CSC Excellence In Risk Management April 2005 Quantitative Risk Analysis for Mining Life Cycle Management. CIM Conference – Risk Workshop Toronto April 24, 2005 C. Coulthard, B.A. D. S. Evans Ph.D., P. Geol. I. Henderson M.Sc., P. Eng. CSC Project Management Services 20 Fourth Street NE, Calgary. T2E 3R5 (403) 233-7994 [email protected]
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Quantitative Risk Analysis for Mining Life Cycle Management. April 24.pdf · Qualitative Range Estimating Quantitative Analysis ... (Quantitative Risk Analysis) Risk Management is
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Terms of Reference - Application Date 1-Aug-02 1-Oct-02
Labour Availability Delays 0 1.4
OTSG Manufacture & Delivery Duration 12 16
Weather Delays 0 0.5
Long Lead Equipment Delays -1 2
Immediate Risk Control Measures
CS
CExcellence In Risk Management
Ap
ril 2005
15-A
ug
-07
1-S
ep-0
7
15-S
ep-0
7
1-O
ct-07
15-O
ct-07
1-N
ov-0
7
15-N
ov
-07
01-D
ec-07
15-D
ec-07
01-J
an
-08
AFE Approval
+6
Engineering to 60%
+1
3
Preliminary Vendor Data
+7
Module Steel Fabrication
0
Module Pipe
Fabrication Duration
0
Rack/ Process
Module Assembly
-3
Last Process Area Module
On-site to Construction
Complete
0
Evaporator Units
0Vapour Compressors 0
Site Prep Duration
+1
Piling
-8
Commissioning Duration
+1
4
Start-up Duration
-3
Construction Duration
+3
1
Materials Delivery
+5
Weather Delay
+5
Labour Issues
+1
2
Long Leads
Complete to MC
+1
4
Design definition Changes
+5
Labour Productivity
+1
0
Reworks
+3
Sta
rt Date
Base=
03-S
ep-0
7
EV
= 2
0-D
ec-07
Th
e Step
Dia
gra
m d
emon
strates w
here th
e gro
wth
from
the
base estim
ate to
the E
xpected
Valu
e occu
rs, an
d id
entifies k
ey
facto
rs impactin
g th
e cost.
Imm
edia
te Risk
Con
trol M
easu
res
CSCExcellence In Risk Management April 2005
A complete risk register considers all sources of information
available for the project uncertainties.
Immediate Risk Control Measures
Project
Documentation
Qualitative
Analysis
Quantitative
Analysis
Risk Register
CSCExcellence In Risk Management April 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07
Unconstrained
Fix Filing Date (-120 days)
Early Application (-40 days)
No JV Delays (-60 days)
No Staffing Delays (-30 days)
The analysis can be used to evaluate impacts of schedule
risks, and test mitigation steps to show the potential for
schedule advancement. Incremental mitigation can be
applied to reach an acceptable target date.
Base
EV = 1-Nov-04
Mitigated
EV = 21-Feb-04
Contingency Plans
CSCExcellence In Risk Management April 2005
Pro
ba
bil
ity
Project NPV ($MM)
10%
30%
50%
70%
90%
2000-800 -400 0 400 800 1200 1600
Definition
EV = 528 $MM Project AFE
EV = 697 $MM
Mid-ConstructionEV = 669 $MM
Start Up
EV = 695 $MM
PlanningEV = 460 $MM
Use of risk analysis throughout the project life helps the
project team to focus on the most important risks for each
stage of development, resulting in a better defined project
(i.e. less risk).
