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By Peter Allen, John R. Stuermer

COUNTRY RISK ANALYSIS A company operating in a foreign country assumes all the risks that it would at home. However, beyond these, it assumes risks that arise from the unique political economic, financial conditions of the foreign country which it operates. These risks are known as "country risks". The importance of these risks has grown appreciably in the recent past (particularly in the aftermath of Iran's revolution in the late 1970s and Mexico's debt rescheduling of 1982-83), and as a result, country risk analysis has become an increasingly useful management tool. Country risk analysis seeks to assess the probability that countries will service their aggregate foreign liabilities on time, as well as the probability that country conditions could inhibit the debt service capability of private sector debtors. This involves assessment of both the ability and the willingness of countries to meet their external liabilities in a timely fashion. "Ability" is linked economic and financial variables: principally, a country's economic structure, foreign exchange generating capacity and debt service burden. On the other hand, "willingness" is tied to political factors: mainly the economic/financial orientation of government policy and the stability of economic decision making. Ability: Economic, Financial Conditions and Prospects Judgement of a country's ability to meet foreign financial obligations begins with a detailed study of a country's external balance sheet which compares the country's foreign liabilities and assets. Table 1 below presents country balance sheets for Mexico, Korea and Indonesia. [TABLE 1 The External Balance 3-,-et 1983 (billions of dollars; Indonesia Mexico Korea Foreign Liabilities 31.1 67.6 40.5 By Source: Bank 13.1 75.5 26.3 Non-bank 18.0 12.114.2 Foreign Reserves 9.3 4.7 7.0] The large magnitude of Mexico's external debt (nearly $90 billion), compared to foreign assets of approximately $5 billion, illustrates the weakness of this country's external payments position, and the main reason that it has been unable to meet interest and principal payments and been forced to reschedule its foreign debt. On the other hand, the relationship between Korea's external liabilities and assets ($50.5 billion and $7 billion, respectively), is more favorable and helps explain why Korea has been able to meet debt service payments and maintain its access to the international capital markets. Indonesia has even a more favorable relationship between its foreign assets and liabilities, $31 billion and $9 billion, respectively, and its debt is mostly lower interest rate, non-bank debt, making for a less onerous debt service burden. After the balance sheet, the analysis turns to a comparison of the country's foreign exchange earning capacity and its prospective financing requirements, that is, the country's future earnings stream

Jan 1, 1985

By James L. Poole

INTRODUCTION Companies in the mining industry are subjected at times to currency exchange rate risks and interest rate risks. The former occurs any time a firm deals in more than one currency. The latter occurs anytime a firm is financing itself with borrowings that have a floating interest rate (although a fixed rate can be a problem at times). FOREIGN EXCHANGE RISKS There are two general reasons why exchange rate risks (FX risk) can occur: First, a firm may be building a mine or plant in another country where financing for the plan is denominated in funds other than the country hosting the plant. For example, if a Canadian firm is building a smelter in another country which is being financed with Canadian dollars, the C$100 million for labor, which must be paid in the local currency, has subjected the firm to a C$100 million FX exposure risk. If after the cost estimates were made the local currency appreciates 30% against the Canadian dollar, the cost of labor has increased to C$130 million. (Of course, the local currency could also devalue during this period making the labor cost component less than estimated.) The other reason exchange rate risk arises is due to the fact that the costs of production in one country producing minerals may be incurred in one currency while the production is sold in another currency, such as coal being exported from Canada to Japan under contracts denominated in Yen. In this example, the Canadian firm is exporting coal to Japan and being paid in yen in 30 days at a contract price of 100 Y per ton. Furthermore, assume that the mining firm anticipates a depreciation of the yen against the Canadian dollar of 5% in the next 30 days. Therefore, the mining firm stands to lose 5% of the value of its shipment in a month's time not including carrying costs. In both cases, the mining company risks an adverse change in the exchange rate, that is, the currency the company holds may decrease in value relative to the other currency. There are a number of ways to mitigate the exposure to foreign exchange which can be utilized by the mining company. Optimally, a company should try to match all their inflows and all their outflows in the same currency. For example, if a Canadian firm has mining costs and debt service costs both denominated in Canadian dollars then 100% of their receipts would need to be in Canadian dollars. If a Canadian firm has 70% of its cash outflows in Canadian dollars and 30% of its cash outflow in American dollars in the form of a loan amortization then their receipts would need to be 70% in Canadian dollars and 30% in U.S. dollars. This general principle of matching cash receipts and cash costs in the same currency works fine in a perfect world but what of the real world when these cannot be matched? In actual practice, however, the financial markets have developed a number of ways in which foreign exchange risks can he managed or reduced. FORWARD MARKETS One method is to use the forward markets which are made on a world-wide basis by the commerical banks for foreign exchange. If a firm wanted to lock in the current exchange rate for the receipt of a foreign currency at some point in the future, they could do so by contracting on the forward market with a bank selling that foreign currency at the current rate at the future date. For example, assume that a Canadian firm is exporting coal to Japan which would pay yen in 90 days. If a firm wanted to lock in today's exchange rate they could contract with a bank to sell on the forward market yen in 90 days. When the yen was received the contract would be executed by selling the yen to the bank and receiving the previously agreed upon number of Canadian dollars. Generally speaking, the forward market can be used to sell forward about 12 months. The costs of selling (or buying) forward

