ISSUE NO.

111— November 2011

C A L E N D A R

Independent Engineer / Due Diligence Reviews
○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

Northwest Mining Association

Convention
This month’s article is an update of Pincock the review of a bankable-level feasibility

November 28 – December 2, 2011
study which has been prepared by a

Perspectives Issue 39, February 2003, and

John Ascuaga’s Nugget Casino mining company, a mineral-engineering
incorporates current items typically covered

Resort company, or alternatively a mining

in the scope of work for a due diligence

Reno, Nevada review. company working in concert with a

www.nwma.org mineral-engineering company. This work

Visit PAH/Runge at Booth 869 Introduction is carried out under the direction of a

project manager assisted by a multi-

Mineral Exploration Roundup The majority of Independent Engineer (IE) disciplinary review team consisting of

assignments for due-diligence reviews of professionals selected with a focus on

2012

January 24 – 27, 2012 mining projects are performed for financial matching specific backgrounds and

institutions considering the lending of experience to the particular project to be

Westin Bayshore

Vancouver, BC, Canada funds for new or expanding mine projects. reviewed.

Due-diligence work is also carried out for

www.amebc.ca

firms sponsoring or underwriting public Completeness Review

offerings, mergers, and acquisitions.

SME Annual Meeting and Exhibit

February 19 – 22, 2012 The first step in a due-diligence review is

In many project-finance cases, IE assistance to ensure that all the major elements

Washington State Convention and

is provided to the lending institutions by normally associated with mine project
Trade Center

developing reasonable project-completion feasibility work are fully addressed. These

Seattle, Washington

covenants. In these cases, the IE must elements are:

www.smenet.org
always keep in mind that the lender must

Visit PAH/Runge at Booths 2308

be protected, while the borrower (usually a Geology and Resource Estimate

& 2310
mining company) must be able to ♦ Mining and Reserve Estimate


reasonably complete construction and satisfy Processing

Prospectors and Developers
physical- and production-completion ♦ Environmental/Social Evaluation and

Association of Canada

requirements. As a truly independent permitting

March 4 – 7, 2012
participant, the IE frequently becomes a ♦ Infrastructure and Administration

Metro Toronto Convention Centre ♦ Project Schedule

facilitator for major mining projects by

Toronto, Ontario, Canada bridging the gap between the financial and ♦ Economics

www.pdac.ca operating entities. By working with both

Visit PAH/Runge at Booth 549A sides, the IE can help keep small problems A sample due diligence checklist is shown

small and flag large problems so they can be on page 4.

114th National Western Mining addressed early in project development.

Conference & Exhibition Site Visit

March 19 – 22, 2012 Due Diligence Process

Westin Tabor Center Hotel The next step in the due-diligence process

Denver, Colorado The due-diligence process for a new or usually consists of a site visit. In the case of

www.coloradomining.org expanding mine project normally involves a grassroots project, the site-visit team will


Copyright 2011 by Pincock, Allen and Holt, a division of Runge Inc. All Rights Reserved.

