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Feasibility A guide to feasibility planning for junior mining companies A Norton Rose Fulbright guide
Contents Summary 04 Introduction 05 Feasibility 07 Other key feasibility considerations 11 Feasibility stage key point summary 15 Contacts 17
Feasibility Summary The importance of a robust strategy for the procurement of a mining project, from project inception through to construction implementation, cannot be underestimated. Full consideration of the key procurement issues identified in this guide can often mean the difference between achieving a bankable project with optimal returns for the mining company, and an expensive project failure. 04 Norton Rose Fulbright
Introduction Introduction General For junior mining companies in particular, cash is king, but in the race to obtain project finance or other forms of financial backing, we regularly see the key iterative steps and considerations mapped out in this guide either being forsaken or missed. The impact of this for the mining company can be considerable. The need for a strategy The aim of this guide is to explore the key steps in pre-construction planning and evaluation (usually referred to as feasibility), and to look at the common misconceptions as to what the junior mining company (the Sponsor) should be looking to achieve at this stage. Importantly, we will look at the iterative steps usually required to achieve completion of the feasibility stage of a mining project and the common pitfalls that must be avoided along the way. When the feasibility stage of a project is properly executed, the Sponsor will be more likely to be in a position to establish at an early stage, with a degree of certainty, whether or not the economics and general viability of the project stack up. If they don t, the project can be abandoned at the earliest possible point, hopefully before significant amounts of money have been expended. On the assumption that it is established during the feasibility stage that the economics and general viability of the project do stack up, the Sponsor will then go on to consider detailed engineering and construction delivery and importantly how this will be structured to achieve both a bankable and an economically viable project. Norton Rose Fulbright 05
Feasibility What do we mean by bankability? The terms bankable or bankability will be used in this guide. Bankability is essentially a view on the robustness of the project structure in terms of it being able to secure for the lenders full repayment of debt outstanding, either through project delivery and operational returns or, in a default scenario, through recourse against the parties responsible for project delivery. The considerations as to bankability will certainly vary from one project to the next, but the lenders will tend to have certain key requirements which must first be met in order to secure internal credit approval and the authority to lend. 06 Norton Rose Fulbright
Feasibility Feasibility General Before discussing the feasibility stage of a mining project, it would perhaps first be useful to clarify its purpose and to dispel a few common misconceptions. The purpose of the feasibility stage is to carry out an appropriate level of testing and analysis to establish if a project should be developed through into the detailed engineering and construction stage. It is important to recognise that completion of this study does not, in itself, mean that the Sponsor has an economically viable project. In fact, it can say just the opposite. Furthermore, adding the word bankable before feasibility study does not mean that the project is one that will secure project financing. A bankable feasibility study simply means a report with a sufficient level of accuracy to enable financial institutions to consider feasibility. The decision as to whether to lend will only come following the completion of further and more detailed due diligence. The feasibility study can therefore be seen in several lights. Provided the content is favourable and the report has been produced to the required reporting standards (eg, JORC, NI-43-101, SAMREC (as appropriate)) with a recognised international mining consultant or engineering firm standing behind the results, the report may be used for the following purposes: an important and valuable marketing tool which can be used to attract potential equity investors and/or lenders a tool to be used by the Sponsor itself to secure internal board approval for the commitment of equity and capital for the progression to detailed engineering and construction a tool to be used by the Sponsor in order declare a reserve on a new project, as provided by the US Securities and Exchange Commission (SEC) or Norton Rose Fulbright 07
