Definition of Project Finance

Financial institutions use a particular type of lending known as project finance when funding a developing mining project. The loan is repaid from the cash flows generated by the project with no recourse, or only limited recourse, to the company as a whole. In non-recourse lending, no tangible assets exist until the operation is brought into production.

Clearly the lender will be exposed to all the risks associated with the project which could result in revenue being insufficient to service debt. Banks will thus always take a conservative stance when evaluating the economic viability of a project and may look to the project sponsor to provide corporate guarantees for the loan. If the sponsor is a junior company with little or no collateral, the role of government-backed guarantees becomes important.

Project finance is not readily available to junior companies with proven deposits but no operating production. These companies may instead generate funds from the equity market to bring the project to the stage of being a viable operation. Once steady cash flows have been established, debt finance then becomes both possible and attractive and is used to develop the project to its optimum potential.

Project finance is also used to develop a particular component of well established operations, such as new mining equipment, the rehabilitation of old or the sinking of new shaft systems, or upgrading of a treatment plant.

Why Project Finance?

Mining projects are capital-intensive ventures with an inherently high risk, and as such are often not deemed sufficiently creditworthy to obtain traditional financing. The project sponsors may be unwilling to carry the risks and assume the debt obligations associated with traditional financing even if it is available. Project finance is an attractive alternative as it allows the risks associated with the project to be shared with the principal lender.

The main advantage of non-recourse funding is that the sponsor has no obligation to service the debt if cash flows generated through mining operations are insufficient to cover the principal and interest payments on the loan. The lender has the security of a collateral guarantee from the sponsor and an economic completion test (ECT) if a project is being developed from the feasibility stage.

An ECT acts as a safeguard for the lender against any flaws in the feasibility study encountered during the construction phase and over the start-up period of the project. Once the project has passed the ECT then the guarantee falls away, and the only asset the bank can claim is the actual cash flow itself.

Sponsors typically seek to finance the development and construction costs of a mining project on a highly geared basis, often around 60% to 70% debt. Such financing permits the sponsor to put fewer funds at risk and develop the project without diluting its equity investment in the venture.

Project finance can also lead to reductions in the cost of capital, as lower cost, tax-deductible interest is used rather than higher cost, taxable returns on equity. Financing should be structured to maximise tax benefits and ensure that all available tax benefits are taken advantage of by the sponsor.

Project Financing Participants

Sponsor/Developer

The sponsor or developer of a mining project is the organising body that controls and has an equity interest in the company or other entity that owns the project. In mining projects there is often more than one sponsor, and these will normally join together under a joint-venture agreement to form a single corporation/partnership that will essentially function as the project owner.

A joint-venture agreement must be carefully drawn up with legal involvement and must clearly state the respective rights and responsibilities to the project of the parties involved.

Lender

The lender of project financing is a financial institution or group of financial institutions that provide the capital loan to the project company. Lenders are usually corporate investment banking groups, though NGO involvement in project finance is important in developing world countries. Due to the non-recourse nature of project finance, the lender takes a security interest in all of the project assets.

Government

If the sponsor is a junior company with little or no collateral, governments may be required to provide the lender with a guarantee on the loan. This practice is particularly common in the former Soviet Union region, where formerly state-owned projects now seeking to develop in the private sector are backed by national governments in their applications for project finance.

An Introduction to Modelling Metal Project Finance - February 1, 2010

Schedule to Project Finance

The development of a project to the stage where project finance becomes viable involves going through the following stages:

resource definition drilling of exploration target;

preliminary feasibility study;

further project development expenditure;

full feasibility study; and

information memorandum.

Preliminary Feasibility Study

Once an economic mineral resource has been identified by an exploration group, a preliminary feasibility study is undertaken by a small group of experienced professionals to determine if further expenditure on the project is justified. The foundation of the pre-feasibility study is the development of a geological model which forms the basis of the reserve estimation.

Geostatistical techniques can then be applied to determine if the deposit has been correctly sampled and provide an indication of the uncertainty associated with the estimated grade. The whole integrity of a project will be called into question if the geostatisticians have to place any qualification on the reliability of the sampling programme.

Once the geometric form and size of the deposit and the concentration of the mineral have been established, an initial design for the mine and mineral processing stages can be considered. It is particularly important that the rate of production should be on a scale which is appropriate to the size of the ore body. A mine life much in excess of 10 years does not enhance the net present value (NPV) of the project, while too short a mine life does not permit adequate return on capital.

A simple discounted cash flow analysis based on some broadly based engineering assumptions can then be set up, provided the reserve estimation is reliable. This will establish the overall financial viability of the project and allows a basic sensitivity analysis to be undertaken.

Full Feasibility Study

Most junior companies do not have the resources required to meet the high cost of generating all the data needed to undertake a full feasibility study and then fund the study itself. This phase of project development is often funded by bringing on board a major joint venture partner or by raising finance through share issues on the stock market.

Essentially, the technical component of the prospectus for a market listing on one of the senior stock exchanges involves the preparation of a pre-feasibility study. Typically, a junior company with a proven deposit will attempt to establish a production capability once equity funding has been obtained. This will provide material for a full feasibility study.

Before a mining project can proceed from the exploration and evaluation stage to full-scale production, all available data and relevant factors are compiled and evaluated as part of the full feasibility study. This should analyse every technical, financial and other aspects of the project. The major topics that are expected to be covered include:

geology;

grade and reserve estimation;

mining method and plan;

mineral processing design plan and test results;

capital costs, taxation and royalty assumptions;

operating cost estimates;

product price assumptions and negotiated sales contracts;

environmental considerations and operating permits; and

financial modelling.

Typically, a full feasibility study would involve a team of at least 10 professionals who could take up to a year to complete the task. It would be used as a blueprint when calling for tenders and awarding multi-million dollar contracts.

Information Memorandum

An information memorandum builds on the full feasibility study and results in the document required by the bank in any application for debt finance. While this document would incorporate a full technical feasibility study, a bank would also require background information on the borrower.

This includes audited company accounts, a profile of the company structure and senior personnel, the legal framework of the company, the proposed loan terms and all the necessary information on exactly how the loan will be administered, controlled and protected. This material is all incorporated in the information memorandum.

Sensitivity analysis would be undertaken on the financial model and key parameters such as operating costs and capital costs would be varied. Clearly much greater confidence will be placed on estimates provided by an experienced mining company than junior companies with no production experience.

While junior companies can hire consultants to provide technical reports covering operating and capital costs acceptable to the lender, they will need to assemble an experienced management team. Getting a mine and processing plant to perform to their design capabilities is as much an art as a science. A proven track record is clearly an advantage.

The information memorandum will also require an environmental audit to be carried out with specific reference to liability for previous mining activity. Superfund legislation in the US can hold lenders responsible for environmental damage at sites where loans have long since been repaid, or where degradation occurred before it was owned by the mining company to which the bank has provided debt finance.

The Lender's Decision Making Process

The lender will initially review the submitted information memorandum and it is then frequent practice to hire an independent consultant to perform a due-diligence test or prepare an independent feasibility study. Banks will construct their own financial models and carry out detailed sensitivity analyses. Potential risks must be identified and quantified prior to committing to a project.

Given the number of independent and interdependent variables present in a mining operation, it is quite impossible to envisage all possible scenarios that could prevail during actual mining. Monte Carlo techniques are sometimes used to simulate some of the possibilities, but these assume the statistical independence of the parameters, which is clearly not valid.

Once the project finance analysts have reviewed and accepted the information memorandum, their findings will be presented to a credit committee which is responsible for the ultimate accept/reject decision. The background information on the borrower and credit guarantees are particularly important at this stage.