Jan 1, 1985

By Michael J. Fiannnaca, Michael M. Easdon

Disseminated epithermal gold metallization occurs within a breccia unit interpreted to be a submarine debris flow. Gold is associated with oxidized pyrite, fluorite, and jasperoidal silica. A minimum of 8 Mt (9 million st) of open-pittable mining reserves will be cyanide heap leached as run-of-mine ore at a rate of 0.9 Mt (1.0 million stpy 1. Careful evaluation of the combined results of successive sampling projects has established the pit plan, minable reserves, and process metallurgy of the operation. The sampling procedure utilized for a given test depended upon geological interpretation as well as the procedures, successes, and failures of previous tests. This paper summarizes the sampling and testing procedures of the development effort in light of the project goals and attendant problems in achieving them.

Jan 1, 1985

By Stuart McGill

This case-study of the financing of the Ok Tedi project illustrates the nature of project financing and outlines the arrangements made in the case of this project; it also demonstrates that the limitation of financial exposure is an important goal for Governments involved in developing the resources sector. The account includes a chronological description of the process by which the sponsors prepared for the financing of the project and the lenders became involved in it. The type of security arid loan documentation required for such financing is described, together with a broad analysis of their content and the manner in which the various risks involved in development are apportioned among the sponsors and lenders. The ability to apportion and limit financial liability is an important development for the owners of capital and resources.

