MINE ECONOMICS

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MINE ECONOMICS

Resource estimates and other technical
inputs. JORC Code Ed Malone
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THE RESOURCE IS PARAMOUNT

• NO RESOURCE, NO PROJECT
• THE INTERACTION BETWEEN THE RESOURCE AND THE
  TECHNICAL OPTIONS DEFINES THE NATURE OF THE
  DEVELOPMENT

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EFFECTS OF RESOURCE TYPE

• grade estimation versus homogeneity
• the nature of gold resources
• comparison with other resource types
• nature of resource affects resource estimation

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THE MINERAL RESOURCE

• Knowledge of the resource is essential for
  successful development
• Inaccurate resource estimates are the most common
  causes of project failure
• Tomic paper illustrates this for gold projects
  Paper by Bruce Tomic, RI Bank of W A
• To SMEDG Resource Estimation Symposium, Sydney,
  16/10/92

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300 project proposals submitted to RI Bank
during 80s mining boom

• 82 Feasibility studies reviewed in detail
• (Rest of submissions were totally inadequate)
• 63 of the 82 proposals were developed generally
  with a mix of debt and equity
• 31 of the 63 developments had failed or were in
  trouble within 18 months of commissioning

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Review of 82 F. studies

• Cap. Ex. Range A1M to A100M (All very small to
  small-medium)
• Project types
• 57 new projects
• 34 upgrades of operating projects
• 9 reopening old projects
• Mining method 70 open pit and 30 underground

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Postmortem review of 63 projects

• Significant concerns in F. studies
• 82 Insufficient mineable reserve tail
• 76 Resource uncertainty
• 43 Mining method uncertainty
• 29 Metallurgical performance uncertainty
• 9 Environmental performance uncertainty
• Project performance does not correlate well with
  feasibility study review

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Echo Bays Cove Gold Project, Nevada, USA

• Reserves estimate, 23/12/88 9.6M oz contd. AuEq
  in proved probable inferred reserves
• Revised estimate, 16/02/90 5.5M oz contd AuEq,
  still proved, probable inferred
• Of 560 RCP holes originally, 137 holes, mostly
  deeper than 300m, eliminated because of
  contamination of samples

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Exxons Harbourlights, W. A.

• March, 84 Reserves estimate 5.5Mt_at_4g/tAu _at_
  1.5g/tAu cutoff
• 0.7M oz contd. Au
• July, 85 Mine opened
• June, 87 revision
• Mined to date, 1Mt_at_3.5g/tAu
• Reserves, 2.5Mt_at_3g/tAu _at_ 1.25g/tAu cutoff
• L G reserves, 1Mt_at_1.8g/tAu
• 0.42M oz contd Au
• Downhole smearing of grade in RCP holes

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Agricola Mine, Qld. Nov. 1987

• Lode 1 Reserves, 82,000t_at_4.5g/tAu mined
  65,200t_at_3.8g/tAu
• Lode 2 Reserves, 174,000t_at_5.5g/tAu mined
  52,300t_at_4.8g/tAu
• Total 60 contd Au shortfall
• Geological misinterpretations
• Au sale price, A630/oz production cost A683/oz
  
• Debt, A4.5M gold loan, repayable by 7419oz Au
  produced 13,520oz Au

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Shamrock mine, Qld.

• Reserves, 344,000t_at_3.2g/tAu
• Nov, 90, reconciliation after initial 5 months
  mining
• Predicted, 75,000t_at_4.5g/tAu
• Mined, 49,000t_at_2.8g/tAu
• 45 gold shortfall A1.4M cashflow shortfall
  bankrupt.
• Geological error, mining method error, management
  failings
• Postmortem re-estimation 308,000t_at_3.2g/tAu, 21
  gold shortfall.

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Henty Mine, Tasmania

• Premining reserves, 506kt_at_27g/tAu
• Mining commenced April, 1996
• Reserves, 30/6/96 526kt_at_26.2g/tAu
• Reserves, 30/7/96 381kt_at_28.4g/tau
• Depletion in year 73kt_at_21.1g/tAu
• Reduction of reserves 72kt_at_19.7g/tAu
• Loss of reserves 10 of contained Au, near
  limit of accuracy of proved reserves.

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Underestimates common

• Paddington, W A
• Original resource, 8.4Mt_at_3.2g/tAu
• Production, 19.2Mt_at_2.3g/tAu
• Mt Muro, Indonesia
• Original reserves, 8.5mt_at_3.9g/tAu,86g/tAg
• Production, 11.2Mt_at_3.8g/tAu,99g/tAg
• Ernest Henry, Qld., Peak Mine, Cobar, NSW, and
  others

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NATURE OF THE RESOURCE

• CONTROLS THE DEVELOPMENT
• DIFFERENT ARRAYS OF TECHNICAL INPUTS REQUIRED FOR
  DIFFERENT COMMODITIES
• GOLD PROJECTS ARE DISTINCTIVE