The Purpose of Modelling

The size and complexity of a project's financing requires accurate financial analysis, and modelling plays a vital role in charting a project's cash flows. Both the lender and sponsor alike need to establish that future revenues will be of sufficient magnitude to meet loan repayments on schedule while still producing a residual profit for the sponsor.

Discounted cash flow (DCF) modelling thus forms an integral part of the preliminary and full feasibility studies and allows the economic viability of a project with debt finance to be tested.

Cash flow modelling should be undertaken throughout project development, with an increasing level of detail as more data becomes available. A preliminary feasibility should include a simple DCF model that allows the overall financial viability of the proposed operation to be established.

By the time a project reaches full feasibility level, detailed engineering studies and market evaluations will have been undertaken and capital costs, operating costs, and predicted sales levels can be defined with confidence. A full feasibility cash flow model will thus be more refined and will incorporate tax and royalty formulae and full project financing scenarios. A detailed sensitivity analysis will also be included.

In evaluating an information memorandum, the lender will scrutinise the cash flow model of the project and employ independent consultants to verify the cost assumptions used. The lender will perform a risk analysis on the model inputs and analyse the project financing component in order to determine the bank's optimum lending scenario.

DCF Analysis and the Time Value of Money

The principle of discounting cash flows is based on the logic that money received in the future is worth less than that same amount received today, due to the opportunity of earning additional revenue on that sum if it were to be invested elsewhere. Suppose there is a choice of receiving $1000 today and investing it or receiving $2000 in ten years time.

Which is the most valuable outcome? The answer clearly depends on the prevailing interest rate. If it happens to be 5%, the money would be worth $1629 at the end of ten years and so it would be better to wait. On the other hand, if the current rate happens to be 10% the sum would be worth $2594 in ten years time and so it would be preferable to take the money now and invest it. The break-even interest rate in this scenario is about 7.2%.

Modelling incremental discounted cash flows analyses the financial viability of a project by not only testing that generated revenues are substantially greater than costs and debt service requirements, but also by measuring the present value of those profits. The underlying philosophy in DCF analysis is that the project is to be compared with investing the same stream of cash flows elsewhere. One of the essential questions in DCF analysis is how to choose the discount rate.

Discounted cash flows can be used to determine the Net Present Value of the project, which is essentially a present valuation of the potential of the deposit to generate future profits. NPV is calculated as follows:

Projects with an NPV greater than zero will produce greater revenues than their costs at the minimum acceptable rate of return (the discount or hurdle rate), and mutually exclusive investment opportunities are ranked by magnitude of NPV.

The Internal Rate of Return (IRR) and Payback Period of a project can also be calculated from a model of future cash flows. IRR is essentially the discount rate at which NPV at time zero of all cash flows is equal to zero, and is calculated as follows:

A project is profitable if the IRR exceeds the opportunity cost of capital (the project's discount rate), and mutually exclusive scenarios are ranked by magnitude of IRR.

Payback period is simply the time taken for the initial capital investment to be recovered by the stream of annual positive cash flows, and is not generally used alone for making an investment decision as it takes no account of the time value of money.

Developing a Spreadsheet-Based Model

The most important elements to remember when developing a spreadsheet model of projected cash flows are clarity, consistency, and flexibility.

The spreadsheets used in some projects can be very large and complicated, with entries going from page to page. Spreadsheet cells call for results from other cells which in their turn call other cells. It is not always easy to follow the logic of the steps being carried out and, when the spreadsheet is very convoluted, there is a real possibility of artefacts being introduced. Even if there are none, it becomes very difficult to test the project's sensitivity to input parameters.

There is great benefit to be gained from a consistent basic layout with a clear flow of logic throughout. Input pages, calculations, and output reports should be kept in separate areas. This course has employed the use of IC-MinEval, a purpose-designed software package for the financial evaluation of mining projects.

IC-MinEval automates all the stages required to produce an Excel-based DCF model of a mining project through a series of clearly defined menu-driven forms that prompt the user to enter all the necessary technical and financial variables. Once the key technical and financial data has been entered, it is checked and a comprehensive series of Visual Basic routines ensures that a set of Excel worksheets are generated to form a customised DCF model.

The DCF method of analysis has the advantage that a model can be constructed which reflects the primary technical features of the project. This does, however, require a level of knowledge about the operation which may not be available outside the company, but it is still possible to develop a model based on comparative scenarios which can provide the basis for a preliminary valuation. This is the approach followed by IC-MinEval and adopted in this course.

The first step in creating a spreadsheet cash flow model is to compile all available project information on an input sheet database. This includes all the technical information which will allow calculation of mine life, annual ROM production and annual production of saleable commodity. The input sheet must also contain project cost information to allow calculation of annual capital, operating, and transportation costs. Finally, financial data must be input, including sale price, tax and royalty rates, project discount rates, and project financing information.

A separate series of worksheets can then be created to calculate the annual production, sales and costs. The results are then used to construct a model of the cash inflows and outflows in each year of the project's life.

A mine life much in excess of 10 years does not enhance the NPV of the project, while too short a mine life does not permit adequate return on capital. A project with a very long potential lifespan should thus only be modelled over the first 10 to 15 years of its life. It is unlikely that a mine with a longer life could operate effectively without additional capitalisation and so the cash flow forecasts for the later years would be highly subjective in any case.

Project Input Data

The input data needed to construct a spreadsheet-based cash flow model is divided into project technical information and financial information. IC-MinEval has a series of input screens which prompt you for all the necessary data, navigated from an input menu screen (Figure 1). The basic technical inputs can be subdivided as follows:

general project information;

resource information;

mining rates;

costs;

commodity price;

expenditure; and

environmental and closure provisions.

General Information

General information is required on the commodity/ies, and on the mining method that is to be used to exploit the resource. The choice of mining method has important implications for the rate of production, equipment, capital expenditure and mining operating costs. The permitting and construction period also needs to be established in order to determine the total pre-production period of the project, the time after the initial capital expenditure (capex) has been spent before production (and revenue) can begin. In terms of project finance, the end of this period signifies completion when the project's cash flows become the primary source of debt repayment.

Resource Information

Information is required on the size of the deposit, the grades, and several other mining parameters. The total mineralised volume of the deposit revealed by geostatistical evaluation can be multiplied by the specific gravity of the particular ore-type to calculate the total in situ ore reserve tonnage. The expected mining recovery (the percentage of the in situ ore that can be mined) provided by the engineering study is multiplied by the total in situ ore tonnage to determine the total ore to be recovered.The expected dilution (the amount of waste rock that is mistakenly mined as ore), stripping ratio (the amount of waste material needed to be removed for every unit of ore mined in surface operations), grade (average grade of ore mined that is higher than the economic cut-off) and plant recovery (the percentage of the commodity contained in the ore rock that can be extracted by the plant) are also required in order to establish the quantity of the saleable commodity produced.

Mining Rate

The mining rate needs to be established because it directly affects the mine life and capex, as the more rock mined per year, the larger the processing plant and equipment that is required. In addition to the average rate during full production, it must also be established if the mining rate is to be varied over the first few years of production, to model a more realistic slower start up rate. It is particularly important that the rate of production should be on a scale which is appropriate to the size of the ore body. A mine life much in excess of 10 years does not enhance the net present value of the project, while too short a mine life does not permit adequate return on capital.

Costs

The reliability of a cash flow model often hinges on the accurate determination of the project's capex and operating costs. If these are known, or an accurate estimation is made from similar operations, then these figures can be entered directly. However, project costs are often not known with any degree of certainty during the construction of an early financial model. In this case, O'Hara cost formulae can be used to calculate rough estimates of capex and operating costs (OHara and Suboleski (1992)).