Jan 1, 1985

By John S. Brock

INTRODUCTION The Oxford Dictionary says that the word "promoter" has usually been used in an opprobrious sense since at least 1876. This popular image of mining promoters is of cigar-chomping shysters and Brooklyn-Bridge vendors, improving their standard of living with the aid of funds raised through the sale of stock to little old ladies. It is unfortunate that mining promoters are considered crooks until they can prove their integrity and honesty by finding a mine. A common rule of thumb states that for every 1,000 prospects, 100 come to be drilled, and one becomes a mine. However, it is also a statistic that there have been mining promotions, where money raised has gone elsewhere than into the ground; Junior exploration companies can be handy vehicles for unscrupulous financial activity. One must remember though that every stock exchange has had its share of sound mining promotions that, because of the one in 1,000 odds, have failed for legitimate reasons. The promoter must be able to rationalize the worth of a mineral discovery which, on an industry- average basis, probably cost more to find than the discounted value of its net return, which return is not an assured percentage of invested capital, and furthermore, is ultimately from a wasting asset. So, it is easy to understand why the promoter must constantly justify the credibility of his operation to his grubstakers during the course of the "five phases of exploration," those being (1) euphoria, (2) disillusionment, (3) search for the guilty, (4) punishment for the innocent, and (5) distinction for the uninvolved. The promoter with the exploration organization that does not have the benefit of positive cash flow, by definition for the sake of this article, works for a promotional outfit, a Junior Company, that must raise its exploration budget from a variety of sources. Promotion, as discussed here, will not entirely refer to the formation and operation of a joint- stock company but rather to the overall methods of raising risk capital for mineral exploration ventures from outside sources. THE NECESSITY OF PROMOTION In Canada, the publicly financed Junior Company has had an enviable record of mine-finding success. In the Province of British Columbia alone, the discovery of fifteen out of twenty-four mines has been as a result of the activity of the Junior Company (B. C. & Yukon Chamber of Mines, 1977). In the Province of Ontario, one research study indicated that between 1951 and 1974 the 'Juniors' spent only 28 percent of the total exploration funds but were responsible for 62 percent of all economic discoveries (Freyman, 1978). The reasons for the success of the Juniors are tied to a variety of factors, the main one being personal initiative based on incentive. In other words, the principals, or their employees have 'a piece of the action.' The smaller companies can operate faster and more efficiently than their larger counterparts. The Junior Company is also destined to take some bigger risks, the 'long shots,' many of which efforts by virtue of the Junior's perseverance coupled with a touch of 'ore is where you find it' philosophy, result in major discoveries. The individuals, syndicates, private and publicly financed Junior Companies, because of high costs of exploration and development, cannot hope to finance most mineral prospects all the way to production. Exceptions do exist, those being the lower capital cost, small, high-grade deposits. Private investors and publicly financed Junior companies, therefore, can usually afford to finance most exploration through the initial drill-testing stage. The major resource company will enter a mining deal with a Junior Company usually by way of option or joint venture agreement, and will finance to production to earn an equity in the prospect or the Junior Company or both. The conventional lending institutions, banks and government agencies, will usually only participate through loaning a portion of capital

Jan 1, 1985

By C. Richard Tinsley

INTRODUCTION The economic analysis (Chapter 3), the engineering studies (Chapter 10), the credit structure (and the consequential funding sources) - Chapter 11, and the overall feasibility structure for any venture are all directed to determining one major decision element: How much and how certain is the reward for taking these risks? Risk assessment is a surprisingly weak area of analysis and is usually addressed in a checklist fashion. It is much preferable to deal within a risk system so that the inevitable tradeoffs among risks are correctly made. DEFINITION The first step toward risk definition must be to ascertain all of the risks to which a project or a company is exposed; otherwise one will remain ignorant of the possibility of a financially crippling loss until it occurs. (Carter and Crockford, 1974). However, simply stating what "risk" is can lead to debate. For example, risk could be (adapted from Vaughan, 1982): -the chance of a loss - uncertainty of loss -possibility of loss - uncertainty -dispersion of actual from expected results - probability of an outcome different from the one expected - possibility of an occurrence of an undesirable contingency -a condition in which a possibility of a loss exists. For the minerals industry financier, the last definition is probably the most appropriate. However, from a mineral company's point of view the definition might well include the possibility of not achieving the expected financial return. RISK CLASSIFICATION Risk identification will be readily agreed as the all-important first step. There are five major "branches" of risk classification. These are: -Statistical -Modellers -Checklist -Project Financing -Insurance The Statistical set discovered probability theory and any risk discussion soon deteriorates into a mathematical jungle (Megill, 1977; Hartman, 1976; Reutlinger, 1970; and Pouliquen, 1970).Their use of terminology tells its own story: coin toss (binomial distribution), gamblers' ruin, delphi (oracle) techniques, monte-carlo simulations, random walks, etcetera. These techniques inadequately represent the judgements necessary in an increasingly complicated and interrelated world. The risk Modellers have turned to the computer to handle these inter-relationships but soon find barriers because of "simultaneity". Certainly the computer has its uses to conduct various analyses (marketed as "sensitivity" analyses) but very often one finds that this involves changing one or two variables at a time, all other things being equal. Unfortunately, in a modern and complex world all other things do not remain equal. The statisticians will, no doubt, jump to their own defence by citing this