Feasibility a tool to be used by Sponsors to satisfy certain pre-listing requirements (eg, the requirements for disclosure of ore reserves in Chapter 18 of the Listing Rules of the Hong Kong Stock Exchange). The common misconception that the production of the final feasibility study will, in itself, either provide the Sponsor with a feasible structure for project delivery and/or secure project financing, often means that fundamental steps are missed or forsaken by Sponsors in pursuit of obtaining the final feasibility report (whatever it may say!). As we will discuss below, this approach may have significant cost implications for Sponsors. Stages of feasibility Sponsors should look to identify issues that may impact on project feasibility at the earliest possible stage. It would be usual therefore for the Sponsor to commission the carrying out of preliminary analysis on the reserve and its economic viability in order to identify key feasibility issues before significant amounts of money are committed to the production of a final feasibility study report. With the cost of a final feasibility study report often running to several million dollars, preliminary analysis can save significant wasted costs later down the line. Below are some of the keys steps typically taken during the feasibility stage of a mining project. As noted, the Sponsor should determine on a project specific basis the appropriateness of each stage of preliminary analysis and/or the requirement for additional stages of analysis both pre and post production of the final feasibility study. Conceptual study The feasibility stage of a project will usually commence with the production of an initial scoping or conceptual study. This conceptual study will typically involve a preliminary evaluation of the project based on initial drilling, industry experience and informed assumptions. The end product will provide a description of the general features of the project, technical factors requiring further investigation and an order of magnitude of likely capital and operating costs, with a usual accuracy of +/- 50 per cent. Whilst this report by no means provides an accurate assessment of feasibility, it can and should be used by the Sponsor to determine whether or not to proceed forward with an exploration program and further engineering work. 08 Norton Rose Fulbright
Feasibility Pre-feasibility study If the decision is made, following completion of the conceptual study, to proceed, the next stage in the feasibility process will typically be the completion of a pre-feasibility study. This is the key intermediate step in the assessment of project feasibility. Typically at this stage there will be sufficient drilling and process test work to enable the production of basic engineering. Pre-feasibility will typically involve a determination of mining and milling extraction methods, anticipated product recovery rates and consideration of key environmental and permitting issues. Again, preliminary capital and operating cost estimates will be carried out, this time with a usual accuracy of +/- 30 per cent. There should be focus at this stage on critical issues to be resolved during final feasibility if the decision is subsequently made to continue. Final feasibility study If the results of pre-feasibility are favourable, the Sponsor may choose to move to the final stage in the feasibility process and the production of the feasibility study itself. The feasibility study deliverables will typically include initial mine and plant design, detailed process flow sheets, product recovery estimates, detailed capital and operating cost estimates and an economic model for the project. It would not be unusual also for the feasibility study to present possible financing options. The feasibility study will typically produce capital and operating cost estimates that are accurate to within +/- 10-20 per cent. Analysis and further investigation Although it would not be unusual for the final feasibility study to identify areas where further investigation may be required, we would typically expect this study to provide sufficient information to enable the Sponsor to make a decision as to whether to move to detailed design and construction or, if the results are not favourable, abandon the project. Whilst the three stage iterative process set out above is typical, it is not a process that should be considered as being set in stone. There may for instance be other intermediate steps that the Sponsor may wish to take before making the decision to commit resource to the further development of a project. Norton Rose Fulbright 09
Feasibility It is however essential that the mining company carries out a full appraisal of the results at each stage of an iterative process to take stock and make an informed decision as to whether to continue to the next stage. The key at each stage is to identify problems to be resolved at the next stage and the means by which they may be resolved within the bounds of the economics of the project or (as the case may be) to identify those problems which are insurmountable and which should on reflection deter additional time and money being committed to developing the project in its current form. This process is about drip feeding both time and money into the project at the right time for the right purpose. 10 Norton Rose Fulbright