Capex

Capital costs (capex) are costs in a particular year that will produce benefits in later years. The major capital requirements in mining projects are the cost of constructing the mine site (including purchase of mining equipment), mill and processing plant. Additional costs and expenses that will be incurred in developing a project are termed capital overheads and can be entered into the model as a percentage of the total capex.

Operating costs

Operating costs (op costs) are costs that only produce a benefit for that year and are calculated annually. In order to establish the total operating costs per tonne of saleable commodity, the costs of mining ore, mining waste and processing must be established. There may be annual fixed operating costs (e.g. administration costs, salaries, office overheads) that must also be incorporated into the model. If coal or an industrial mineral product is the commodity in question, an additional transport cost component must be established.

Commodity Price

The expected sale price(s) of the product(s) and how this/these will vary over the project life must be established. It must be decided whether the commodity/ies will be sold entirely on the spot market or whether a percentage will be forward sold at a different price. Hedging details must be incorporated into the model if forward sales are to be applied.

Expenditure

The model must reveal how capex payments are to be spread over the first few years of the project and the amount of working capital to be used must be established. The capex is unlikely to all be employed in the first year of the project, depending on delays and the construction period. Working capital is the capital reserve required for the day-to-day running of the operation and can be expressed as a percentage of the annual operating costs, normally set at around 25%.

Environmental and Closure Provisions

A financial model should include the expected environmental costs and additional costs associated with the project's closure. This may incorporate a fixed bullet payment at the end of the mine life to cover environmental rehabilitation costs, a sink fund at the beginning of production that acts as an environmental bond to cover rehabilitation costs, and annual environmental costs during production and after mining to cover on-going costs. It must be established how long after completion of mining the annual rehabilitation costs have to be paid.

Basic Financial Parameters

The financial inputs to the model set the basic financial parameters of the project, such as tax and inflation rate, depreciation, and project financing scenario (Table 1).

Discount Rate and Cost of Capital

There are two methods of discounting that can be used to calculate the NPV in a financial model. The pre-determined discount rate can be used or the weighted average cost of capital (WACC) can be used. WACC is calculated as follows:

As the NPV is calculated on the cash flows before funding but after tax, an allowance is made for the tax implications of interest payments on debt. The cost of debt is calculated as:

The WACC thus varies according to the debt/equity ratio of the project's funding structure. The cost of equity is generally higher than the cost of debt, reflecting the higher rate of return required by the equity holders in comparison to the 'cheaper' interest rate on debt. Thus the greater the percentage of total capex funded by debt, the lower the WACC and thus the more favourable the calculated NPV. This is an essential principal of project finance.

Project Finance Parameters

Input information is required to set up the financing structure of the project including the amount of debt and equity, interest rate and repayment schedule.

Capital structure

The debt/equity ratio and the size of debt will be decided by the lender. This can be expressed as a percentage of the total financing requirements that will be funded as debt. The optimum draw-down period for the debt funding will be agreed between the project sponsor and lender, and may be drawn out over as long a period as the first five years of the project.

Loan type and repayment schedule

The schedule for loan repayment needs to be established in order to complete the cash flow model. The number and size of loan repayments will be negotiated between the lender and sponsor, as will the grace period, if any, before repayments must commence. Loan repayments can be made in equal instalments (straight loan) or made proportional to the production rate (production loan).

There will be other cash flows associated with organising the project finance that must also be included in the early years of the model. These include an up-front fee by the bank for arranging the loan (a percentage of the total loan available), a commitment fee (an annual fee charged on the amount of the loan that has not been used), fixed charges (for agents' fees, legal documentation, independent reports, etc.) and contingency to act as a cushion against unexpected cost rises, etc. (a percentage of the total required funding).

Loan interest rate

This is the annual rate of interest on the debt as set by the lender.

Return on equity

This is the annual expected return on equity invested as funds. This can be calculated by a variety of methods including the Capital Asset Pricing Model (CAPM). It is often linked to the overall company gearing of the project sponsor.

Demand for Nickel

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Introduction

Nickel is one of the more common elements in the composition of the earth, but it is sparingly distributed in the earth's crust. Nickel is usually found in modest concentrations and occurs in conjunction with a wide variety of other metals and non-metals. The world's nickel resources occur in two main geological settings:

in secondary minerals such as garnierite and limonite contained in nickel-bearing laterites; and

in sulphide minerals associated with mafic and ultramafic igneous rocks.

The nickel grade of lateritic ore typically ranges from 1-2%, and that of sulphide ore from 1-4%.

Nickel is of considerable economic and strategic importance to many countries, its main use being a critical component in the development of metal alloys. More than 80% of the world's nickel production is used in alloys, and about 60% of global nickel is used specifically for the manufacture of stainless steel (NIDI (2005)). Nickel is also used in the manufacture of Monel Metal, a corrosion-resistant alloy used by the shipbuilding industry, and is an important strategic metal. Throughout the early 1980s the growth in nickel production exceeded the growth in demand, but the late 80s and early 90s saw this trend reversed as the number of emerging new applications of stainless steel, combined with its rapidly-improving price competitiveness, generated a sustained growth in demand for nickel metal. Indeed, China's use of nickel-containing stainless steel and its use of primary nickel have grown dramatically and with impressive consistency over the last fifteen years (NIDI (2004)). Nickel stocks were rapidly depleted over the middle years of the 2000s, but recovered during the 2008/9 world financial problem period.

Concern over depleting reserves of sulphide ores, the traditional source of nickel metal, and high nickel prices led to renewed interest in nickel laterite ores that were previously thought too technologically difficult and costly to treat. The introduction of High Pressure Acid Leaching (HPAL) as a large-scale hydrometallurgical method of concentrating nickel metal and cobalt by-products from limonitic laterite ore appeared to enhance the feasibility of laterite deposits as a long-term solution to the continuing demand for nickel. However, poor initial operating performances at major new HPAL processing plants have cast doubt over this technology's ability to provide a large-scale supply of nickel while operating economically. So sulphide deposits remain the main source of nickel metal. The following working sessions therefore will concentrate on sulphide nickel deposits and provide a review of the major technical aspects of nickel projects that must be taken into consideration in the economic analysis of such operations. Part 5 introduces a typical nickel sulphide case history with which to demonstrate the modelling of nickel project finance.

Prices and Markets

The nickel price is closely linked to the global demand for stainless steel which is in turn governed by industrial productivity associated with the global economic climate. 2007-08 witnessed a huge fall in London Metal Exchange (LME) nickel prices (Figure 1), principally due to the collapse of the world economy resulting in huge drop in demand for and production of stainless steel associated with the recession. 2009 has witnessed a modest resurgence in the LME nickel price as demand has outstripped production.

Since 2002, a booming commodities sector, partly driven by the rapid growth of China, put substantial pressure on nickel suppliers to meet demand. This in turn had a huge impact on prices. However, forecasting forward much is dependent on how sustained the 2009 easing of the recession will be.

The general trend of increasing nickel prices in through most of the mid 2000s, generated renewed interest in the nickel sector. Western Australia in particular witnessed significant increases in production over the past period, with several new major nickel sulphide and laterite projects arising. However, the new HPAL laterite operations in the region did not live up to expectations, with over-optimistic production forecasts, commissioning problems and unforeseen low recovery rates all to blame.

Types of Nickel Deposits

As previously mentioned, nickel is concentrated in economic quantities in two very different types of ore deposit: nickel laterites and nickel sulphide deposits. Each deposit type has a distinctive set of ore and accessory minerals and is located in very different geological settings. The different physical and chemical properties of each ore type means the treatment processes to extract the nickel from lateritic and sulphide ores are also very different. Nickel sulphide operations utilise froth flotation techniques to concentrate nickel sulphides, while operations with silica-rich garnieritic laterite ore have traditionally used conventional pyrometallurgical processes to extract the nickel. Limonitic nickel laterite ore requires hydrometallurgical treatment, and pressure acid leaching techniques have recently been developed. However, these are still having problems reaching design capacity and so sulphide nickel deposits remain the main source.

