Mineral Resource

Management

Module 1
Introduction to course

Structure of course
Objectives
Backgrounds
Limitations
Study material
Programme/outline

Day Broad topic Sub topics

1 Mineral Resource Management Mineral Resource Management introduction
03 August What is the asset's capability? The changing environment
Samrec compliance
Mineral Asset management
Translating top down goals
Startegic Mine Planning

2 What is the asset worth? Integrated Mine Planning

04 August Valuation and value metrics
Value chains
Exploration and development
3 What is the asset availability? Optimisation
10 August Cutoff grades and optimisation
Enterprise optimisation

4 What is the asset performance? Process optimisation

11 August Mine Call factor
Reconciliation
Mine to mill optimisation
Capacity utilisation
5 What are the asset risks? Governance and compliance issues
11 August Risk in MAM
Course structure

Test 17th August 20%

Exam counts 60%
Assignment 20%
 The CEO’s nightmares

Plans that don’t work Any examples?

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
The orebody dictates … what?
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
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
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
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
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
Margin squeezes and price
changes
Some downward
trends in real
prices
Supply/demand
drivers
Escalating costs
Increasing cutoff
grades
Decreasing payable
reserves
Price risks
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
Global competition
• Steadily reducing costs
• Desirable to be in lower quartile
• Reflects strategy of growth
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
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.

What MRM is not…

Geology

+
MRM
Survey
=
+

Evaluation

Planning
A model for MRM

Business environment
Technology Markets Mineral Resource Legal framework

Business strategy

Organisational design

Tactical actions

Business performance
MRM involvement
Ownership Titles, authorisations, valuations
Structural model Structural interpretation

Geological model Evaluation techniques

Project valuation Economic assessments

Optimised schedule Extraction plan

Risk analysis Bankable project

Monitoring and control Production operation

Review and sensitivity Dynamic business

How well are companies managing their mineral assets?

VIEW FROM THE MARKETS

What is important for the
markets?
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
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

…through:
• significant cost reduction
• lower cutoffs
• increase in reserves
• increase in output
• capitalisation
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.
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
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
Market view of South Deep

Governance issues
Gold loan
Lateness
Successive
reductions and
mistakes on
Resources
Mining methods
Shaft accidents
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
Feasibility estimate
performance
7
Number of projects

6
5
4
3
2
1
0
) ) %
0%
5% 0% o 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 50
1 ( o t >
<( to )t % to to to to to to to to to
) % 0
0% (5 6% 11% 16% 21% 26% 31% 36% 41% 46%
(1
Feasibility estimate overrun/(underrun)

• 60 projects since 1980

• Average overrun of 22% Source: NW Mining Assn
• Half had overruns of 20% or more See article + Pincock
Resource estimation errors

40
35
30
%
25 Grade
20 Tonnage
15 Technical
No problems
10
5
0
Errors
55 projects analysed
Grade errors

45
40
35
% 30
Database
25
Assaying
20 Interpolation
15 Dilution
10
5
0
Errors
Source : CMMI 1998
 Founded on
Famous follies poor
information
Shell restatement
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?
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.
 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”.
More decline
Effect on equity value
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
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!
Conclusion

The general conclusion must be that

we are not managing our mineral
assets very well.
SO, HOW CAN WE MAKE IT
BETTER?
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
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
COMPELLING REASONS TO
IMPLEMENT AN MRM
APPROACH
Compelling reasons

Stated Company objectives in terms

of growth
Current and expected performance
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
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
Compelling reasons

Stated Company objectives in terms

of growth
Current and expected performance
Corporate Governance
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

Corporate Governance in MRM

Resource and Reserve statements

Reconciliations
Valuations
Book values
Metal accounting
Metal in process
Accounting versus cashflow value
Compelling reasons

Stated Company objectives in terms

of growth
Current and expected performance
Corporate Governance
International alignment
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
Compelling reasons

Stated Company objectives in terms

of growth
Current and expected performance
Corporate Governance
International alignment
Invested capital
Market expectations
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
 Mineral Resource
Management : a holistic
approach
Performance
Structures Competency Management

Vision Strategy Delivery

IS/IT Protocols Systems

Technical excellence
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
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
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
MRM in Coal…

Resource and Reserve model: coal

attributes
Mining widths
Strip ratios
Environment
LOM plans
Adaptability/flexibility
Beneficiation
Product spread
NPV optimisation
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
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
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
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
IS THIS ENOUGH?