Risk Monitoring System
CSCExcellence In Risk Management April 2005
Presentation Agenda
(2) Introduction to Risk Management
• Risk Management
• Risk Identification and Quantification
(1) Mining Issues and Problems
• Mining Activities – Life Cycle
• Key Uncertainties
(3) Risk Analysis and the Risk Management Process
• Quantitative Risk Management Tools
(4) Specific Application Examples
• Portfolio Management
• Mine Development
(5) Summary
CSCExcellence In Risk Management April 2005
Mining Issues and Problems – Key Uncertainties
Life Cycle Activity: Business Focus Key Uncertainties
Strategic Planning Market conditionsPolitical & Social Risk
Stakeholder Value / GovernanceSelection of Business / Areas
Portfolio Management Balance of PortfolioRationalization of Assets
Market conditionsPolitical & Social RiskGeological Potential
Prospect Definition Rationalization of Assets Resource Quality / QuantityEstimate of Potential Value
Start Up / Ramp Up Production On Stream Quality of Execution, Technology
and Regulatory Issues
Development Project Execution Capital Cost, Schedule
Technology
Expansion Project Optimization and Planning
Capital Cost, Schedule
Technology, Interference
Production Volumes, Rates, OPEX, Product Slate and Quality
Ore grade, Plant operability, Operating
team performance, Regulatory Issues
Abandonment Long Term Liabilities, Closure Cumulative Impact of Operating
Decisions, Environmental and
Social Issues
CSCExcellence In Risk Management April 2005
Mining Issues and Problems
Activity: Business Focus Key Uncertainties
Strategic Planning Market conditionsPolitical & Social Risk
Stakeholder Value / GovernanceSelection of Business / Areas
Portfolio Management Balance of PortfolioRationalization of Assets
Market conditionsPolitical & Social RiskGeological Potential
Prospect Definition Rationalization of Assets Resource Quality / QuantityEstimate of Potential Value
Early in the Project life cycle the analysis should be focused at a high level to level to
ensure that the right strategic decision is taken.
CSCExcellence In Risk Management April 2005
Strategy Table for Country Risk Analysis
Decisions
Strategy Country Commodities MiningExtraction
Processing Markets
Increasing
Reserves
Canada Polymetallic Open Pit Heap Leach In Country
CompetitiveNeed
Indonesia Precious
Metals
Underground Standard
Flotation &
Concentration
Regional
CompetitiveAdvantage
Russia Industrial
Minerals
InSitu Leach Solvex
Smelting&
Refining
In Country:
onsite
In Country:
offsite
Out Of
Country
International
Selected Strategy Options
CSCExcellence In Risk Management April 2005
Portfolio Management to select best mining project
Pre-
AcquisitionAcquisition
Project
Execution
CAPEX
OPEX
Revenue
ProjectNPV
Discount
Rate
Acquisition
Duration
Exploration/
AFE DurationMech.
Duration
Extraordinary
Costs
Acquisition/
Exploration
Costs
Local
BenefitsLabour
Productivity
Labour
Costs
Energy &
Utility Costs
Chemical
Costs
Fixed
Costs
Variable
Costs
BulksMaterial
& Equipment
Costs
Commodity
PriceFiscal
Terms
Taxes &
Royalties
Expropriate
First
Production
Smelting &
Refining Costs
Closure
Environmental
Performance
Infrastructure
Costs
Political
Climate
Socio-Cultural
Environment
Environmental
Performance
Closure
Cost
CSCExcellence In Risk Management April 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-1500 -1000 -500 0 500 1000 1500
Pro
ba
bil
ity
$MM NPV @ 12%
NPV Country Case Comparison
CanadaEV = $147 MM
IndonesiaEV = $48 MM
Portfolio Management
RussiaEV = -$415 MM
CSCExcellence In Risk Management April 2005
-1000
-500
0
500
1000
2000 2005 2010 2015
Canada Payout
EV = 2011
Indonesia PayoutEV = 2014
Russia Payout
EV = Never
$M
M
Cumulative Cash Flow
Year
Portfolio Management
CSCExcellence In Risk Management April 2005
-100 0 100 200 300 400
EV = $147 MM
$MM NPV @ 12%
The Tornado Diagram highlights the key drivers for the option
and identifies areas to focus mitigation efforts to ensure success
NPV Canadian Case
Political Climate
Daily Production
Socio-Cultural Environment
Taxes & Royalties
Au Grade
Cu Price
Environmental Performance
Au Price
Labour Costs
Zn Recovery Rate
Zn Grade
Chemical Costs
Ramp-up Duration
Local Benefits
Acquisition / Exploration Costs
Portfolio Management
CSCExcellence In Risk Management April 2005
Mining Issues and Problems
Activity: Business Focus Key Uncertainties
Start Up / Ramp Up Production On Stream Quality of Execution, Technology
and Regulatory Issues
Development Project Execution Capital Cost, Schedule
Technology
Expansion Project Optimization and Planning
Capital Cost, Schedule
Technology, Interference
During the Project Development phase the analysis should have more focus on the
tactical level to ensure that the project is executed well.