The low concentration of nickel and abundance of accessory minerals in nickel deposits makes ore processing the critical component of many nickel projects. Indeed, the design and construction of an appropriate treatment plant is often the key to an operation's success and usually accounts for the greatest proportion of a project's capital expenditure. The following working sessions discuss in greater detail the technical aspects of a traditional nickel sulphide project. This scenario sets the scene for the later financial modelling of a large-scale nickel project in Western Australia (see Part 5, Case Example - Modelling Nickel Project Finance).

Nickel Sulphide Deposit 1

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Introduction

The critical issues in the project financing of nickel projects will now be assessed by modelling a theoretical case scenario set in Western Australia. The last decade of the 20th century witnessed renewed interest in the state's nickel sector, with major new developments in traditional nickel sulphide provinces but also the exploitation of substantial nickel laterite resources utilising pioneering HPAL technology. Though not based on any existing operations, the case example is a realistic representation of the current nickel mining scenario in Western Australia, and the figures used are reasonable reflections of those that might be encountered.

The IC-MinEval input screenshots are included but the user should try to become familiar with the software's format from by modelling the case example (see General Information ). The full set of Excel output sheets are available to view in the model analysis section (see Nickel Sulphide Model Analysis).

CASE HISTORY 1: Nickel Sulphide Deposit, Western Australia

"It is proposed to exploit a komatiite-hosted nickel sulphide deposit located within the Archaean greenstone terrain of Western Australia's Yilgarn Craton. The deposit lies close to the surface and reserves are extensive, but the deposit is low-grade in comparison to most sulphide nickel resources across the globe.

An open pit mine with a capacity of just under 31,000 tonnes of ore per day (in calculations use 360 working days per year) is to be established. The mining reserves are 150.4 million tonnes of in situ ore with an estimated grade of 0.6% contained nickel. As is common with nickel sulphide deposits, the ore also has some economically recoverable copper, grading 0.1%. It is estimated that dilution will be 5% and the mining recovery will be 85%. The operation's major produce will be a high quality nickel sulphide concentrate for sale to a nearby smelting facility. The project will operate at 60% capacity in the first year of production, 80% in year two, and will reach full production capacity by year three.

The deposit benefits from an unusually favourable life-of-mine stripping ratio of 3.2 tonnes of waste for every tonne of ore mined, meaning that the daily tonnage mined, ore plus waste, will be 130,200 tonnes. Ore will thus be mined by conventional open pit truck-shovel methods, utilising hydraulic excavators and large-scale dump trucks. Waste rock will be hauled to designated disposal areas with on-going surficial land rehabilitation. ROM ore will be taken to the mill where it will undergo comminution before entering a selective sulphide froth flotation treatment plant. The plant is capable of recovering 65% of the contained nickel in the ore as nickel sulphide concentrate -- the remaining nickel is tied up as unrecoverable silicates. Ninety percent of the contained copper is recoverable.

Purchase of mining equipment and construction of the mill will cost approximately US $165 million. The capital investment required to construct the processing plant is estimated at US$ 275 million. There will be capex overheads of 10%. There is a one year delay for securing permitting requirements, followed by a two year pre-production period to construct the plant and mine infrastructure. Sixty percent of the capital cost will be incurred in the first pre-production year with the remainder incurred in the second pre-production year. The unit costs of mining have been estimated at US $2.5 per tonne for ore and US $0.75 per tonne for waste respectively. Processing costs are estimated to be US $3.5 per tonne of feed ore. There are annual fixed costs of US $10 million and working capital is calculated at 25% of annual operating costs.

Nickel is to be sold on contract to a nearby smelting facility and the cost of transporting the sulphide concentrate is so small as to be considered negligible. The assumed nickel price is US $14,000 per tonne and for copper US $3000 per tonne of metal-in-concentrate. Revenues have been amended through a downward metal price estimate to take into account a net smelter return or off-take agreement.

Amendments to metal price forecasts are carried out through an allowance for concentrate toll treatment or purchase. In addition, credit and penalty adjustments arising from the concentrate's chemical and physical properties as well as the smelter's specific requirements are also taken into consideration.

Assume a tax rate of 30% of taxable income. Capital allowances can be claimed as straight-line depreciation over the mine production life. A royalty of 3% of gross nickel and copper value is payable. Environmental costs will amount to US $1.5 million per annum during mining and US $5 million in each of the two closure years to reflect the additional costs of removing the mine and plant infrastructure and rehabilitating the land back to its pre-mining condition.

The project sponsors are seeking 70% debt funding of the total capex and have been offered an interest rate of 8.5% on the loan capital. The assumed cost of equity is 15%. NPV will be calculated using the weighted average cost of capital (WACC), reverting to the cost of equity once debt has been paid off.

For large corporations it is inappropriate to evaluate a project based on the way it is financed as this leads to the varying of NPV for otherwise identical projects for no clear economic reason (Brophy, 2003). This means that although project debt reduces with time, company debt stays constant as money is borrowed for other projects.

However, in this case study financing is considered from a 'ring fenced' project perspective in which the applicable WACC varies throughout the project life according to the debt:equity ratio.

The banks require straight loan annual repayments over 5 years and are willing to grant a 2 year grace period on repayments. An up-front fee of 1% of the total debt is assumed with a 1% commitment fee. Fixed financing charges will amount to US $0.5 million and there is a contingency of 10% to act as a cushion against unexpected cost rises."

Basic Mine Information

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Nickel Laterite Model Analysis

Once the data is entered into IC-MinEval as detailed above, a fully integrated Excel-based spreadsheet model of the proposed nickel sulphide project is created. A glance at the model output sheet "wshtDCF" reveals that the project is certainly profitable, producing an NPV of US$1008.36 million with an IRR of 46.19%. (Figure 1) The "funding" option of IC-MinEval has optimised the loan draw-down and injection of equity to ensure that the cumulative cash flow after funding is positive throughout, despite the large negative net cash flows before funding in the early years of the project due to the enormous expenditure on developing the mine and processing plant (Figure 1). IC-MinEval has calculated the maximum cash exposure at US$484.00 million, reflecting the high capital investment of the project and the amount it stands to lose in the event of failure to reach production.

From a banker's perspective, the project economics look to be fundamentally secure. The annual cover ratios (interest, principal and cash cover ratios) calculated in "wshtFinance" are significantly greater than 1 even in the initial years of debt repayment (Figure 2). The project will therefore have little difficulty in servicing its debt from cash flows generated by production revenue.

From an equity shareholder's perspective, the project also looks favourable. The "wshtTax" shows that the project does achieve considerable savings on tax, over US$50 million, as a result of interest on debt reducing taxable income. This somewhat offsets the negative effect of debt servicing on the project's cash flows.

Nickel projects commonly produce other by-product metals, and these often have a significant impact on the project's economics. The "wshtRevenue" in IC-MinEval allows you to analyse the contribution of each product to the project's revenue stream. Copper is produced as a by-product to nickel in the case example and, though it makes up a significant proportion of the operation's total metal produce (due to high copper recovery rates), it accounts for a far lower proportion of the project's annual revenue (Figure 3).

Project Sensitivity Analysis

IC-MinEval also has a facility for running a sensitivity analysis to show how the viability of a project is affected by changes in key parameters. The calculations are made on "wshtSensitivity" and the resulting spider graph is displayed in "Sensitivity" (Figure 4). The spider diagram compares the percentage change in a parameter against the percentage change in either the NPV or IRR. IC-MinEval allows you to select the variables you wish to test and run the sensitivity analysis by a series of user-friendly menu driven forms. The nickel sulphide case history has been tested for sensitivity to changing nickel and copper grade, processing plant capital expenditure and processing operating costs (Figure 4).