Jan 1, 1985

By M. K. McCarter

Jan 1, 1985

By E. Kendall Cork

The traditional financial objective for a single mine company has been to operate as frugally as possible and to pay out most of the earnings as dividends. If the business is cyclical (as it is for most metals) the dividends might fluctuate quite widely. When the mine is exhausted the company disappears. This is still quite a viable strategy for a single mine company. It is not however a viable strategy for the world as a whole. The mining industry is built by mine development companies who can mobilize the people and capital to bring new mines into production. Their skills must include marketing, engineering, finance and other politics. It is very rare for a property to be brought in without the support of a major company that can provide all these services. The exceptions will usually have some other form of big brother support, for example the U.S. government uranium contracts at guaranteed generous prices. The mine development company will seek as a minimum to perpetuate itself by developing new mines in order to replace those which are running out. The more common and more ambitious objective is to grow -- that is to add to its ore reserves and current production by developing more new mines. The financial objectives for that company are very different. Obviously if all the earnings were paid out in dividends there would be nothing left to work with. The first financial policy then is to spend an appropriate amount on exploration for new properties. The next is to retain enough of the earnings to provide the capital for new projects at least sufficient for the equity. There is no magic formula as to what proportion of earnings should properly be distributed as dividends by a growth-oriented mine development company. As a rough rule of thumb distributing half or more will probably leave too little to work on and 30% or so is probably a good balance. However the circumstances differ widely from company to company. It may be useful to set an objective for the rate of growth of a company's earnings. Some have picked rates such as 15% per annum compounded. Others have set a target in real terms which might appear as 10 or 11% plus inflation. Obviously the arithmetic of compound interest is very attractive; however in practice there is much variation. Indeed current returns from existing operations swing widely with the business cycle and there is no assurance that economic new properties will be found according to someone's arbitrary time schedule. For example, Western Mining Corporation Limited in Australia explored for 30 years with little to show for it, but then found the great Australian nickel deposits and more recently the huge Roxby Downs copper. That long dry spell could not have fitted anyone's arbitrary calendar of growth and yet they would not have found such orebodies without that long period of effort. Should they have abandoned the search? Once a new property has been found or acquired there has to be a threshold rate of return on the new capital to be invested against which to evaluate the property's economics. Conventionally this seems to be 15% after tax, a number common in other heavy industries as well. In some cases it is expressed as a lower number plus allowance for inflation. Discounted cash flow analysis is a very useful tool but it does not make the decision. In the end a "go" decision depends on judgment of many factors some of which are numbers used in the DCF calculation whose credibility must be examined. It is curious how frequently investment proposals come in with the rates of return very close to 15%. The project advocates know that a number much less than 15% will not fly and that a number much more is not necessary. With much higher nominal and real interest rates of recent years, even though before tax, logic suggests that the hurdle rate should also rise. The power of compound interest is so great that 20% is very hard to achieve in any cash flow projection but 18% may be a sensible yard - stick. Once again it is remarkable how many project proposals come in with an 18% return. On the record the mining industry as a whole has not been overly restrictive in choosing its hurdle rates of return. This is shown by the abundance of metals in recent years and the failure of metal prices to keep up with inflation. All of the foregoing is standard text book stuff.

