optimistic future production schedules (e.g. metal recoveries, plant availability, etcetera) o Limited or poor planning to meet future ore type requirements


‘Show Stopper’ Processing Case Studies

• Three cases studies based on process development issues concerning

flowsheet design and equipment selection

• Common theme was the involvement of the equipment vendor in the testwork, the flowsheet development and the equipment selection. o Notably, testwork was designed around the equipment

• Key issues were :

o Misrepresentation of the capability of the processing equipment o Misinterpretation of the testwork results o Metallurgical ignorance by the project owners i.e. no processing competency

• Key outcomes of the Technical DDs:

o Investment interest waned o Two of the projects were not developed


Case Study 1

• Chinese investor (without any technical personnel) proposing to invest in

an iron ore (hematite) project in WA

• Initial testwork had been conducted with known equipment (Eriez WHIMS – Wet High Intensity Magnetic Separation) with positive results however the equipment has o High unit capital costs o High power requirements o Low unit capacities

• New equipment vendor proposed to change the equipment to conventional drum magnetic separators (LIMS – Low Intensity Magnetic Separation) with rare earth magnets o Lower unit capital costs o Lower operating costs

• Key issues o The proposed equipment

Would be unable to generate the magnetic intensity required to recover the hematite Was not tested

o The ‘FS’ Assumed the same metallurgy as the WHIMS Not surprisingly, returned a very positive NPV


• A major Western gold producer allowed geological staff to conduct a

metallurgical study without any metallurgical input

• Only the gravity concentration stage was investigated o Remainder of flowsheet was not tested, namely crushing, grinding, direct smelting or

intensive leaching/gravity concentrate or cyanidation of tailings o No mineralogical studies were undertaken on feed samples or intermediate products

(e.g. gravity concentrate)

• In the subsequent study, it was assumed that it would be technically and economically feasible to direct smelt the gravity concentrate with 100% gold recovery

• The technical DD challenged this assumption and additional testwork reluctantly undertaken and it was found that the gravity concentrate o Was mainly pyrite, assaying only 30 to 80 g/t Au

5,000 to 8,000 g/t [0.5 to 0.8% Au] is the threshold for direct smelting o Could not be easily upgraded o Was difficult to recover gold from (low gold recoveries found with intensive leaching)

Case Study 2

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Case Study 3

MetPlant 2015 Perth

• A multi-base metal (Cu-Pb-Zn-Ag-Au) deposit located in Peru was being

assessed

• A gravity separation equipment vendor conducted the testwork program o Testwork focussed on gravity separation o Limited or no testwork was conducted for milling, flotation and dewatering

• The proposed flowsheet consisted of eight gravity separation stages, some differential flotation stages and no tailings stream

• The flowsheet was fatally flawed and undermined the FS

• Since the orebody was ‘attractive’, the project feasibility could be revisited by conducting a more rational testwork and flowsheet development program

Conclusions • Technical Due Diligences are often challenging experiences that often reveal

flaws, sometimes fatal • ‘Forearmed is forewarned’ - identifying fatal flaws or ‘Show Stoppers’ provides

the investor or potential owner with the opportunity to either walk away or become involved by applying a new approach

• While technical DDs are not an inexpensive exercise, they serve to protect investors and are well justified

• While it is difficult to predict specific fatal flaws or ‘Show Stoppers’ for projects, they typically arise from o Insufficient or non-availability of supporting data e.g. geological data, metallurgical

samples, trade-off studies, etc. o Optimistic, incorrect or poorly based interpretations of data e.g. geological data, future

metal prices, metal recoveries, etc. o Poor costing methodologies o Proposed levels of study accuracy not being achieved e.g. capital and operating costs


Conclusions continued • The primary source of potentially fatal processing flaws is associated with the

development and interpretation of the flowsheet which, in turn, is based on the nature of the samples and the adequacy of the testwork program

• Two other areas are process design, including equipment selection and sizing, and the development of capital and operating costs

• It is important that technically competent people manage the testwork program and subsequent process design and study

• In the case of existing operations, the availability of records and the ability to inspect the operation makes conducting a Technical Due Diligence relatively straightforward

• Operational potential flaws include o Current or future bottlenecks o Poor equipment, circuit or plant availabilities o Quality of operational staff o Condition of the plant o Ability of the plant and/or poor planning to handle future ore types o Optimistic future production schedules (e.g. metal recoveries, plant availability, etcetera)


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