It is immediately clear that the project is most sensitive to changing nickel grade, with a 10% increase/decrease in grade resulting in a 16% increase/decrease in the NPV (Figure 4). Grade variability is of course governed by nature and so, other than ensuring grade control is effectively maintained in the mining and processing operations, there is little that can be done to minimise this risk. However, sensitivity to changing grade is analogous to a project's sensitivity to variation in recovery rates.

Project recovery rates are in part governed by mining and processing technology, and this sensitivity analysis indicates the importance of maximising nickel recovery in sulphide projects. The project has a relatively low nickel recovery rate of 65%, reflecting the fact that bulk sulphide flotation can only recover and concentrate sulphide nickel, and so will 'lose' a significant amount of ore nickel that is tied up in other minerals. In the case of such a low-grade deposit that also has technical constraints on its ability to achieve high processing recoveries, the key to maximising nickel recovery, and thus NPV, lies in maximising mining recovery to ensure an optimum supply of ore to the concentrator. This project appears to be meeting that directive, utilising efficient, large-scale mining equipment to supply over 11 million tonnes of ore per annum to the concentrator.

The project's NPV is not nearly so sensitive to changes in the processing plant capital expenditure and operating costs (Figure 4), indicating that there may be scope to increase expenditure on the plant in an effort to improve processing recovery rates. The sensitivity analysis also reveals that large variations in the copper grade/recovery have minimal impact on the NPV, reinforcing previous conclusions that the production of copper by-products makes little difference to the project's economic viability.

Previous FigureNext FigureFigure 1. Sample of DCF model worksheet -- nickel sulphide project example. Compare the cash flows and accumulated cash flows before funding with the cumulative cash flows after funding. The project should have few problems meeting future costs and servicing it's debt.

Previous FigureNext FigureFigure 2. Sample of "wshtFinance" -- financial ratios for nickel sulphide project example. The Cash Cover, Interest Cover and Principal Cover ratios are all of reasonably high magnitude and suggest that the project is secure in its ability to service debt.

Previous FigureNext FigureFigure 3. Sample of "wshtFinance" -- financial ratios for nickel sulphide project example. The Cash Cover, Interest Cover and Principal Cover ratios are all of reasonably high magnitude and suggest that the project is secure in its ability to service debt.

Previous FigureNext FigureFigure 4. Sensitivity spider chart for nickel sulphide project example.

Enter Project Data

Open IC-MinEval and bring up the main menu box, Figure 1. Click on General Information.

General Information

After entering the project name, the project basics are entered (Figure 2). As this case history is a nickel/copper project, nickel and copper are selected.

After the deposit type has been defined, the mining method is selected from the available list. The differing mining methods enable different options including stripping ratio for surface mines and specific costs information. For this case history, the mining method "open pit" is selected.

The pre-production period allows both the permitting period and the construction period to be defined. This is useful if you have a period before the first expenditure and/or production starts. In this case we have a 1 year permitting period and two pre-production years during which construction takes place and so we enter 2 into the construction period.

Resources

Once the project has been defined we can set up the details of the project's resources and grades (Figure 3).

We have been told the project has an in situ resource of 150.4 million tonnes of in situ ore. The in situ resource is what is in the ground and will be more than we are actually able to mine. Based on the geology we can calculate that given a specific gravity of 3.2, the total mineralised volume is 47 million m3. Alternatively, if you do not know the SG, you can enter 1 and enter the volume as the in situ tonnage as this will not effect the calculations. As you enter values into the forms, several calculations are made and these are also displayed on the form, such as in situ tonnage, total mined, etc.

We can now determine how much of the in situ ore is mined. In this case we have entered 85% to reflect the fact that some of the material is uneconomic to extract. Next we can enter the dilution factor, in this case 5%, which means that for every 9.5 tonnes of ore we extract we will also extract 0.5 tonnes of sub-economic rock. Having some dilution is normal, as it is often caused by mining conditions, but the key is to keep it to a minimum as it is also often caused by poor grade control.

Entering these values we can immediately see that over the life of the mine we will be extracting 6.39 Mt of sub-economic material. The stripping ratio is set at 1 tonne of ore for every 3.2 tonnes of waste mined.

Once the total resource has been defined we are able to define the grade and plant recovery. The in situ grade here is 0.6% nickel and 0.1% copper, and we have been given a plant recovery of 65% for nickel and 90% for copper. These are entered under the relevant metal tabs (Figure 3 shows the copper figures).

Based on these figures we will recover 127.84 million tonnes of ore in situ from which we are able to recover 0.5 million tonnes of nickel and 0.12 million tons of copper. Tabs are displayed for each metal type for entering the grade and recovery.

Once we have entered all the relevant figures we can click on OK and the model will be updated, correctly setting up each commodity with the correct units (g/t, %, etc).

Mining Rates

With the deposit's resources defined we can now specify how the deposit is to be mined and calculate the mine life. The mining rates form (Figure 4) gives us several different ways of entering the mining rates. We can either estimate it by entering the mining rate per day (this is the amount of rock and waste removed) or use a calculation to approximate the rate based on published data. We know that the mining rate will be 130,000 tonnes of ore per day so we can select the option to estimate the rate and enter 130,000 in the mining rate box. We also know that the mine should operate for 360 days per year, which we enter into the working days / year box. The ore mined per day and the total ore mined per year is then automatically calculated.

We also have the option to ramp up production rates over the start of the project as it may take a year or more to achieve optimum production rates. In this project it is estimated that there will be 60% production in year 1, 80% in year 2, with full production being reached by year 3 of the mine life, which is calculated as 12.65 years.

Once we have made these changes and we select OK, the model will update and the correct number of columns will be set up throughout the model (12 for the production period and 2 for the construction period).

Costs

The project costs are an important part of any project and IC-MinEval is flexible enough to allow you to make your cost estimations as detailed as you require, enabling you to link into your own cost models or use the built-in functionality of IC-MinEval. If you have no cost figures available, IC-MinEval can calculate basic capex and operating costs (Figure 5).

In this case history we have been provided with basic costs and so we can enter the capex of US $165 million for the mine and mill. This covers all expenditure on mining equipment and the primary milling circuit along with all other costs associated with developing the mine infrastructure. In addition there will be a capital cost of US$ 275 million for the processing plant, and both these capital costs will have 10% added to those values for additional overheads.

Operating costs break down to US $2.5 per tonne for ore, US $0.75 per tonne of waste and processing cost have been estimated at US $3.5 per tonne. Annual fixed costs have been assumed at US $10 million per annum.

Commodity Prices

The commodity sales menu (Figure 6) allows us to set the initial price for each metal to be sold and specify how this will vary over the life of the project (increase with inflation, increase/decrease by fixed % or remain constant). The base case we are looking at here involves a contract nickel price of US $14,000 per tonne and for copper US $3000 per tonne of metal-in-concentrate. Revenues have been amended through a downward metal price estimate to take into account a net smelter return or off-take agreement.

We thus set the spot metal price to these values under the corresponding tab and select fixed. As well as setting up the spot price, you have the option to forward sell a % of production for a specified number of years, though this is not required in the base case.

Expenditure

As we have specified US$484.00 million as capex, we are able to split this 60%/40% over the 2 year construction period by entering the values under the Capex payment schedule (Figure 7). When doing this, the actual amount is calculated and displayed for you to check: in this case, US$290.40 million and US$193.60 million, respectively. Also, on the expenditure, we can set the level of working capital. This is a percentage of annual operating costs so setting the value to 25% as specified in the project specification (equivalent to 3 months) works out as US$21.22 million.