Other key feasibility considerations Other key feasibility considerations The Sponsors role at the feasibility stage Whilst a feasibility study is often produced by an experienced and recognised international engineering consultancy practice, the Sponsor still has a very important role to play if, on the assumption that a reserve may be declared, the feasibility study is to provide a solution that meets the economic expectations of the Sponsor and is acceptable to potential lenders. Whilst controls relating to equipment selection and parameters of affordability should be established under the terms of the consultant s feasibility study appointment, careful monitoring of the progress of the study at fixed milestones will enable the Sponsor at an early stage to pick up on (and ideally resolve) issues that may affect possible financing solutions or go to the affordability of the project. Sponsors should be aware that equipment selection made at feasibility stage may impact on possible financing options, especially in the context of securing export credit agency (ECA) backing. ECAs may provide certain types of financial support and/or political or commercial risk cover to support exports of goods and services from their jurisdiction. However, to secure such support or cover, it will usually be a requirement of the ECA that a fixed minimum value of the relevant support or cover is made up of works and/or services sourced from the ECA s home country (often known as a local content requirement ). Where a Sponsor is looking to secure ECA support, it should look to work closely with the party producing the feasibility study to ensure that plant and equipment selection made at this stage will not be a rigid requirement and that appropriate flexibility and assumptions are provided in, for example, equipment selection proposals and options to account for possible ECA support from various jurisdictions at a later stage in the project. Norton Rose Fulbright 11
Feasibility There should ideally be close dialogue between the engineering consultant producing the feasibility study and the Sponsor throughout the final feasibility stage to allow refinement of the study and the assumptions on which it is based. It is also likely that interested lenders will be willing to offer input at this stage. It is advisable for the Sponsor to tap into this resource where available. This interactive process is about pointing the consultant in the right direction to ensure that assumptions on which the final report is based correspond with the expectations of the Sponsor and any potential lenders. This exchange of dialogue must not however be viewed as a means by which the Sponsor can manipulate results to provide an answer they are looking for where a project would not otherwise be feasible. Contracting arrangements Whilst the production of the conceptual study and the pre-feasibility study may be based on more informal terms agreed between the Sponsor and the engineering consultant, or indeed carried out in-house by the Sponsor, the final feasibility study should be completed under the terms of a formal contractual agreement between the relevant parties to ensure that all key requirements of the Sponsor may be achieved. These key requirements will typically include (but not be limited to) the following: the final report to contain all required deliverables and to be produced to the required reporting standards the engineering consultant to stand behind all results in the final study and to be responsible for any errors and/or omissions in the final study (in practice, consultants tend to look to cap their exposure in this regard and appropriate cap levels will be a matter for commercial discussion) the consultant to assign all intellectual property rights in the feasibility study report to the Sponsor, or at least provide an irrevocable licence with a right to grant sublicences (ie, the Sponsor has to consider the possibility that other third parties may wish to rely on or use the report (eg, third party equity investors or potential lenders)) the final report to be completed within a certain time period to meet the Sponsor s overall project programme with appropriate sanctions for delay 12 Norton Rose Fulbright
Other key feasibility considerations a right for the Sponsor to review the progress of the report at fixed milestones and to require changes to the scope and/or the assumptions on which it is based. The contract will typically be a form of professional consultancy services contract. The consultant may propose a form of contract but this should be reviewed to ensure that the key requirements of the Sponsor may be achieved. There are also international forms of consultancy agreement that may be employed. For instance, FIDIC has produced a form of professional services agreement (FIDIC White Book) which is often proposed by engineering consultants. It is often the case however that amendments to this form are required in order to achieve an acceptable position for the Sponsor. Legal advice should be taken by the Sponsor in this regard. Design development A fundamental consideration for the Sponsor should be the level of detailed design (if any) being produced at feasibility stage. Whilst a more developed design will permit more accurate capital and operational pricing prior to commencement of construction, the development of detailed design at feasibility stage can (and often does) have a real impact on final construction pricing levels and ultimately bankability. The Sponsor should consider carefully the extent to which a third party contractor would be willing to accept responsibility for design developed by the engineering consultant producing the feasibility study. If the design produced at feasibility stage is conceptual and limited in detail, the Sponsor may have less difficulty in getting the party producing detailed design to accept risk in the accuracy and completeness of the feasibility design. If however the design produced at feasibility stage is more detailed: it will be less likely that a third party contractor will be prepared to accept risk in the earlier design as part of its works delivery obligations or in further development of this earlier design and any resultant split in design responsibility that may transpire may create additional interfaces, which will increase the risk to the Sponsor of time and cost overrun Norton Rose Fulbright 13
