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Mining project evaluation

process for investment decisions:
Modeling and assessment of project risk - part two
by H.M. Park and M.G. Nelson

R isk is a major factor in

all mining activities, Table 1
arising from many internal The initial risk assessment criteria.
and external variables. The
authors’ research has resulted Major categories Minor categories
in a systematic method for
the quantification of risk Partner risks Domestic partners
in mining projects (Park, Foreign partners
2012). This is the second Technical risks Project stages
part of a three-part series. Geological risks
The first part was published Operating risks
in the October 2013 issue Production scale
of Minining Engineering Reliability of data
magazine and can be found
Marketability Standard of products
here at www.me.smenet.org.
This paper discusses Investment climate Political risks
methods of assessing the Permitting
overall risk associated with Infrastructure
those variables, and presents
a statistical model based on Economic values Internal rate of return
a survey of 31 experts. The Net present value
third paper, to be publised at Payback period
www.me.smenet.org on Oct.
14, presents an evaluation
of the statistical model, using data from previous were from Asia, one from Europe, 11 from the
mining investment decisions in which the authors United States, two from Africa and six from
have been involved. Oceania. The companies represented ranged in
size from almost no annual revenue to $16 billion
Methods in annual sales as of 2010. The survey respondents
A survey of 31 mining experts was taken to represent a variety of companies related to the
determine what current practice is being used mining industry. Several major mining companies,
when evaluating mineral investments. Specifically, senior mining companies, consulting firms,
this survey attempted to determine which risk educational institutes and trading companies were
factors are being employed and how they are surveyed. The titles of the respondents included
weighted in the analysis of mining project risk. vice president, former vice president, chief
The survey also asked respondents to report executive officer, chief operating officer, managing
the minimum rate of return used by their director, director, senior manager, manager, mine
organizations in rating prospective investments. head, mine manager, former mine manger, former
The survey was performed by email and senior manager, professor and consultant.
telephone. The respondents were current or In the survey, the experts were asked to
retired employees of mining companies, mining consider the risk matrix described in Table 1 of
consultants, commodity trading companies and the authors’ previous paper (reproduced here),
end users of minerals that also then to suggest the weighting factors for the major
H.M. Park and M.G. Nelson, participate in mining projects. and minor risk factors, as percentages, based on
members SME, are student Individuals from the United respective their experience and opinions. The
and associate professor, at the States, the Republic of Korea, results for all risk categories are summarized in
University of Utah, email mini. Canada, Australia, Japan, the Table 7.
park@utah.edu or mike.nelson@ Republic of South Africa, The following sections consider each major
utah.edu Chile and the United Kingdom risk factor, showing how the experts rated the
responded to the survey. Eleven risks. For each major risk, the minimum, average
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 ME Online Exclusive
Table 2
The partner risk matrix.

Major Investment Minor Weight Grade and description

categories assessment categories
assessment proportion
Domestic 34.5 A Financially strong
Partner 8% partners Min 10 B Financially weak
risks Min. 5% Max 60
Max 30 % Foreign 65.5 A Listed company, senior company or with operating
partners Min 40 cash flow
Max 90 B Private company, junior company or in poor finances
C No corporate entity

and maximum investment assessment proportions range of partner risk is from 5-30 percent. The
indicated by the experts are shown. This category weight assigned to domestic partner risk is 34.5,
represents the proportion of the overall project with a range of 10 to 60; for foreign partner risk
risk that will be attributed to a given risk factor. it is 65.5, with a range of 40 to 90. For domestic
Similarly, the table for each risk factor shows partners, the major and perhaps the only criterion
the minimum, average and maximum weighting is the partner’s financial condition. For foreign
factors for the minor categories associated with partners, financial condition should be considered
each major risk factor, as indicated by the experts. in combination with the level of corporate and
legal organization. In particular, the capabilities
Results and discussion of the management team, the partner’s financial
Partner risk. Table 2 shows the average condition, and its ability of secure funding for the
proportion for partner risks is 8 percent and the project in question are essential considerations.

