Mine Examination
Mine examination
• Careful scrutiny of a mineral property in order to
form an opinion or judgement
– of its present worth
– or future possibilities
• A mine is any artificial excavation made for the
purpose of winning mineral values. This includes
– Open-pit and underground metal, coal workings,
quarries, oil and gas, salt mines…
– Excludes all digging made for commercial purposes
Purpose of Mine Examination
•
•
•
•
When change of ownership is considered
Appraisal for tax purposes
When funds are acquired through sale of stock
When planning broad revision of operating
methods or installation of important long-life
equipment
Types and scope of mine
examination
• Preliminary examination
– Rapid survey of a property covering more
essential features (some sampling, brief geological
survey, some mapping, a rough cost setup and an
estimation of management)
• Formal examination
– Detailed survey of a property
– Lengthy process (Usually takes 1-6- months)
Qualifications of an examining
engineer
• Sound reasoning abilities (properly weigh component parts, is
logical)
• Honesty
• Working knowledge of geologic principles and ability to apply on
local conditions
• An understanding of sampling theory and practice
• Knowledge of mining methods and there effect on production cost
• Working knowledge of mineral dressing
• Ability to compute production costs and estimate profits
• Knowledge of economic principles and business conditions and
their effect on mining industry
• An understanding of money values
Professional ethics
“Every precaution should be taken to avoid the
influence of question of compensation upon
the engineers judgment and opinion.”
• Examining engineer must be unbiased in his
opinion
• Should not have personal or monetary interest
in the property he is inspecting
• Must ascertain the true purpose of the
examination
Economics
the management of scarce resources on the
earth for social development of human being.
Planning of field work
• Field work involved in a mine varies widely,
depending upon
– The type of property under examination
– The familiarity of the engineer with the mine
– The purpose of examination
Examining a Prospect
• Prospect
“What chance has it to become a mine”
– Work is carried out along the following lines:
•
•
•
•
•
Geology,
Drilling records,
Sampling of outcrops and pits,
Estimate of plant cost, transportation,
Market conditions and future possibilities
Examining Old working
• Old workings:
– Faulting was not understood, primitive mining
techniques used with cheap labour, mining below
water table was not possible
• Make the map of the property and place the
geology on it
• Working can be sampled to determine
whether profits can be made from modern
methods
Examining an operative property
• Estimate the past and present management
• Study of office data, maps, drill records, sample
maps, cost sheets, productive history
• Underground geologic study
• Check sampling at vital points
• Study of methods to find weaknesses
• Survey of plant, equipment
• Estimate of future costs, life and expected profits
• Computation of value
Purpose and scope of examination
• The purpose and scope of examination will decide the extent
of examination.
– Geography: mine maps, town map, transportation, freight
and weather
– History
• Legal: Changes of ownership, tax history, leases,
royalties, suits
• Productive: Production record since beginning,
shutdowns, comparison
• Financial: Capitalization, profits, yearly statements,
present standing
– Management: Personnel & Organization, Comparison,
efficiency
Geographical location
• More important for undeveloped mines
– Railway facilities: freight costs being most
important
– Powerlines
– Town sites
– Nearness to market
Legal history
• Inspection of the legal history of the property
should cover
– all land and mineral titles and deeds
– All transfers of title
– All recorded documents to show acreage and
rights are included in property
– Disclose errors, conflicts in title
– Rentals, leases, royalty/sale contracts and any
long-time agreements
Productive record
• The productive history of the mine gives a
record of the past achievements to base
estimates of future capabilities
• Particular attention should be paid to
determine causes and effects of shutdown
• Correctness of accounting practice:
– distinction between capital and operating costs
– When Expense items are improperly charged to
capital accounts, depreciation is not accounted,
loss turned into profit
Financial structure
• Itemization of financial structure and cost
summaries for the past years:
– Confirms the examiners judgement
– Gives a general picture of financial standing of the
business and attitude of the shareholders or
owners
– Summary of yearly profits furnishes rough gauge
of the past success
Management
• Management is the influence that coordinates land,
capital and labor.
• Mangement responsibilities
– Direct: managing salaries and wages
– Indirect: planning the work
• Management is the most important factor (90%) in the
success of a business
• Costs obtained at a mine are largely dependent on
management
• Good management looses small amount of money on
poor property, small profit on a fair property and will
make a bonanza out of a good one
Criterion of assessing management
• An examiner builds from his experience has laid out
criterion upon which a mangement can be assessed
– Safety conditions in a mine is used as a barometers
– Good housekeeping at a mine may indicate efficient
direction
– Conditions of cars used for hauling ore
– Are the records, maps and estimates such that a clear
presentation is made of the whole situation
– Does the management plan the work or merely measure it
afterwards
– The ratio between the amount paid and results obtained is
worthy of notice
Purpose and scope of examination
Contd.
–
–
–
–
Geology: District maps, surface, underground
Sampling: study of all records, correlation with geology
Estimate of ore reserve
Methods and costs
• Mining: method in use, recovery, advisable
improvements, estimate most economical rate of
mining and corresponding life
• Milling: Flow sheet and details of all unusual features,
percent of recovery, water supply; space available for
tailings
Purpose and scope of examination
Contd.