Environmental & Closure Provision

Included in the package is the ability to model ongoing environment and closure expenditure including up front (sink fund), post (bullet) and annual costs during production and for a specified period post production (Figure 8).

The base case used here includes US$1.5 million annual costs during production and US$5 million costs in each of the first two post-mining years.

Financial Information

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Financial

"After defining the deposit, we can look at the financial regime in more detail, including taxation and the discount rate we will use to value the project. For this scenario we are using straight-line depreciation. This allows us to use the capex to reduce the taxable income by the same amount each year of production. The royalty rate is set to 3% and the basic tax rate to 30%. This sets up the basic tax parameters for the project. If you have a more complex tax structure, IC-MinEval allows you to design custom tax modules which you can save and import into models as required.

The model assumes zero inflation so we can leave the annual inflation at 0%. The cost of capital for the project is 10%, which we set as the discount rate. IC-MinEval can be used to model the project finance and allows you to calculate the NPV using the Weighted Average Cost of Capital (WACC), including variable WACC as debt is repaid, instead of using a fixed discount rate if required.

The project is to be considered from a 'ring fenced' perspective and so a variable WACC is selected, allowing the applicable WACC to vary throughout the project life.

Each of the products to be produced from this project has the same royalty rate and this is entered as 3%.

For large corporations it is inappropriate to evaluate a project based on the way it is financed as this leads to the varying of NPV for otherwise identical projects for no clear economic reason (Brophy (2003)). This means that although project debt reduces with time, company debt stays constant as money is borrowed for other projects.

Project Finance

Now we can model how the project is to be funded and the effect this has on the project viability, by using this module to structure the funding (Figure 10). Seventy percent of the total capital cost is to be funded by debt, and so this figure is entered in the debt box. The total funding (debt and equity) for each of the initial years is then automatically calculated.

In this case example the loan is to be repaid on a straight line period over 5 years, with a 2 year grace period before repayments must begin. The financing fees and contingency are entered as requested. As we are modelling project finance we want to calculate the NPV using the WACC rather than the project's discount rate. Upon entering the loan interest rate and the cost of equity for the base case (8.5% and 15% respectively), IC-MinEval will automatically calculate the WACC using the formulas described in Part 2 (see Discount Rate and Cost of Capital).

Multi-Partner

IC- MinEval can calculate the results for each partner in a multi-partner financing scenario. For the purposes of this case study though, this capability will not be demonstrated.

Nickel Sulphide Model Analysis

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Nickel Laterite Model Analysis

Once the data is entered into IC-MinEval as detailed above, a fully integrated Excel-based spreadsheet model of the proposed nickel sulphide project is created. A glance at the model output sheet "wshtDCF" reveals that the project is certainly profitable, producing an NPV of US$1008.36 million with an IRR of 46.19%. (Figure 1) The "funding" option of IC-MinEval has optimised the loan draw-down and injection of equity to ensure that the cumulative cash flow after funding is positive throughout, despite the large negative net cash flows before funding in the early years of the project due to the enormous expenditure on developing the mine and processing plant (Figure 1). IC-MinEval has calculated the maximum cash exposure at US$484.00 million, reflecting the high capital investment of the project and the amount it stands to lose in the event of failure to reach production.

From a banker's perspective, the project economics look to be fundamentally secure. The annual cover ratios (interest, principal and cash cover ratios) calculated in "wshtFinance" are significantly greater than 1 even in the initial years of debt repayment (Figure 2). The project will therefore have little difficulty in servicing its debt from cash flows generated by production revenue.

From an equity shareholder's perspective, the project also looks favourable. The "wshtTax" shows that the project does achieve considerable savings on tax, over US$50 million, as a result of interest on debt reducing taxable income. This somewhat offsets the negative effect of debt servicing on the project's cash flows.

Nickel projects commonly produce other by-product metals, and these often have a significant impact on the project's economics. The "wshtRevenue" in IC-MinEval allows you to analyse the contribution of each product to the project's revenue stream. Copper is produced as a by-product to nickel in the case example and, though it makes up a significant proportion of the operation's total metal produce (due to high copper recovery rates), it accounts for a far lower proportion of the project's annual revenue (Figure 3).

Project Sensitivity Analysis

IC-MinEval also has a facility for running a sensitivity analysis to show how the viability of a project is affected by changes in key parameters. The calculations are made on "wshtSensitivity" and the resulting spider graph is displayed in "Sensitivity" (Figure 4). The spider diagram compares the percentage change in a parameter against the percentage change in either the NPV or IRR. IC-MinEval allows you to select the variables you wish to test and run the sensitivity analysis by a series of user-friendly menu driven forms. The nickel sulphide case history has been tested for sensitivity to changing nickel and copper grade, processing plant capital expenditure and processing operating costs (Figure 4).

It is immediately clear that the project is most sensitive to changing nickel grade, with a 10% increase/decrease in grade resulting in a 16% increase/decrease in the NPV (Figure 4). Grade variability is of course governed by nature and so, other than ensuring grade control is effectively maintained in the mining and processing operations, there is little that can be done to minimise this risk. However, sensitivity to changing grade is analogous to a project's sensitivity to variation in recovery rates.

Project recovery rates are in part governed by mining and processing technology, and this sensitivity analysis indicates the importance of maximising nickel recovery in sulphide projects. The project has a relatively low nickel recovery rate of 65%, reflecting the fact that bulk sulphide flotation can only recover and concentrate sulphide nickel, and so will 'lose' a significant amount of ore nickel that is tied up in other minerals. In the case of such a low-grade deposit that also has technical constraints on its ability to achieve high processing recoveries, the key to maximising nickel recovery, and thus NPV, lies in maximising mining recovery to ensure an optimum supply of ore to the concentrator. This project appears to be meeting that directive, utilising efficient, large-scale mining equipment to supply over 11 million tonnes of ore per annum to the concentrator.

The project's NPV is not nearly so sensitive to changes in the processing plant capital expenditure and operating costs (Figure 4), indicating that there may be scope to increase expenditure on the plant in an effort to improve processing recovery rates. The sensitivity analysis also reveals that large variations in the copper grade/recovery have minimal impact on the NPV, reinforcing previous conclusions that the production of copper by-products makes little difference to the project's economic viability.

Platinum Group Elements Deposit 1

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Introduction

The critical issues in the project financing of platinum projects will now be assessed by modelling a theoretical case scenario set in the Bushveld Igneous Complex in South Africa.

Selected IC-MinEval input screenshots are included to assist the users as they become familiar with the software's format from the previous modelling case example (see General Information). In addition some of the Excel output sheets are available to view in the model analysis section (see PGE Model Analysis).

The Bushveld Igneous Complex (BIC): Geology and Genesis

The BIC is an extremely large, 2-billion-year-old, saucer-shaped, layered igneous intrusion occurring in the northern part of South Africa.

The complex comprises an array of diverse igneous rocks ranging in composition from ultramafic to felsic. It is generally understood that the BIC was formed by the repeated injection of magma into an enormous chamber. Due to the huge volumes of magma involved, cooling and subsequent mineral crystallisation out of the magma was a slow process. Different minerals were formed as the magma cooled. These minerals accumulated into sub-horizontal layers, building from the base of the chamber. These processes were repeated by the intermittent replenishment and addition of existing and new magma as the case may be, thus producing a repetition of the mineral layering.

Some individual layers or groups of layers can be traced for hundreds of kilometres. This layered sequence, the Rustenburg Layered Suite, comprises five principal zones, the Marginal, Lower, Critical, Main and Upper Zones. The BIC, dipping in general to the centre of the complex, is, horizontally, roughly clover-leaf-shaped, consisting of four compartments or limbs, the western, eastern, northern and southern limbs, in order of economic importance.