Table 3
The technical risk matrix.

Major Investment Minor Weight Grade and description

categories assessment categories
assessment proportion
Project 17.3 A Developing or operating
execution Min 5 B Engineering study
risk Max 20 (Scoping Study, Pre F/S, F/S)
C Exploration
Geological risk 38.6 A Measured and indicated resources, or proven
Min 20 and probable reserves
Max 50 B Inferred resources
43.2%
Technical Min. 25% C No source statement
risks Max 50 % Operating risk 20.7 A Standard extraction
Min 10 C New technology proposed
Max 40
Production 13 A Coal - 2Mt/a; copper - 100 kt/a
scale risk Min 5 B Coal - 1-2 Mt/a; copper - 50-100 kt/a
Max 30
C Coal - less than 1 Mt/a; copper less than 50 kt/a
Data reliability 10.5 A International standard applied (JORC, NI 43-101
Min 0 B Domestic standard
Max 20
C No standard

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Table 4
The partner risk matrix.

Major Investment Minor Weight Grade and description

categories assessment categories
assessment proportion
8.6% Product A Sutiable for investors market
Marketability Min. 5% standard 100 B Suitable for foreign market
Max 25 %
C Market uncertainty

These considerations are often made difficult by Experts from some medium- and small-sized
the fact that the bigger companies want to operate mining companies indicated that their companies
projects by themselves, while the smaller (and require a minimum grade when they determine to
often less qualified) companies are interested in invest or develop copper projects. For example, in
working with a partner, to decrease mining risks. sulfide deposits, copper grade should be greater
than 0.5 percent for opencut mining and greater
Technical risks. Technical risks are the most than 1 percent for underground mining. In oxide
critical factor in new investors’ investment deposits, copper grade should be greater than
analysis. Table 3 shows that the average assessment 0.3 percent for opencut mining. The average
proportion assigned by the experts to technical minimum size for a copper reserve to justify
risks is 43.2 percent. Most experts considered investment is 9.1 Mt (10 million st) of contained
technical risks as the most important of the major copper. In contrast, the bigger companies are
risks. willing to invest in prospects with lower grades,
The weighted average of project execution because they can finance bigger operations and
risk is 17.3 with a range of 5 to 20. In project achieve economies of scale that result in lower
execution, the initial stage is always more risky but unit costs. Thus, these companies can show more
it also carries a lower cost. Thus there is a range resources and reserves, even though many of their
of competing factors such as cost, approval risk, projects have lower grades.
construction risk and geological uncertainty. In For operating risk, the weighted average for
the case of geological risk, the weighted average is investment assessment is 20.7, varying from 10 to
38.6, varying from 20 to 60. The experts considered 40. Operating risk is the second most important
geological risk the most important factor among among the technical risks. The quality of the
the technical risks. Many of the experts mentioned feasibility study and the execution planning for
the importance of using definitions of resources a project have a big impact on the ultimate
and reserves from international standards such as success of an operation. These require a good
those previously cited. understanding of geology, ore quality and product

Table 5
The investment climate matrix.

Major Investment Minor Weight Grade and description

categories assessment categories
assessment proportion
County risks 35.2 A Standard and Poor’s A, Fitch A, Fraser top 15
Min 10 B Standard and Poor’s B, Fitch B, Fraser top 30
Max 50
C Less than above
Permitting 31.1 A EIS and mining permit approved, cleared land
Investment 18.2% Min 20 status
climate Min. 10% Max 50 B EIS approved in process
Max 30 %
C None
Infrastructure 33.6 A Secured transportation, power, water labor
Min 20 B Available transportation, power, water, labor
Max 60
C Two elements available

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Table 6
The investment climate matrix.