○ ○ Geology and Resource Estimate due diligence process. geotechnical. or in other currently 73 financial institutions that are ○ ○ ○ ○ resource calculations will be reviewed. Metallurgical testwork. ○ ○ ○ system. the technical team siveness and suitability of baseline ○ operation. Geotechnical investigations and An appraisal of the potential for the ○ ○ ○ discuss environmental management. a technical review is Environment and Social Impact monitoring plans. designs for mine and plant project to give rise to adverse ○ ○ ○ and collect all relevant data. A process engineer will ○ ○ normally arrange a visit to the Process Plant Engineering and ♦ An evaluation of the thoroughness ○ ○ ○ ○ metallurgical laboratory where the Construction and quality of available environ- ○ ○ testwork has been carried out. due diligence review: ○ ○ ○ ○ specialist. Typically the ○ ○ ○ ○ identification of potential environmental The nature of the environmental and ○ ○ Sound geological interpretation and and social impacts. and appropriate social analysis for a given project ○ ○ ○ ○ appropriate sampling are the mitigation measures to offset these depends largely on the financial ○ ○ foundations of a successful mining impacts. waste disposal methods. and social impacts of a mining project alignment with identified ○ ○ ○ ○ are an important consideration in the international standards. been prepared to demonstrate framework for the implementation of ○ ○ compliance with environmental and social and environmental policies. documentation. Infrastructure and Administration ○ ○ selection. As such it is project financing activities. data. are articulated in an institution requesting the IE ○ ○ ○ ○ project. mine-waste design community or regional reaction. the following reviewed to determine if necessary ○ ○ 2 . etc. ○ ○ developed as to the suitability of the required permits to implement the ○ ○ ○ ○ proposed mining method. overall water-balance requirements An appraisal of the appropriateness ○ ○ ○ will be reviewed for conformance with and reasonability of project ○ ○ Technical Review environmental management ○ appropriate design standards. It is construction. ○ ○ ♦ ○ during or shortly after the site visit. An appraisal of the appropriateness ○ ○ ○ review team to meet with the heap-leach pads. ○ ○ ○ ○ Mining and Reserve Estimate social regulatory requirement contained procedures and standards related to its ○ ○ in host country law.and operating- ○ ○ ○ ○ cost forecasts. including tailings-dam structures. Investigation of any legacy contam- ○ ○ ○ examine exploratory drifts and ○ Geotechnical and Hydrological ination from past mining practices. documentation that captures this same signatories to the Equator Principles ○ ○ and requisite statistical checks will be intent. For example. a mining schedule is feasible and accurately items are typically addressed in the ○ ○ engineer. ○ ○ ♦ ○ always desirable for the diligence. ○ ○ ♦ ○ a general inspection of the property. and process design. Opinions will be prevent the timely obtainment of all Health and Safety Guidelines. In the mentally and socially related ○ ○ ○ ○ case of an ongoing mining operation. The EPs. recovery used and summary interpretations. and ○ ○ ○ ○ carried out to confirm that the level of Assessment environmental and community ○ ○ engineering and accuracy of cost relations staffing. carry out and operating costs will be reviewed.). Geological and geostatistical Environmental and Social Impact assessment. ○ ○ ○ ○ reserve estimate. and Assessment (ESIA). mass balances. ○ ♦ ○ available core. ○ ○ estimates. and an environmental reflected in the cash flow. management and ○ ○ After the site visit. Often this documentation has (EPs). and to Performance Standards and World Bank ○ ○ preparation of the mine plan and identify potential obstacles that may Group sector-specific Environmental. Mine plans will be In addition to an evaluation of a Mine and plant infrastructure will be ○ ○ reviewed to confirm that the production project’s permit status. check for adequacy and Engineering An opinion on the adequacy of ○ ○ ○ review sampling methods (geologic. assumptions. and reclamation planning and costs. plant flowsheet appropriateness of methodology ○ ○ ○ ○ be part of the site-visit team. and ○ ○ ○ ♦ ○ estimates are consistent with Analysis of the potential environmental A high level opinion of the project’s ○ ○ feasibility (“bankable”) requirements. and capital. including ○ ○ the process engineer would normally reagent requirements. impoundments and and reasonability of closure/ ○ ○ ○ sponsoring company’s technical team waste rock disposal areas.generally include a geologist. as well as forecast capital ○ ○ will review local infrastructure. there are ○ ○ methodology. are largely based on the ○ ○ determine that appropriate cutoff permitting status of the project within the International Finance Corporation (IFC) ○ ○ ○ ○ grades have been calculated in the context of host country law. equipment project. ○ ○ ♦ ○ metallurgical. a common baseline and ○ ○ ○ ○ performed. in ○ ○ ○ ○ Project economics will be reviewed to important for the IE to verify the current turn. plant construction and ♦ An evaluation of the comprehen- ○ ○ ○ During the site visit.