The BIC is unique both in its size, covering an aerial extent of some 66,000km2, and in the economic importance of its minerals. Contained within the well-layered ultramafic to mafic succession are two horizons in the Critical Zone which host economically exploitable quantities of PGEs, namely the Merensky Reef and the underlying UG2 Reef. These two economic horizons can be traced for hundreds of kilometres around the complex. PGEs - platinum, palladium, rhodium, ruthenium, osmium and iridium - are recovered, together with quantities of nickel, copper and several other metals and compounds.

The Merensky Reef is generally composed of a feldspathic pyroxenite, overlying a thin basal chromitite stringer, followed by an anorthosite to norite footwall and with mineralisation decresasing from the basal chromitite stringer into the hangingwall and footwall. The UG2 Reef is defined as a main chromitite layer, with most of the mineralisation contained within this unit, followed by a poorly mineralised pegmatoidal pryoxenite footwall. Below the UG2 Reef are numerous other chromitite layers that are mined for chromium, as their PGM content is too low to be economic.

Underground Mining

The mining of ore from underground involves firstly the establishment of access routes from surface. For safety reasons there should always be at least two routes to the surface from any point underground (in the event of an accident to one the other route out can be used as the escape route). This is usually a legal requirement, as well. For most underground mines, the main access routes will be vertical shafts. In the case of the platinum mines on the BIC, where the shallowly dipping 'reefs' or ore horizons, outcrop at the surface, there are also usually footwall inclines or declines a safe distance beneath the ore horizon and dipping down at the same angle of dip as that horizon.

These access routes into and out of the mine will then be connected together underground by a network of horizontal and inclined tunnels, drives, drifts, raises, orepasses, ramps and declines. These are developed to provide an infrastructure through which workers, machinery, materials, power, water, and air can enter the mine to perform the work of recovering the ore. The same tunnels and shafts will, of course, be the routes by which the ore and everything else also leaves the mine.

These infrastructure tunnels are usually in barren rock, as they are the permanent travelling ways of the mine. They must also mostly be developed before there can be any ore produced from underground. In addition to them, and depending on the method chosen to recover the ore, further tunnels will be developed, mostly this time in the ore horizon, specifically designed to facilitate the mining of the ore itself. The mining of the ore is carried out in openings which are called stopes, and the action of recovering the ore is called stoping.

Depending on the geometry of the orebody, i.e. its size, shape, dip, lateral extension etc., the stoping method will be chosen to recover as large a percentage as possible of the resource in the ground in as safe an operational manner as can be designed. The figures 2 and 3 below show isometric drawings of the layout of the stoping system planned for this operation.

In underground non-coal mines the mining is almost always done by drilling and blasting. For this purpose, drilling machines are used, with special set-ups for the low stoping heights in the platinum reefs, to drill the rock; explosives are then inserted into the holes in measured amounts and blasted. Figure 4 shows one such set-up.

The rock is then loaded out mostly using scrapers in the stopes and dropped down ore passes. See Figure 5.

From the ore passes the rock is taken by truck or train to the surface or to the shaft from whence it can be hoisted to the surface.

Processing

Comminution

The ROM ore will be sent to a crushing station where it will go through several stages of crushing and screening to reduce the size of the particles of ore to a size where it can be mixed with water to form a slurry and pumped to the milling section. In some platinum recovery plants there is a gravity recovery section inserted at this stage where a fair proportion of the very dense PGE, occurring as native metal, can be scalped off before the material is milled and sent to the flotation plant. In the mills it will be ground to a fineness, usually greater than 75% less than 76 microns (200 mesh) as it is only at that fineness that the minerals to be recovered have been properly liberated from the gangue materials to which they were attached in the rock. The milling is a wet process and the material comes from there as a fine pulp, which is sent on to the concentration section of the plant.

Concentration

In the flotation cells the pulp is mixed with reagents to make the minerals to be recovered hydrophobic (usually xanthate). A suitable frother is added and the pulp in the cells is agitated with compressed air (Anthony and Flett (1997)). Air bubbles form and collect the hydrophobic metal sulphide particles. The sulphide-loaded air bubbles float to the surface and concentrate as a froth which is then collected. The recovered sulphide pulp is fed back into the flotation circuit several times over, increasing the contained metal grade of the concentrate each time. It is vital that as much of the nickel sulphide in particular is recovered and the PGE tend to report with the nickel sulphide. Inevitably, however, some of the metals in the initial ore feed can never be recovered but a 95% recovery rate for nickel and copper can realistically be expected to be achieved on the Merensky ore. However, for the PGEs, 85% is a more realistic figure.

Smelting and refining

Concentrate received from the concentrator is then sent to a smelter to be smelted, resulting in the production of furnace matte. The furnace matte is then treated in a converter to further prepare the recovered metals for refining.

The converter matte tapped from the converter is slow-cooled, crushed and dispatched to a base metal refinery for further processing. This is usually a leach plant where the nickel and copper will be recovered using hydrometallurgical processes. The products will be nickel and copper cathodes.

The precious PGE are recovered as a sludge from the electrolytic cells and sent on to a PGE refinery for final recovery as pure platinum group metals. The period of time from the mining of the ore containing PGE to the actual arrival of the PGE once in that ore on the market is often as long as 6 months or more. This means that most PGE mining companies have a lot of metal tied up in the production 'pipeline' and need to plan for working capital to cover that cost.

The platinum market is forecast to be in a small annual surplus of 140,000 oz in 2009. The surplus is due to the downturn in global economic activity. Net global demand for platinum is forecast to be 5.92 million ounces in 2009, while global platinum supplies are expected to be some 6.06 million ounces. South African platinum sales should be about 4.73 million ounces, while those from North America and Russia are set to fall to 255,000 oz and 745,000 oz respectively in 2009.

The palladium market is forecast to be in oversupply by 655,000 oz in 2009. Net global demand for palladium is expected to be about 6.52 million ounces. Supplies of palladium (including sales of Russian state stocks) are expected to total about 7.18 million ounces in 2009.

Net rhodium demand is forecast to fall to 548,000 oz in 2009, largely due to a decline in usage by the automotive industry. Rhodium supplies are expected to be 719,000 oz in 2009. The weak global economy is expected to drive net ruthenium demand down to 583,000 oz and depress iridium demand to 79,000 oz.

The major use of platinum is in jewellery, and that mainly in the far East - Japan and China. The next largest use is in autocatalysts, to clean up the emissions from internal combustion engines. The third biggest use is in other industrial applications in the chemical, glass and electronics industries, and platinum is also used as an investment in a similar way to gold. The Russians, Canadians, Australians, Isle of Man and Americans have all at some time produced platinum coins, the more modern ones being specifically for investment purposes.

The major use of palladium is in automobile catalysts. There is also a significant demand for palladium jewellery. Like platinum and gold, palladium is also used as an investment medium and the Canadians also produce palladium coins. There is also good demand for palladium in the electronics industry and in dentistry.

Rhodium's largest use is again in the automotive industry as a catalyst, it is also used in the glass, chemicals and electrical industries. Ruthenium's largest use is in the electronics industry, other uses are n the chemicals industry. Iridium has many small uses in the chemical, electrochemical, electrical and other industries.

Case History 2

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CASE HISTORY 2: PGE Deposit, Bushveld Complex, South Africa

"It is proposed to exploit a Platinum Group Elements (PGE) deposit on the Merensky Reef in the Bushveld Igneous Complex in the North West province of South Africa. The deposit lies close to the surface and reserves are extensive, and the grades are typical of those of most of the mines in that area.

