7/27/2019 Basics of Mining Mining and Money[1] http://slidepdf.com/reader/full/basics-of-mining-mining-and-money1 1/71 The 13th Annual Americas School of Mines Basics of Mining and Mineral Processing Part E: Mining and Money Vancouver Instructor: W. Scott Dunbar
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A mill at a base metal mine typically uses flotation to produce a concentrate that has a concentration of 20-40% of a
primary metal. Copper concentrates are typically 25-30%. The concentrate is transported to a smelter/refinery
complex. Unless the mining company owns the smelter/refinery, the sale of concentrate is governed by a smelter
contract.
The situation for a precious metal mine is similar. The mill at the mine uses leaching to produce an impure metal
product which must be refined to produce pure metal (99.99% pure) The impure metal at a gold mine is called doré,
a mixture of 60-90% gold and other metals, often silver. Unless the mining company owns the refinery, the sale of
the impure metal is governed by a refinery contract.Iron ore, potash and industrial minerals typically require some form of separation technology to produce a desired
product. Flotation is used to obtain fertilizer grade potassium chloride and to separate coal from stones. Grinders
and cyclones are used to produce iron ore products. The processed ore is shipped to a buyer under terms of a
delivery contract which specifies the delivery times of required quantities and the required grades.
In some rare cases, the ore from a mine is so rich, it is shipped directly to a smelter or refinery. For some time the ore
from the Eskay Creek mine in British Columbia was shipped by train to smelter/refineries in Quebec or Japan. Eskay
Base metals: Al – Aluminum, Cu – Copper, Pb – Lead, Ni – Nickel, Sn – Tin, Zn – Zinc,
Precious metals: Au – Gold, Pt – Platinum, Pa – Palladium
LME – London Metal Exchange www.lme.co.uk
NYMEX – New York Commodity Exchange www.nymex.com
Prices at these exchanges are determined by a continuous auction carried between member dealers acting on behalf
of their customers, the companies they represent, or themselves. The auction is done by open outcry.
See www.lme.co.uk/pricing.asp
www.nymex.com/how_exchang_works.aspx has a more descriptive explanation.
Both NYMEX and LME engage in e-trading of metals. There are other sites where e-trading of metals is done, e.g.,
www.suppliersonline.com
The Shanghai Futures Exchange (www.shfe.com.cn/Ehome/index.jsp) provides services for trading futures contractsin commodities such as copper, aluminum, natural rubber and fuel oil.
Until about 1990, there seems to be a correlation between inflation and gold price. However, after1990 the correlation is not as good. In the late 1990s, central banks began selling their gold supply so
that gold price decreased even though inflation increased. Hedging of gold by gold producers during
the same period effectively increased the supply because hedging is effectively selling gold that is not
yet mined; however, producers have decreased hedging activity since about 2000. Terrorist activities
in 2001-2002 may have caused investors to protect the value of their portfolios with gold causing an
increase in price. But the more recent price increase is large and cannot be explained by the increase
in inflation or by the need for portfolio protection. Other forces may be at work.
Trading in physical gold is done for electronics fabrication, jewellery, dentistry, coin and medal makingand retail investment. The London Bullion Market trading volume is mainly composed of the purchase
of large lots of gold by central banks and financial institutions, a paper market.
It is evident from the graph that the paper market for gold is much larger than the physical market and
that trading in physical gold has remained relatively constant since about 2000. Transactions in the
paper market, a representation of the demand for investment in gold, affect the price of gold more
than physical transactions. The paper market for gold investment constitutes a fundamental aspect of
Commodity exchanges have warehouses where a physical supply of a metal is stored. In this case thecopper supply is the total available for purchase in these warehouses on a particular day. Traders know
this supply and also know of any constraints on supply (eg smelter or mine shutdowns) Thus they
know as much as possible about the market and bid or ask a price on that basis.
The correlation coefficient between copper stocks and price is -0.76, almost completely anti-
correlated. Similar results for other base metals.
From these data, an empirical relationship between supply and price can be determined. Predictions
of supply can be made using macro-economic factors. The empirical relationship between supply and
price can then be used to predict future price from future predicted supply. Results are generally good.