CSCExcellence In Risk Management April 2005
Materials/
Estimate
Variance
Total
Project
CAPEX
$ 160 MM
Indirects
$ 20 MM
Mill
$ 60 MM
Mine
$ 60 MM
$ 40 MM
LevelExcavation
$ 5 MM
ShaftExcavation
$ 5 MM
Water
$ 5 MM
Roads
$ 10 MM
Miscellaneous
Bid
Rate
Engineering
Cost
Variance
Organization
Performance
Competing
Projects
Labour
Productivity
$3 MM
Administration$ 15 MM
EPCM
Exchange
Rate
$1.5 MM/yr
SustainingCapital
Local
BenefitsCost
Variance
SubsurfaceEquipment
$ 15 MM
$20 MM
Infrastructure
Used
Equipment
Labour
Rate
Scope
Variance
Development – capital cost for a mining project
CSCExcellence In Risk Management April 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
50 100 150 200 250 300
Pro
ba
bil
ity
CAPEX ($MM)
The Cumulative Probability Distribution shows that $35 MM (16%)
contingency is required for a 70% confidence limit. The slope
(uncertainty) in the curve approximates a Class V Estimate.
Expected Value
CAPEX = $175 MM
Development - CAPEX
Base Estimate
$160 MM
P90 = $220 MM
P90 = $130 MM
Class V Estimate
+25%/-25%
$35 MM
CSCExcellence In Risk Management April 2005
-15 -10 -5 0 5 10 15 20
Mine Dev. Unit Cost Variance
Mine Dev. Quantities Variance
Competing Projects Environment
Level Excavation Dev. Scope Variance
Infrastructure Costs
Execution Organization Performance
Infrastructure Construction Duration
Regulatory Process Duration
Tailings Cost Variance
Roads Cost Variance
Subsurface Equipment Costs
Mine Construction Duration
EPCM Cost Variance -Base
Leaseholder Negotiations Duration
Water Cost Variance -Base
Total Capital Expenditure $MM
$175 MM
The range in in Capital Cost is largely due to uncertainty in Mine Unit
Cost Variance, Mine Quantities Variance and Level Development Scope
Variance.
Development - CAPEX
CSCExcellence In Risk Management April 2005
Presentation Agenda
(2) Introduction to Risk Management
• Risk Management
• Risk Identification and Quantification
(1) Mining Issues and Problems
• Mining Activities – Life Cycle
• Key Uncertainties
(3) Risk Analysis and the Risk Management Process
• Quantitative Risk Management Tools
(4) Specific Application Examples
• Portfolio Management
• Mine Development
(5) Summary
CSCExcellence In Risk Management April 2005
• Risk management is fundamental for accountability on corporate governance and on maximizing shareholder value.It begins with strategic definition and continues in a consistent manner throughout the project life cycle. The earlier risk management starts, the earlier you can avoid
or mitigate risks and capture opportunities.
• Risk Management ensures that there are no surprises.Documentation of assumptions and all risks. Communication of risk analysis results and the plan for managing those risks (avoid, accept, manage). The focus of efforts is on the underlying project risks.
• Range Estimating is not Risk Analysis.Fully accountable risk analysis considers the specific uncertainties of a project, and incorporates these underlying risks into the project value. Processes that provide single-point outcomes or risk distributions based on the probability of fixed outcomes (decision trees, KT, range estimating) do not meet the definition of risk analysis.
• “Ignoring risks to a project is not an option; important decisions will be made anyway, should they not be made with the best information available?”(Project Manager Today, October 2000)