An underground mine with a capacity of 7800 tonnes of ore per day (in calculations use 360 working days per year) is to be established. The mining reserves are 24.5 million tonnes of in situ ore with an estimated grade of 4.8 g/t Pt, 2.0 g/t Pd, 0.24 g/t Rh, 0.10 g/t Ir, 0.7 g/t Ru and 0.01 g/t Os. There is also 0.17 % Cu and 0.28 % Ni in this ore. It is estimated that dilution will be 15% and the mining recovery will be 95%. The operation's major product will be a high quality nickel/copper sulphide concentrate, containing the PGE, for sale to a nearby smelting and refining facility. The project will operate at 70% capacity in the first year of production, 85% in year two, 95% in year three and will reach full production capacity by year four.

The mine will be worked from one main vertical shaft with the second outlet being an inclined shaft from surface in the footwall of the reef horizon. Underground stoping (recovery of ore) will be by a special cut-and-fill method of mining. ROM ore will be taken to the mill where it will undergo comminution before entering a selective sulphide froth flotation treatment plant. The plant is capable of recovering 85% of each of the PGEs, 95% of the nickel and 95% of the copper all contained in a nickel/copper sulphide concentrate.

Purchase of mining equipment and construction of the mill will cost approximately US $60 million. The capital investment required to construct the processing plant is estimated at US$ 35 million. There will be capex overheads of 10%. Since the mine is in an area where there is already extensive mining it is considered there will be no delay for securing permitting requirements, but there will be a two year pre-production period to construct the plant and mine infrastructure. Fifty percent of the capital cost will be incurred in the first pre-production year with the remainder incurred in the second pre-production year. The unit costs of mining have been estimated at US $20.0 per tonne for ore but in this type of underground mine there is negligible waste mined. Processing costs are estimated to be US $8.0 per tonne of feed ore. There are annual fixed costs of US $5 million and working capital is calculated at 25% of annual operating costs.

The metals are to be sold on contract to a nearby smelting and refining facility and the cost of transporting the sulphide concentrate is so small as to be considered negligible. The assumed platinum price is 670 $/oz, palladium 250 $/oz, Rhodium 600 $/oz, Iridium 600 $/oz, Ruthenium 200 $/oz, and Osmium 200 $/oz. The nickel price is US $8500 per tonne and for copper US $1700 per tonne of metal-in-concentrate. Revenues have been amended through a downward metal price estimate to take into account a net smelter return or off-take agreement.

Amendments to metal price forecasts are carried out through an allowance for concentrate toll treatment or purchase. In addition, credit and penalty adjustments arising from the concentrate's chemical and physical properties as well as the smelter's specific requirements are also taken into consideration.

Assume a tax rate of 30% of taxable income. Capital allowances can be claimed as straight-line depreciation over the mine production life. A royalty of 1.2% of gross metal sales value is payable. For this project it is assumed that there will be no costs associated with environmental liabilities.

The project sponsors are seeking 60% debt funding of the total capex and have been offered an interest rate of 8.5% on the loan capital. The assumed cost of equity is 15%. NPV will be calculated using the weighted average cost of capital (WACC), reverting to the cost of equity once debt has been paid off.

For large corporations it is inappropriate to evaluate a project based on the way it is financed as this leads to the varying of NPV for otherwise identical projects for no clear economic reason (Brophy, 2003). This means that although project debt reduces with time, company debt stays constant as money is borrowed for other projects.

However, in this case study financing is considered from a 'ring fenced' project perspective in which the applicable WACC varies throughout the project life according to the debt: equity ratio.

The banks require straight loan annual repayments over 5 years and are willing to grant a 2 year grace period on repayments. An up-front fee of 1% of the total debt is assumed with a 3% commitment fee. Fixed financing charges will amount to US $0.75 million and there is a contingency of 10% to act as a cushion against unexpected cost rises."

PGE Model Development

Enter project data

Open IC-MinEval and bring up the main menu box and click on General Information

General information

After entering the project name, the project basics are entered (Figure 2). As this case history is a PGE project, all the PGEs nickel and copper are selected.

After the deposit type has been defined the mining method is selected from the available list. The differing mining methods enable different options and specific costs information. For this case history the mining method UG - Cut and Fill is selected. Note that selecting underground methods disable the stripping ratio tab on the main menu.

The pre-production period allows both the permitting period and the construction period to be defined. This is useful if you have a period before the first expenditure and/or production starts. In this case we have a 1 year permitting period and two pre-production years during which construction takes place and so we enter 2 into the construction period.

Resources

Once the project has been defined we can set up the details of the project's resources and grades (Figure 3). The idfference here from the nickel project is that there are a much greater number of product tabs to be entered.

Mining Rates, Costs

The mining rates and costs menus are filled in from the project data as before.

Commodity Prices

The commodity sales menu (Figure 6) allows us to set the initial price for each metal to be sold and specify how this will vary over the life of the project (increase with inflation, increase/ decrease by fixed % or remain constant). Once again there are a large number of metals to have their data entered by clicking on the relevant tabs and entering the data from the brief.

Expenditure, Environmental and Closure Provision

These two menus are filled in with the given data as previously shown.

Financial Information

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Financial, Project Finance

Again, these two menus are filled in with the given data as in the last case study.

Multi Partner

This case demonstrates the multi-partner capability of IC-MinEval. In many of the countries where some of the people, or the country itself have been disadvantages in some way, there are requirements to involve local people in the project's ownership. In the former Soviet Union and the countries that were once part of that union there is often a requirement for a local partner who may or may not be required to inject some cash for his equity. In the case of a country like South Africa, where one section of the population was disadvantaged with respect the other, the local partner may not have to put up any revenue. In this case, there will be a Black Economic Empowerment partner who will have a free carry. Partner 2 will be the controlling company of the project, and partner 3 is another investor in the project.

The percentage of the initial capital put in by each partner is then entered. At each of the trigger points each partner gets a differing percentage of the net revenue. Initially the paying partners are entitled to earn back their investment before the free carry partner starts receiving a share. Trigger 2 is when that has been done and at that point the free carry partner starts to get his share of the net revenue. The third trigger point occurs when the second investor leaves and the profits are now split between the remaining partners in the project.

Once the data is entered into IC-MinEval as detailed above, a fully integrated Excel-based spreadsheet model of the proposed PGE project is created. A glance at the model output sheet "wshtDCF" reveals that the project is certainly profitable, producing an NPV of US$604.55 million with an IRR of 89.32% (Figure 1). The "funding" option of IC-MinEval has optimised the loan draw-down and injection of equity ensuring that the cumulative cash flow after funding is positive throughout, despite the large negative net cash flows before funding in the early years of the project due to the high expenditure on developing the mine and processing plant before production is possible (Figure 1). IC-MinEval has calculated the maximum cash exposure at US$104.5 million, reflecting the high capital investment of the project and the amount it stands to lose in the event of failure to reach production.

From a banker's perspective, the project economics look to be fundamentally secure. The annual cover ratios (interest, principal and cash cover ratios) calculated in "wshtFinance" are significantly greater than 1, even in the initial years of debt repayment (Figure 2). The project will therefore have little difficulty in servicing its debt from cash flows generated by production revenue.

From an equity shareholder's perspective, the project also looks favourable. The "wshtTax" (Figure 3) shows that the project does achieve considerable savings on tax, as a result of interest on debt reducing taxable income. This somewhat offsets the negative effect of debt servicing on the project's cash flows.

PGE projects always produce a large variety of metal products, and though the project is usually mainly dependent on the platinum price the other metals produce significant revenues. The "wshtRevenue" in IC-MinEval allows you to analyse the contribution of each product to the project's revenue stream. (Figure 4). In this project, platinum consistently produces approximately two thirds of the revenue.