Backwardation is a situation in which the price of a commodity for future delivery is lower than thespot price or, more generally, a far future delivery price is lower than a nearer future delivery price.
Backwardation is a premium representing what a buyer is willing to pay for the immediate delivery of
the commodity.
The difference [Spot Price – 3 month Futures price] would be an indication of this premium. A plot of
this difference for copper between 2000 and 2008 is shown below. Until about the end of 2003 there
was little to no premium associated with immediate delivery of copper. Then there was a significant
premium and some rather wild changes.
The simple explanations for the increase in premium are the increase in demand for copper in China
and India and the supply interruptions caused by strikes at copper mines in Chile, Peru and Mexico.
The demand and the strikes put pressure on copper supplies so that manufacturers pay more to assure
delivery now rather than later when the price may increase.
However, the wild changes in the premium suggest to some that the market is being influenced by
speculators who have the ability to enter and exit the copper market depending on their investmentgoals. Their trades typically involve large volumes of copper which have an influence on spot price.
(Note that the copper likely does not move to or from the warehouse – it is merely tagged as sold.)
Essentially the copper market is becoming a financial market, much like a stock exchange, which
Equity comes from the owner of the mining project who may have the cash available or could issue
shares to obtain the cash. The loan may come directly from a commercial bank or the company may
issue bonds to obtain cash.
During the construction period a total K is spent to build the project. Alternatively K may be the cost
to buy the project from another company.
Assets such as equipment and buildings are depreciated by an amount D during the course of the
operation. Various depreciation schemes are used. Canada uses the double declining balance method
for mine equipment. The depreciation is tax-deductible.
The mine reserves are an asset but are usually depreciated in a different way depending on the
jurisdiction.
In general, a loan is paid off by means of a payment to principal and interest: A = P + I. The interest
payment is tax-deductible.
Royalties paid to private party are tax-deductible. In Canada, royalties are paid to the province inwhich the mine is located, but these are accounted for as a deduction from federal taxes.
Notes: Stripping CostsThe numbers shown on the graph are illustrative. The point is that the strip ratio may be high after production starts
and then decrease to a “life of mine” value.
Following commencement of commercial production, stripping costs are not generally capitalized, but are included as
a cost of production as incurred. However, Canadian GAAP permits capitalization of stripping activity, during
production, if the stripping allows access to additional ore (a betterment of an asset). Capitalized stripping costs are
amortized on a units-of-production basis over value of the additional ore (actually the proven and probable reserves –
see later). Under US GAAP, all stripping costs are treated as variable production costs of current production.
A pushback of the west wall of the Valley pit at Highland Valley, BC will provide access to additional ore. The pushback
could not have been done until some geotechnical issues had been resolved and is therefore considered abetterment. The waste stripping associated with the pushback will be capitalized and amortized based on the
estimated value of the additional ore. However, the amounts of waste and ore are subject to a number of
uncertainties and could change over time. (This manifests as changes in the strip ratio or the cutoff grade.) If the
amount and/or value of ore changes, the amortization schedule will have to be changed.
The cost of the north wall pushback at Bagdad is treated as a cost of current production and is not related to the ore
underlying the pushback. The cost per ton of ore will therefore change as the current strip ratio changes. In effect,
Bagdad is buying an option on the underlying ore, the value of which is uncertain.
See
EITF Issue No. 04-6 available at www.fasb.org/eitf/0406WGR1S2.pdf (p. 13)
CICA EIC-160, dated March 2006 (was available somewhere on CICA web site)
Teck Cominco Annual Report 2007, p. 112 (available at www.teckcominco.com)
Considerable judgment and technical input often required to estimate the projected costs and the oreavailable. (reserves) Only proven and probable reserves (see later) are used in calculating depreciation
expense on a unit-of-production basis to measure impairments.
The undepreciated value is computed by subtracting the sum of annual depreciation expenses from
the original cost of the asset
Depreciation rate = (Acquisition cost – Residual value) Estimated production
Depreciation expense = Depreciation rate Units produced
Undepreciated value = Acquisition cost – Depreciation expense
The estimated production of a mine depends on the mine life which, in turn, depends on the estimates
of resources/reserves (higher reserves, longer life). This affects estimates of the depreciation rate.
