Independent Engineering Information For Project Financing

INTRODUCTION A long time has passed since geologists encountered encouraging mineralization in their regional exploration program for base metals deposits. Detailed drilling during the following two field seasons served to delineate the configuration of the deposit. Various statistical techniques were employed to provide confidence levels regarding the extent of the reserves and to categorize them according to whether proved, indicated or inferred. At this juncture, it appears that the company has an orebody. Time elapsed? - three years; money spent? - $2.5 million. Much remains to be done before the orebody becomes a mine. The company urgently needs to develop new orebodies to replace its existing mines which are being depleted. It therefore has expended sizable amounts in exploration, the life blood of the company. A staff of specialists is maintained to evaluate new projects and to conduct feasibility studies. The scale of new mining projects today is beyond the resources of most mining companies. Bank financing, therefore, is often vital if the company is to survive. The following scenario describes how a company goes about evaluating mine projects and what is needed to meet lender's criteria in securing the needed financing. MINE PLANNING Now that the company engineers have taken over the project, their concern is no longer with finding ore but in developing it. An exploration shaft has been put down and a tunnel driven into the orebody to verify, on a large scale, what has been seen so far only in pencil- like drill cores. A large tonnage bulk sample is mined and shipped off to an independent metallurgical process laboratory for beneficiation testing. The budget is expended to cover engineering studies. Preliminary capical and operating costs are developed in- house and profitability studies are made based or1 assumptions concerning the markets for the main product and the indicated gold, silver, and other by-products. Time elapsed? - four years; cost to date? - $3.5-$4.5 million. The staff prepares its own pre-feasibility study. After review, the Executive Committee authorizes management to proceed with full-scale studies. The task is to make preliminary designs and to develop definitive capital and operating cost estimates. Specialized consultants will be engaged to study slope stability for the open pit and rock strength if underground recovery proves more feasible. If it is near the sea, an oceanographic report might be commissioned to see if the tailings can be disposed of off shore. Environmental impact studies are commissioned from a firm familiar with government requirements and regulations in this important area. The company subscribes for an expensive multi-client study of the supply- demand-price outlook for the product to support its own long-range price forecast. Now all the numbers are available to make a definitive appraisal of the value of the project. Cash flow analyses and sensitivity studies follow. Reams of computer printouts are generated. Time elapsed: five years. Amount spent? - up to $9 million, depending on the size, complexity and attractiveness of the project. Marginal projects always take longer. Finally, an engineering and construction (E&C) company is given the task of integrating and compiling all the data into a feasibility study. The results of dozens of reports, memoranda, computer printouts, and charts are boiled down to one final summary report of a few hundred pages together with conclusions and recommendations. After thoughtful review at a board meeting, the directors authorize management to proceed with detailed engineering work - provided that