Jan 1, 1985

By Brian J. Gorval, Robert L. Kemeny

INTRODUCTION Financing, or providing adequate capital at low cost for developing and bringing a natural resource property into production, is a fundamental requirement for profitable operation. Under the present economic environment the cost of financing any project is gaining more importance than ever. The fundamental keys for success in mining are "the Four M's": Mineral, Market, Management and Money. In recent years, with capital and operating costs skyrocketing, increased emphasis on obtaining adequate and low cost capital funds for bringing in a prospect is essential. For a small mining company there are limited sources for raising funds. In most cases these companies have neither a substantial asset base, nor any cash flow, and they are deemed as risky investments. The issue of shares of capital stock of such a company is probably the most common method of raising funds via the public purse. Alternatively, debt could be used and a source of such capital might be private investors or financial institutions. The company which intends to raise funds from the investing public by way of the sale of equity, subsequently lists those shares for trading on a stock exchange. Going and staying public commits a company to a multitude of complex laws, rules and reporting requirements. The governing bodies are the watch dogs for the public. The largest of such an organization of this kind in the world is the Securities and Exchange Commission (SEC) in the United States. In Canada, the Securities Laws come from within provincial jurisdiction. Most provinces have their own Securities Act, and Securities Commission. It is the Commission which administers the Act, and hence controls the distribution and trading of securities within the province. Extra provincial registration is required for trading and distribution in more than one province. In British Columbia, prior to a public offering, the approval of the Superintendent of Brokers (SOB) and of the VSE must be obtained. THE VANCOUVER AND TORONTO STOCK EXCHANGES There are five stock exchanges in Canada which supply a trading forum in which mining companies may operate. The stock exchanges are located in Montreal, Toronto, Winnipeg, Calgary, and Vancouver. Of the five stock exchanges, the Vancouver Stock Exchange (VSE) and the Toronto Stock Exchange (TSE) are the most heavily used for resource-based issues and are the focus of this paper. The objective of this section is to provide a brief background on the VSE and TSE. The Vancouver Stock Exchange The VSE is Canada's predominant stock exchange for financing resource-based, junior issues. Since 1907, the VSE has acted as a source of funds for mining, exploration and energy companies throughout Canada and the world. Currently, there are over 1400 companies listed on the VSE. During 1983, over 3.1 billion shares traded at a value exceeding CDN$3.96 million. The VSE has developed a reputation as one of the few exchanges where a speculative resource venture may obtain a listing and subsequent financing in a relatively short time, generally five to ten months. The SOB, the Investment Dealer's Association of Canada (IDA), and the VSE all regulate trading at the Exchange. Any irregularities in a company's stock dealings are investigated and trading may be halted by the VSE until a satisfactory explanation has been received from the suspended company. Companies can be suspended from trading or delisted for various reasons. One reason is misrepresentation of facts in documentation submitted to the SOB, VSE, or to the public, through news releases.

Jan 1, 1985

By Peter Sonnenfeld

Bedded potash deposits are known only from Phanerozoic evaporite sequences. They are composed of either sylvite or carnallite, of which only the former produces commercial potash ores. Both Permian and Neogene potash deposits have experienced sulfatization by percolating oxygenated surface brines, causing enrichment in the potash content. Permian potash deposits are mined in various parts of Europe and North America, Miocene ones only along the outer rim of the Carpathian Mountains and in Sicily. New discoveries of large Miocene rock salt bodies make it possible to predict the occurrence of potash deposits along their flanks.