security. and recoveries. Often ○ ○ the jungles of Indonesia. Report Preparation point where it can produce ore on a ○ ○ ○ ○ fire control. the logistics completion. Mine and plant done including data. employee ○ ○ housing. roads. and the process ○ ○ ○ ○ medical facilities. Lending institutions completion requirements include ○ ○ ○ ○ and constructability of new projects frequently request assistance in performance tests of major process ○ ○ require careful scrutiny to make defining these covenants with specific circuits such as crushers. ○ ○ Logistics and Constructability of their loan agreements. and consistent with the ○ ○ ○ ○ administrative. and explosive ○ Under a true project-finance scenario. supervisory and assumptions. ○ ○ be reviewed or. Typically. pertinent operational. a client may request a review well as the reconciliation of ore ○ ○ ○ ○ of proposed engineering and produced against the geologic model ○ ○ Management and Organization construction contracts at this time. Physical or Mechanical Completion ○ ○ ○ ○ revisions in the cash-flow and Information for this month’s article was ○ ○ sensitivity studies will be completed Physical or mechanical completion contributed by PAH’s Mining. camp facilities. place. ○ ○ ○ ○ structure will be reviewed. In mills. ○ ○ revisions to the approved plan are monitor project operations until ○ ○ Economic Analysis generally reviewed and approved by completion of the payback of the loan. alternatively. Performance or Production ○ ○ Completion ○ ○ checked. completion test is performed over a ○ 90. warehouses. ○ ○ ○ ○ independent cash-flow analysis will ○ ○ be prepared. and provide an The role of the IE during the requires close cooperation with the ○ ○ ○ sponsor company. the mine and ○ ○ ○ ○ requirements under these covenants process plant must operate at agreed- ○ ○ typically focus separately on 1) upon minimum capacities. used in the feasibility study. power. Additional proposed ○ ○ facilities such as maintenance Project Completion ○ ○ A typical performance or production ○ ○ shops. The report will Typically. and methodologies development plan approved by the ○ ○ technical personnel. grinding ○ ○ ○ ○ certain that project scheduling and and measurable requirements. As with the physical ○ opinion on possible shortcomings construction period depends on the ○ ○ in the management/organization complexity of the project and the completion test. Whether the site is in the completion followed by 2) the costs and consumption rates not ○ ○ ○ ○ frozen tundra of Far East Russia or performance and/or production exceeding agreed-upon levels. with unit ○ ○ countries.to 180-day period depending on ○ lending institutions universally include ○ storage will be assessed. ○ ○ ○ ○ the IE before implementation. General the project will be clearly identified ○ ○ and administrative costs will be and quantified where possible. Risks and concerns regarding financial institution. safety and A professional technical due-diligence tonnage and grade. and report will be prepared at the plant is built to design specifications. addition. and organization used. the IE will verify that the ○ ○ ○ ○ that capital and operating costs summarize all the results and work major components are in place. ○ ○ an IE is retained to monitor appropriate certification document will ○ ○ be executed. ○ ○ sewage treatment are adequate and conclusion of the work. and flotation cells as ○ ○ capital allotments are adequate. Should it be necessary. industrial and potable continuous basis at the required ○ ○ water. ○ ○ reflect these services. once the production ○ ○ test is successfully completed. an ○ ○ structure. Any ○ are reviewed. needs of the financing entity.services such as communications. the mine is developed to a departments. ○ ○ project completion covenants as part the covenants of the loan agreement. ○ ○ Material Contracts construction progress to ensure that ○ ○ construction keeps pace with the ○ ○ Production Monitoring ○ ○ Material contracts relating to the capital outlays and that construction ○ ○ development / operation of the mine matches the feasibility study or ○ ○ It is not uncommon for the IE to ○ accepted development plan. Process ○ ○ ○ ○ to represent alternative scenarios occurs when all infrastructure is in and Environmental Services ○ ○ requested by the client. ○ ○ 33 . conveyors. This work may include a review of ○ ○ Construction-related reports are monthly reports and annual or ○ The detailed cash-flow analysis ○ ○ ○ prepared by the owners or client will reviewed monthly and periodic site quarterly site visits. Completion During the test period. ○ ○ ○ ○ ○ ○ Review and comment on the level Construction Monitoring Monitoring of the production test ○ ○ ○ ○ of management expertise available period by the independent consultant ○ ○ to the facility. ore ○ Many mining projects are being built ○ ○ ○ in remote locations in developing physical and/or mechanical grades. an trips are a common requirement.