The relevant standards are:
IAS 36 (1998, revised March 2004): Impairment of AssetsFASB 144 (2001): Accounting for the Impairment or Disposal of Long-Lived Assets
CICA Handbook, Section 3063 (2003): Impairment of Long-lived Assets
One way to describe the difference between resources and reserves is
Resources are reported as in situ estimates of mineralization (e.g., “The grade in this drill core is x%.”)
Reserves are reported as masses with a particular grade distribution that can be mined (e.g., “There are X
tons of reserves with an average grade of y%”)
Note the need for geological knowledge to go from indicated to measured resources or from probable to proven
reserves. Several modifying factors cause resources to become reserves. Reserves cannot be estimated from
inferred resources.
Measured resources often become probable reserves even though geological knowledge does not decrease. For
example, the drill hole spacing may not be sufficient to classify the reserves as proven, but a few modifying factorsmay be established or assumed. For this reason, some think that probable reserves should be moved down to
become aligned with measured resources.
Estimation of reserves involves considerable technical difficulties and uncertainty. Among the considerations are:
the distribution of grade in the resource
the portion of the mineral resource that can be extracted when allowance is made for dilution and recovery
metal prices
production costschanges in technology
Information concerning the first two items tends to increase as the mine is developed. The last three items can
change during the life of the mine and it is not uncommon to see reserve estimates change as a result.
To obtain reserves mining companies must take on some significant unsystematic risks (risks notrelated to market changes) associated with exploration, project feasibility and constructability of new
projects in places where there is little geological knowledge or infrastructure. One way to diversify
these risks and still attract investment is to have a steady flow of cash from existing operations, some
of which can be used to provide opportunities for development of new projects. If the unsystematic
risks cause the new projects to fail, the existing operations provide a “safety net”.
The large grades and/or resources of some copper deposits shown here attract large mining
companies, but there are significant unsystematic risks:
•Freeport McMoran: Fungurume in the Congo. Political risks as well as social and health issues
•Rio Tinto, Ivanhoe Mines: Oyu Tolgoi in Mongolia. No infrastructure and uncertainty about what
royalties the Mongolian government will charge
•Rio Tinto: Resolution project east of Phoenix. Orebody at a depth of 2 km in rock where the
temperatures are 80C. Feasibility of any mining method under these conditions is uncertain.
•Teck Cominco, Novagold: Galore Creek in northwestern BC. No roads, no power and significant watermanagement issues at the proposed mine.
The resource estimate is classified into inferred, indicated and measured. The measured resource is
the area where the most drill hole data are available while the inferred and indicated resources are in
areas with fewer drill holes.
The extent and orientation of the inferred and indicated resources are suggested by the geological
cross-section which shows a northerly-southerly orientation of the mineralization. Thus, for example,
the inferred and indicated resources circled with the dashed red line is oriented as shown even though
there is only one drill hole at the center of the indicated resource. Note that no continuity is assumedbetween these resources and the other resources to the east.
Source: Technical Report (NI 43-101) for the Minto Project, Hatch Associates, August 2006
Pre-feasibility study (aka “Preliminary Feasibility Study”)
a comprehensive study of the viability of a mineral project that has advanced to a stage where the
mining method, in the case of underground mining, or the pit configuration, in the case of an open pit,
has been established and an effective method of mineral processing has been determined, and
includes a financial analysis based on reasonable assumptions of technical, engineering, legal,
operating, economic, social, and environmental factors and the evaluation of other relevant factors
which are sufficient for a qualified person, acting reasonably, to determine if all or part of the mineral
resource may be classified as a mineral reserve
Feasibility study
a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating,
economic, social, environmental and other relevant factors are considered in sufficient detail that it
could reasonably serve as the basis for a final decision by a financial institution to finance the
development of the deposit for mineral production
Note: financial institution or a mining company. Sometimes the adjective “bankable” is used but thiscan only be decided by a bank or lending institution.
See www.sedar.com to download copies of feasibility studies or technical reports from public