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