Jan 1, 1985

By Mark E. Emerson

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

Jan 1, 1985

By Edwin A. Rides

HISTORICAL ORIGIN OF THE EXPORT CREDIT AGENCIES Almost since the inception of international commerce sellers, having manufactured and/or sold and shipped goods to an overseas buyer, have been obliged to accept the risk that they will not be paid for one reason or another. There are many reasons why payment may not be forthcoming, for example, the goods may be lost at sea, or rejected by the buyer or the buyer nay simply not be creditworthy. These risks were brought into sharp relief as international trading became more sophisticated and the practice of giving credit to buyers gathered momentum. Inevitably enterprises sprang up which offered same mitigation of this exposure, accepting houses and later confirming houses and banks were prepared to assure acceptable credit risks an behalf of the seller, usually by discounting trade paper, and for many years the market ticked over reasonably satisfactorily. However, after the 1914-18 War international trade was at an extremely low ebb and its inherent risks were accentuated to a point where they were often commercially unacceptable. Yet a healthy and vigorous international market was indispensable to recovery of the world economy and a number of governments, led by the United Kingdom, perceived a need to offer their exporters a comprehensive form of insurance, particularly to facilitate the extension of credit to foreign buyers. In the United Kingdom the Export Credits Guarantee Department (ECGD) was set up to encourage trade through the provision of export credit insurance. Over the ensuing years others followed suit and now most of the developed trading nations and many developing nations have similar agencies. PRESENT DAY IDLE OF THE EXPORT CREDIT AGENCIES (ECAS ) Traditionally then the BA's role was to encourage trade through the provision to exporters of insurance against the risks of non-payment by overseas buyers of their goods and services. However, during the 1970's the manufacturing industries of most of the developed nations found themselves facing severe competition for business, particularly in the developing world. As a result the more aggressive ECA's began to introduce ancillary forms of cover designed to reduce exporters' risks outside of the credit field. For instance, most of the European agencies now have a form of cover against foreign exchange risks here contracts are denominated in currencies other than that of the exporter's country. Most of the agencies also provide cover to exporters against the risk of unfair calling of bid, advance payment, performance bonds etc and in certain countries, where high inflation rates were endemic, a form of cover against cost escalation. In certain circumstances it is also possible for an exporter to obtain cover against losses arising as a result of the involvency of a partner in a consortium or joint venture. These are all forms of insurance but, also during the 1970's, many of the national export credit programmes took a major step away from their original raison d'etre by facilitating the provision of preferential financing terns for the acquisition of capital equipment by an overseas buyer. This new line of business quickly became an important ingredient of major export financing packages and, as we shall see later, turned out to be extremely costly for the countries providing it.

Jan 1, 1985

By Willard C. Lacy

Rather than attempting to present a summary of the many and highly varied papers that have been presented at this symposium on sampling and grade control, I will attempt to extract the general philosophy of analysis and approach, and attempt to identify the trend of future developments. First, the term "sampling" is used with its broadest connotations. A sample consists of a representative portion of a larger mass, and must represent the mass not only in the grade of contained metals or minerals, but also in all other respects in terms of mineralogy and mineral quality (1, 5), deleterious materials, recoverability of economic components, physical behavior, geophysical response (I), and even archaeological and environmental aspects (7, 11). The sample must be taken from a locality and in such a manner and quantity that it is representative of the larger rock mass. This calls for complete and accurate geological control and an understanding of the nature and distribution of the contained chemical and physical elements and a record of the effectiveness of the different sampling methods. Second, value of a given mass of ore material is based upon its profitability - the difference between recoverable value and costs to achieve recovery, beneficiation and sale. There is a strong movement in mining geology control toward more complete analysis in determining cutoff grades and in grade control, as illustrated by the kriging of metallurgical recovery factors as well as grade at the Mercur Mine (8). To achieve a "profit- ability factor" as a guide for economic mining practice requires further integration of: 1) the value of contained metal or mineral, 2) percentage recovery of values, 3) dilution of ore with waste rock, 4) addition to, or loss of value as a consequence of by-product materials or deleterious components, 5) cost of producing a saleable product plus mini- mum profit to justify the effort (cutoff), and 6) cost of land restoration (7, 11). All these parameters vary with the rock type, rock structure, mineralogy, depth, geometry, mining and metallurgical methods, but they must be sampled and analyzed if sampling and grade control are to reflect profitability. A wide variety of deposits has been presented at this symposium; each deposit with its own problems and special solutions. Deposits containing high unit-value components, e.g. precious metals and diamonds, present special problems in the obtaining of accurate samples and generally require statistical analysis control methods or may disregard or modify occasional high or occasional low values, based upon experience (12 ) Grade control may be accurate for the long term but may vary for the short term. Bulk sampling is always essential. Deposits containing metals or minerals with low unit value are very sensitive to transport costs, and they are often very sensitive to small amounts of deleterious components or differences in physical or chemical behavior. Problems of sampling and grade control change with the genetic type of deposit, with the stage of deposit development and with the size of the information base. Precious metal epithermal deposits (2, 6, 8), because of rapid vertical zonation and erratic lateral distribution of values, have always been difficult to evaluate and maintain grade control and ore reserves. On the other hand, evaluation and grade control are relatively easy in bulk-low- grade deposits (4, 13). However, these deposits generally have a low margin of profit and are sensitive to mining and beneficiaton costs, price fluctuations and political costs. Industrial mineral deposits (5) often must be evaluated on the basis of their behavior, rather than by chemical analysis. Environmental impact generally increases with the scale of the operation, but certain elements or minerals have especially high impact effects (7, 11). In the exploration phase there is no production control of sampling procedures and careful geological observations are particularly essential. The greatest number of problems is related to the oxidized outcrop where the chemical environment of the ore body has changed and the contained values may have been enriched, depleted or values left unchanged (2, 6). Present evidence suggests that gold values may be very mobile under certain conditions (2, 6) and stable under others. Everything must be sampled in detail. Principal values and by-product or deleterious elements may vary dependent upon their position within the soil profile. Such factors as geomorphic position, erosion rate, vegetation, climate, etc., may affect the interpretation (1, 3). During the development phase it is equally easy to overtest, to have "paralysis by analysis," as to undertest (3, 6). Bulk samplng and testing are