Major Investment Minor Weight Grade and description

categories assessment categories
assessment proportion
23 A Greater than 19%
IRR Min 15 B Greater than 15%
Max 40
C Less than 10%
NPV 57.7 A Positive NPR
Economic 22% Min 40 C Negative NPR
values Min. 10% Max 70
Max 40 %
PBP 19.3 A Less than 6 years
Min 10 B Less than 12 years
Max 20
C Greater than 12 years

markets, as well as proper equipment selection, the location of project, or if the product is of low
good mine planning and production management quality, compared to competitors.
and adequate process testing leading to design of
an appropriate processing facility. The weighted Investment climate. Table 5 shows that
average of the production scale risk is 13, with a investment assessment proportion for investment
range of 5 to 30. The production size required for climate risk was ranked by the experts at 18.2
investment depends on company size and project percent, over a range of 10-30 percent. This
specifics, and the opinions of the respondents ranking made investment risk is the third most
varied considerably. Experts from some coal important factor in assessing investment risk.
mining companies indicated that a good project For the political risks associated with investment
should be 4.5 Mt/a (5 million stpy) to more than climate, the weighted average is 35.2, and varied
45 Mt/a (50 million stpy) of coal. On the other from 10 to 50.
hand, representatives copper companies expected The matrix sent to experts for evaluation
annual production from 91 kt (100,000 st) to 1.6 Mt included some suggested guidelines for rating
(1.8 million st) of copper. The production scales political risk, based on rating provided by financial
shown are relatively small. The determination of services companies such as the Fraser Institute,
appropriate production size must be supported Standard & Poor’s and Fitch Ratings. Some
by robust financial analysis, thorough tradeoff companies are hesitant to invest in countries
studies, and excellent engineering and technical that are considered extremely risky, such as some
assessments. African countries. Recent investments by some of
In fact, all risk factors in the technical risks the major mining companies suggest that they are,
category depend on the reliability of data. at least in some instances, willing to bear this risk.
The accuracy of data affects all the other The experts were asked to consider permitting
factors in this category. The weighted average status on the basis of the degree of completion
assigned by the experts to data reliability is 10.5, of applicable environmental impact statements.
with a range of 0 to 20. Major mining companies While standards certainly vary among countries,
may be less concerned about data reliability this is considered a reasonable guideline. In
because they often have their own properties case of permitting, the weighted average is 31.1,
that are ready to develop with expert, in-house varying over a range of 20 to 50.
geologists and engineers. Finally, those surveyed were asked to consider
specific and important elements of the required
Marketability. Table 4 shows the experts’ infrastructure. The weighted average is 33.6 with a
weighting of marketability risk. The weighted range from 20 to 60.
average investment proportion is 8.6 percent, with
a range of 5-25 percent. Most trading companies Economic values. Detailed financial analysis
put great value on marketability, because the profit must be supported by a range of sophisticated
earned in trading is their main source of revenue. financial risk tools. Table 6 shows the experts’
Markets for new or dormant mining projects are weightings of factors in the economic values
usually more difficult to develop than operating matrix. The weighted average of economic values
projects. Marketability may also be affected by is 22 percent, the second highest factor among the

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 Table 7
Comparison of construction and pumping equipment costs, for high-efficiency ESPs versus conventional ESPs.

Major Proportion Minor Weight Grade and description Applied %

Domestic 34.5 A Financially strong 100 %
partners B Financially weak 50 %
Partner 8%
risks A Listed company 100 %
Foreign 65.5 B Private company 50%
partners
C No corporate entity 0%
Project 17.3 A Developing or operating 100%
execution B Engineering study 50%
C Exploration 25%
Geological 38.6 A Measured & indicated 100%
risks resources or reserves
B Inferred resources 50%
C No source statement 0%
Operating 20.7 A Standard extraction 100 %
Technical 43.2% risk
risks C New technology proposed 25%
Production A Coal 2 Mt/a, Copper 100 100 %
scale risk kt/a
B Median production 50%
C Coal - less than 1 Mt/a, 0%
copper less than 50 kt/a
Data 10.5 A International standard 100%
reliability applied
B Domestic standard 40%
C No standard 0%
A Suitable for investors’ 100%
Product 100 market
Marketability 8.6% standard B Suitable for foreign market 50%
C Market uncertainty 0%
A S and P, Fitch A, Fraser 15 100%
Country 35.2 B S and P, Fitch A, Fraser 30 50%
risks
C Less than above 0%
Investment 18.2% A EIS and mining permit 100%
climate Permitting 31.1 B EIS approval in process 50%
risks
C None 0%
A Secured infrastructure 100%
Infrastructure 33.6 B Available infrastructure 50%
C Limited infrastructure 20%
A Greater than 19% 100%
IRR 23.0 B Greater than 15% 75%
C Less than 10% 25%
Economic 22% NPV 57.7 A Positive NPV 100%
values
C Negative NPV 0%
PBP 19.3 A Less than 6 years 100%
B Less than 12 years 50%
C Greater than 12 years 0%