8907 • www. Pit Samples or Channel Phase Plans Flow sheet Processing Excluded Samples and Reasons Phased Pit Resources Capacity Infrastructure Chain of Custody Program Production Schedule Operating Parameters Sustaining Capital Database Description Schedule Optimization Special Considerations Working Capital Checks of Duplicates.Pit Slopes Metallurgical Test Work Structure Foundation Characterization Assaying Pit Design Basis from Cones / LG Crushing Test Work Regulatory History QA / QC Procedures . Lakewood. Sampling Protocol Ultimate Pit Reserves Metallurgical Trouble Spots Mining Surface Trenching. Your comments and suggestions are always welcome.Subsurf ace Exploration History Stockpile Aging Support Biota Regional Mapping Dilution and Recovery Operating Hour Summary Acid Generation Potential Topography Hydrology and Water Management Manpow er Waste Dump Chemistry Drilling and Sampling Surface Mining Training Endangered Species Drillhole Location Map Whittle / LG Pit Optimization Engineering and Survey Local Population Geotechnical Logging Pit Design Parameters Management Regulatory Agencies Bulk Density Determinations Artificial Pit Restrictions M illing Permit Requirements / Status Geological Logging Tonnage Optimization Curve Metallurgical Background Site Impacts Hydrological modeling Pit Shell Check Metallurgical Sample Locations Reclamation Sampling and Sample Prep Geotechnical Analysis . DUE DILIGENCE CHECKLIST Geology Mining Gene ral Mining Environm ental Regional Geology All Mines Equipment Selection Site Background / Baseline Mining District History-Property Ow nership & Existing Project Description Operating Parameters Climate Property Geology Ore Type Descriptions Special Considerations Vegetation Ore Genesis Cutof f Grade Assumptions Mechanical Parameters Seismology Mineralization Grade Control Method Drilling Special Conditions Weathering and Post Mineralization BECO and IPCO Calculation Blasting Air Quality Summary of Controlling Geology Metallurgical Impacts Loading Hydrology .pincock. Ventilation Problems (CO. Allen & Holt is a consulting and engineering firm serving the international mineral resource industry. etc.com.. Geochemical Training Mining Re source Estim ation Dump Design . Colorado 80228 • TEL 303.Geometry Management Processing Geological Model Development Dump Reclamation Considerations Infras tructure Infrastructure Identification of Controlling Lithology Underground Mining Access Roads Assessed Charges Construction of Rock/Lithology Model Primary Access (Shaft / Decline / Adit) Pow er Supply Capitalized component breakout Data Declustering Primary Development (Main Haulage) Water Supply Marketing Block Model Definition Secondary Development (Stope Access) Housing Market Analysis Modelling Method Mining Method Logistics. Contact Pincock. Methane. Allen & Holt • 165 S.Freq. Repeats. Union Blvd.986. Warehousing for supplies Concentrate Sales Agreements Block Statistics Stope Design Port Facilities Dore Sales Agreements Basic Statistics and Cum. Pit Advance Maps w ith Dumps Mill Production Schedule Ow ner's Costs Check Randomly Selected Samples Pit Water Control and Hydrology Mechanical Parameters EPCM Costs Dow nhole Bias Contamination Checks Project Specific Conditions Manpow er Operating Cos ts Database Adjustments Dump Design .Check assays Slope and Road Design Grinding Test Work Capital Costs Tw inned Holes or Samples Ultimate Pit Design Metallurgical Recovery General Cost Summary Assays By Size Fractions. Consultants for Mining and Financial Solutions 4 . Suite 950. Radon.Geotechnical.Surface Exploration and Database Compilation Stockpiling Hauling Hydrology .6950 • FAX4 303. Pincock Perspectives is published as a free information service for friends and clients.987. etc) Product Transport Freight and Insurance Population Identification Ventilation Design Air Service Mate rial Contracts Correlation Pow er Distribution Medical Care Construction Contracts Compositing Water Distribution Communications Pow er Supply Composite Statistics Compressed Air Distribution Security Off-take/Refining Variography Emergency Evacuation Administrative Staf fing Fuel and Consumables Capping Pumping Accounting Managem e nt/Organization Confidence Limits Rock Mechanics and Ground Support Methods Personnel Organization Structure Existing Workings Backfill Type and Design Government Relations Labor Relations Model Validation Development Schedule Purchasing Manning Levels Reconciliation against Production Stope Production Capacities Information Management Adequacy of Training Constrained Pit Resources Stope Extraction Schedule Site Layout & Facilities Project Schedule Resource Statement Site Background / Baseline Task List Critical Path Chart Econom ic Analysis Project Revenues Exclusions Taxes and Customs Royalties Financing Discount Rate Cash Flow Projection Sensitivity Pincock.