– Marketing: sale of ore or metal, smelter contracts, by
products possibilities
– Valuation: Values for years, life, profit, interest rates,
present and future worth
– Plant and equipment:
• Underground: Condition of Shafts, Plats, drifts,
crosscuts raises; pumps
• Surface: head frame, hoist, power plant, shops, mills;
conditions of machinery
– Miscellaneous: Timber ,land ,power; labour, ,wages,
disputes; local govt; liabilities
– Economic situation: Avge profits, future prospects, future
earning power
Assignment No: 2
Gold and Silver as monetary metals
Due: 23-02-2010
OR
Assignment No: 2
Causes of recent (2005-20010) changes in prices of Copper and Gold
Due: 23-02-2010
Mineral Financing
Profits  Revenue - Cost
Revenue  Material sold(units ) x Price/unit
Cost  Material sold (units) x Cost/unit
Profit  Material sold (units) x (Price/uni t - Cost/unit)
Fundamentals of project financing
Project financing:
• Financing of a particular economic unit in which a
lender is satisfied to look initially
– to the cash flows and earnings of that economic unit (as the
source of funds from which a loan will be repaid)
– and to the assets of the economic unit as collateral
(property or valuable that you promise to give if you
cannot pay back money that one borrows) for the loan.
• Lenders initially look to the cash flow from the
project being financed rather than the corporation or
corporations seeking funding.
Fundamentals of project financing
• The ultimate goal in project financing is
– To arrange a borrowing for a project which will
benefit the sponsor and at the same in no way
affecting its credit standing or balance sheet.
• Project financing has great appeal when it
does not have a substantial impact on the
balance sheet or the creditworthiness of the
sponsoring entity.
Fundamentals of project financing
• The moving party in a project is its promoter or
sponsor. A project may have one or several sponsors.
• The motivation of construction companies acting as
sponsors is to profit in some way from the
construction or operation of the project.
• The motivation of operating companies for
sponsoring a project may be simply to make a profit
from selling the product produced by the project.
• In many instances the motivation for the project is to
provide processing or distribution of a basic product
of the sponsor or to ensure a source of supply vital to
the sponsor’s business.
Borrowers vs Lenders
Borrowers:
• prefer their projects to be financed independently
– off-balance sheet with appropriate disclosures in financial reports
indicating the exposure of the borrower to a project financing.
Lenders:
• on the other hand, are not in the venture (a business project
especially one that involves taking risks) capital business.
• are not equity (value of a property after all charges/debts
have been paid) risk takers.
• want to feel secure that they are going to be repaid either by
the project, the sponsor, or an interested third party.
successful project financing
• The key to a successful project financing is structuring the
financing of a project with as little recourse (use of others
help in difficulty) as possible to the sponsor
• while at the same time providing sufficient credit support
through guarantees or undertakings of a sponsor or third
party, so that lenders will be satisfied with the credit risk.
• If correct financial planning was done, revenues from the sale
of the product produced or service performed should be
–
–
–
–
sufficient to service debt
interest and principal
pay operating costs
and provide a return to sponsors and investor
successful project financing (contd)
• a satisfactory feasibility study and financial plan should be
prepared with realistic assumptions regarding future inflation
• rates and interest rates;
• the cost of product or raw materials to be used by the project
is assured;
• a supply of energy at reasonable cost has been assured;
• A market exists for the product, commodity, or service to be
produced;
• transportation is available at a reasonable cost to move the
product to the market;
• Adequate communications are available;
• building materials are available at the costs contemplated;
• the contractor is experienced and reliable; the operator is
experienced and reliable;
• management personnel are experienced and reliable;
successful project financing (contd)
• untested technology is not involved;
• the contractual agreement among joint venture partners, if
any, is satisfactory;
• the key sponsors have made an adequate equity contribution;
• satisfactory appraisals of resources and assets have been
obtained; adequate insurance coverage is contemplated;
• the risk of cost overruns has been addressed;
• the risk of delay has been considered;
• the project will have an adequate return for the equity
investor;
• environmental risks are manageable.
Project financing (contd)
• When the project involves a sovereign (free to
govern itself) entity, the following critical elements
are important to consider ensuring the success of a
project:
– a stable and friendly political environment exists;
–
–
–
–
–
–
–
–
licenses and permits are available; contracts can be enforced;
Legal remedies exist;
there is no risk of expropriation;
country risk is satisfactory;
sovereign risk is satisfactory;
currency and foreign exchange risks have been addressed;
protection from criminal activities such as kidnapping and extortion;
existence of a commercial legal system protecting property and contractual rights.
Risks in Project financing
•
•
•
•
•
•
•
•
•
common causes for project failures, which include the following: Delay in
completion, with consequential
increase in the interest expense on construction financing and delay in the
contemplated revenue flow;
Capital cost overrun; Technical failure; Financial failure of the contractor;
Uninsured casualty losses;
Increased price or shortages of raw material; Technical obsolescence of the plant
or equipment; Loss of
competitive position in the marketplace; Poor management; Overly optimistic
appraisals of the value of
pledged security, such as oil and gas reserves. In addition, for projects in a foreign
country, the following
are causes for project failures: government interference; expropriation and
financial insolvency of the host
government. For a project financing to be successfully achieved, these risks must
be properly considered,
monitored, and avoided throughout the life of the project.
Risks in Project financing
•
•
•
•
•
•
•
•
•
When investors consider financing a mining project, they analyze the current state
of the
industry (supply, demand and price factors), the company (cost profile, operating
efficiency, technology, labour factors, access to raw materials, reserve replacement
strategy, contingency and emergency planning, safety and environmental record,
management) and the country where the project will be located (political risk). All
these
aspects are important as mining projects can experience various difficulties. For
example, the US$900 million Gamsberg zinc project in South Africa is on hold due
to
poor market conditions.7 The Windy Craggy copper zinc project in Canada was
permanently halted in 1993 due to environmental concerns and transboundary
pressures.8
Mineral Financing
• The global mining industry is dominated by
some 10 large companies whose total market
• capitalization is US$92billion.
• Mining itself has a huge impact on
surrounding communities,
– leaves a large environmental footprint and is
controversial largely because of issues