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 ME Online Exclusive

major risks. The range for economic values is from investment objectives. Thus we need to recognize
10-40 percent. All companies surveyed indicated that if a major mineral deposit exists, even in a
that they have their own required internal rate of high-risk country, investment may be made.
return (IRR). The average weight for IRR is 23,
and values range from 15 to 40. The respondents Conclusions
indicated that, in most cases, their companies Based on a survey of 31 experts, the criteria
preferred projects where the IRR is 10-20 percent, were revised and improved. It was concluded
depending on project status and location. that the logic and weightings of the matrix model
In case of net present value (NPV), the are robust and accurately reflect the realities of
weighted average is 57.7, with a range of 40 to 70, the various elements that come into play in an
the highest ranked factor among the economic investment analysis. The analysis showed that the
factors. According to the survey results, NPV most important areas relating to investment risk
generally plays a major role in decision making are, in order of decreasing importance:
by larger firms. The responses in the survey
regarding the payback period varied considerably. 1. The nature of the resources – resource,
The weighted average is 19.3, varying from 10 to grade, access, and development potential
20. The survey indicates that the payback period 2. Economic values – positive NPV
is relatively less important than other factors but 3. Marketability – suitable for newcomer
all companies, especially the smaller ones, prefer 4. Operating risk
the payback period to be short. Most companies 5. Country risk and environmental
hope to see less than 6 to 12 years in the payback constraints related permitting
period.
The authors suggest that, although a new
Summary and discussion investor may be late coming into the market
The improved risk assessment criteria, based for mining properties, that investor will be
on the opinions of the 31 experts surveyed, are able to assess its risks and narrow the gap with
shown in Table 7. The weight for each minor larger mining companies using the results model
factor is determined from the grade assigned presented here. By using this model, an investor
to that factor. The applied percentages for each will be able to complete those reviews more
grade were based on the authors’ experience, with quickly and more effectively, making it possible
some slight modifications as suggested experts’ to review more projects, or to review the same
experience. number of projects in great detail. This should
Of course, the risk assessment criteria lead a mining newcomer to better investment
should be applied differently for each company, decisions.
depending on the size of the organization, the It is suggested that the use of this method
magnitude of the mining projects where the will facilitate more rational and consistent
company is involved, and the company’s internal investment decisions, which will allow potential
investment philosophy. Smaller companies investors to develop more precise business
may take on more risk because there may be plans for developing overseas mineral resources.
fewer projects available to them, compared to The proposed model and the associated risk
international mining majors. Also major firms may assessment criteria will lead to reduction of the
have greater resources, and may be more willing risks associated with mineral investments by
than other companies to take risks. They may facilitating systematic research and analysis of
be marginally less risk averse than their smaller the technical and economic feasibility of mining
competitors, depending on their assessment of the projects. n
host country and other factors.
In considering overall project risk for an
investor, it is important to recognize the objective
of the investor in making the investment. In some Read part three of this series on Oct. 14
cases this might be to generate a clear financial
return. In other cases it might be to secure exclusively at
access to the resource for long-term resource
security. There may be several other reasons for
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investment. Risk must be considered against the

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