Feasibility where the Sponsor (and potentially any lenders) look to achieve a continuity of design responsibility from feasibility through to final design and construction in order to reduce interface risk, they may be left to look to either an EPC structure under which the EPC contractor effectively wraps the entire design risk irrespective of the identity of the party producing this design (this will often have a material pricing impact for the Sponsor since it would be usual for risk in third party design to be priced by an EPC contractor on a contingent basis) or an EPCM structure under which the party producing the feasibility study is retained to complete detailed design and to manage works delivery and the procurement of the individual works and supply packages on behalf of the Sponsors. There has been suggestions in the market that an over engineering of the project at feasibility stage has been used as a tactic by engineering companies to eliminate competition prior to the detailed design and construction phase in order to secure EPCM roles on preferred terms (although we would note that we do not have first-hand experience of this ourselves). We have produced a number of further guides which consider in detail the various detailed design and construction delivery structures employed in the mining sector (eg, EPC, EPCM and other hybrids of the two). Clearly, the Sponsor will look to manage design input at feasibility stage to avoid either being: designed into a corner by the party producing any feasibility design or being exposed to either unnecessary design interface risk or material contingent pricing under a wrapped EPC solution. 14 Norton Rose Fulbright
Feasibility stage key point summary Feasibility stage key point summary The feasibility stage of a mining project is about the carrying out of an appropriate level of testing and analysis to facilitate the making of an informed decision on whether a project should be developed through into the final engineering and construction stage. The production of a final feasibility study report does not in itself mean that a project is viable or that the project will be one that will attract project finance, it can say just the opposite. If a project is not feasible, from a cost control point of view, Sponsors should be looking to find this out at the earliest possible stage in the process. It is important that Sponsors take a careful and measured approach to the collation of data and information pre-final feasibility in order that an informed decision can be taken as to whether to commit time and resource to the completion of the final feasibility study report. Simply jumping in at the deep end without first carrying out the type of preliminary analysis suggested in this guide can have wasted cost implications for the Sponsors if the project is subsequently deemed not feasible for reasons that should have been identified in the carrying out of initial analysis. In practical terms, the Sponsors should: establish at project inception the series of steps to be taken in order to achieve completion of the feasibility stage of a project and where possible, establish the results and information required at the completion of each step to facilitate the making of a go / don t go decision in terms of whether to commit the time and resource to move to the next stage or to the detailed engineering and construction stage (as the case may be). The Sponsors should select an appropriate form of contract for completion of the final feasibility study to cover key Sponsor requirements. Advice in the regard should be sought from in-house counsel or external legal advisers. Norton Rose Fulbright 15
Feasibility If any detailed design is to be developed at feasibility stage, the Sponsors should first consider what impact this will have on the pricing of the detailed design and construction stage of the project and more generally the impact this may have on the achievement of a bankable detailed design and construction contracting structure. The Sponsors should work closely with the relevant engineering consultant and seek input from potential lenders (to the extent available) throughout all stages of feasibility to provide increased certainty that the final deliverables will meet the Sponsor s and any potential lenders expectations. 16 Norton Rose Fulbright
Contacts Contacts Martin McCann Global head of mining, infrastructure and commodities Norton Rose Fulbright LLP Tel +44 20 7444 3573 martin.mccann@nortonrosefulbright.com Mark Berry Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3531 mark.berry@nortonrosefulbright.com Matthew Hardwick Senior associate, London Norton Rose Fulbright LLP Tel +44 20 7444 5550 matthew.hardwick@nortonrosefulbright.com Norton Rose Fulbright 17
Feasibility
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