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OPTIMUM DEVELOPMENT

• REQUIRES THE CORRECT BLEND OF MAJOR TECHNICAL
  OPTIONS
• RESOURCE DEFINITION, MINING METHOD, TREATMENT,
  SALABLE PRODUCT SELECTION, MARKETING
• BEST POSSIBLE MINOR TECHNICAL OPTIONS

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TECHNICAL STAFF ROLE

• DEFINE RESOURCE
• IDENTIFY AND REVIEW POSSIBLE OPTIONS IN
  CONJUNCTION WITH MARKETING AND MANAGEMENT
• DEFINE RESERVES, MINING METHOD, MILLING AND
  SALABLE PRODUCT/S FOR VIABLE OPTIONS
• CONTRIBUTE TO FINANCIAL MODELLING

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FINANCIAL EVALUATION

• RANKS THE DEVELOPMENT OPTIONS
• BUT
• CANNOT JUDGE THE TECHNICAL INPUTS
• NOR
• RECOGNISE IF THE OPTIMUM DEVELOPMENT WAS
  CONSIDERED

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MANAGEMENT INPUT

• MAKE NECESSARY STRATEGIC DECISIONS EARLY
• AVOID ARBITRARY REQUIREMENTS
• ASK THE RIGHT QUESTIONS TO IDENTIFY THE OPTIMUM
  DEVELOPMENT

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NATURE OF RESOURCE ESTIMATES

• Resource estimates are never accurate
• What is the order of accuracy of the resource
  estimate?
• Is the project economic at the lower limit of the
  resource estimate?
• increase the size of the resource or improve the
  accuracy of estimation
• There is no substitute for a big margin for error

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RESOURCE DEVELOPMENT

• resource --gt minable reserves --gt mill feed
• The mining department mission
• to mine the ore body, the whole ore body and
  nothing but the ore body - at the lowest possible
  cost
• the sting is in the tail

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RECONCILIATION

• The economic resource is not a fixed quantity
• variances between predicted resource and minable
  reserves
• variances between minable reserves and mill feed
• a reserve tail may be no protection against a
  resource shortfall

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MINOR PROBLEMS

• The early mined ore
• Metallurgical performance
• All project components must fit together
• Every project is unique

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RESOURCES AND RESERVES

• Australasian reporting code
• History and future
• Broad definitions only - mainly guiding
  principles
• Importance of competent person
• ?peer review in future

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DECEMBER, 2004 EDITION

• Expands on 1999 edition to cover diamonds and
  industrial minerals in more detail but few
  changes in principles
• Maintains the large checklist of assessment
  criteria
• But Code still implies an unachievable level of
  accuracy
• Still working on Coal draft code

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INTERNATIONAL COMPATIBILITY

• Definitions in 2004 JORC code identical to or not
  materially different from international
  definitions
• Code meets most of main requirements
• Non-technical people can understand
• definitions comprehensive but user friendly
• definitions acceptable to all major players
• capable of amendment over time
• regarded as minimum levels

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INTERNATIONAL INITIATIVE

• 1997 CMMI adopted
• standard international definitions for resources
  and reserves
• at least for Aa, S A, U K, C, USA (major members
  CMMI)
• 1998, UN-ECE International Framework
  Classification for Reserves and Resources
  adopted similar definitions
• Spin off from Busang

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MINERAL RESOURCE CATEGORIES

• Inferred resource
• Indicated resource
• Measured resource
• in order of increasing confidence downwards
• Criteria needing qualification
• Cut-off grade
• Must be potentially economic

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ORE RESERVES

• Probable reserves
• Proved reserves
• Reserve category based on resource category with
  option to convert measured resources to probable
  reserves
• after application of economic, mining,
  metallurgical, marketing, legal, environmental,
  social and governmental factors

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Example of Rounding, Clause 24

• Calculated resource estimate
• 10,863,000 tonnes _at_ 8.23
• Code suggests tonnes should be rounded to
• 11Mt (11Mt /- 500kt, /- 4.5 error)
• Code suggests grade should be rounded to
• 8.2 (8.2 /- 0.05, /- 0.6 error)
• Metal content error, /- 5.1
• Very hard to achieve that accuracy in resource or
  reserve estimates, particularly at the
  Feasibility Study stage.

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ESTIMATION UNCERTAINTY

• measured resource --gt proved reserves
• /- 10 to 15
• indicated resource --gt probable reserves
• /- 15 to 25
• inferred resource /-50
• This inherent uncertainty is not made obvious
  when reported under the JORC code

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CUT-OFF GRADE, NATURAL OR ECONOMIC

• Factors affecting cut-off grade
• Revenue/tonne at average grade and at cut-off
  grade
• Mining dilution and ore continuity
• Metallurgical performance
• Fixed, variable and marginal costs
• Ease of application
• Lead time to production
• Changes in external variables

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CUT-OFF GRADE CHANGES

• may affect the following parameters
• Ore continuity
• Minable reserves
• Open pit and stope designs
• Operating costs/tonne
• Fixed costs/tonne

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OTHER RESOURCE AND RESERVES MATTERS

• Top cuts
• Samples above the top cut are not as
  representative as samples below the top cut
• correction factors
• empirical factors based on mining performance