Jan 1, 1985

By H. W. Schull

The Alligator Ridge gold deposits are located in northwest White Pine County at the southwest end of Alligator Ridge. Alligator Ridge is on the west side of Long Valley in the range of hills that separates Long and Newark valleys. The nearest population center is Ely, about 113 km (70 miles) to the southeast. Access to the Alligator Ridge gold mine from Ely is via US Highway 50 and the Long Valley Ruby Marsh Road. The latitude and longitude is approximately 39° 45' north and 116° 30' west. The Alligator Ridge gold deposits occur in the lower 61 m (200 ft) of the Mississippian-Devonian Pilot Shale formation, a laminated calcareous carbonaceous siltstone. The gold deposits contain carbonaceous, oxide, and jasperoid type gold ore. For more details on the geologic features of the deposits, see Schull, Sutherland, and Ilchik (in press). The discovery story of Alligator Ridge began in the spring of 1976 when the areas mapped as jasperoid on the 1:250,000 scale geologic map of White Pine County (Hose and Blake, 1976) were examined and sampled. Seventeen samples, about 23 kg (50 lb), were collected from an area about 0.65 km2 (0.25 sq mile). Of these 17 samples 10 reported atomic absorption values of less than 0. 1 ppm Au and 7 reported values in the 0.1 to 1.0 ppm Au range. In June of 1976 20 lode claims were staked to claim the area of the rock chip sampling. The claims' end and side center lines were used as a grid for soil sampling. Sample stations were 91 m (300 ft) apart and sample lines were 229 m (750 ft) apart. The samples were sieved to - 180 µm (- 80 mesh). Out of 99 soil samples, seven samples reported Au values in the 0.1 to 1.0 ppm range. Of the seven auriferous samples, five were located over the jasperoid outcrops previously sampled; one over unmineralized Pilot Shale a few hundred m (ft) downslope from some Au-bearing jasperoid; and one from a 15 x 15 m (50 x 50 ft) talus outcrop area of hitherto unnoticed mineralized Pilot Shale. Subsequent sampling, mapping and drilling would show that this 15 X 15 m (50 x 50 ft) outcrop area was the top of the Vantage 1 ore body, about 1.27 Mt (1,400,000 st) of over 3 g/0.9 t (0.11 oz/st) Au. Late in the summer of 1976 about 30 more 1.4 to 2.2 kg (3 to 5 lb) rock chip samples were collected in the course of preliminary geologic mapping. This mapping and sampling showed that the gold-bearing jasperoids occurred at the contact between the Pilot Shale and the underlying Devils Gate Limestone. Rock chip samples of 0.1 ppm Au or greater were restricted to the jasperoids and the mineralized outcrop area of Pilot Shale located by the soil sample survey. Rock chip samples from the area of mineralized Pilot Shale were in the 3 to 5 ppm Au range. Activity resumed in the summer of 1977 with a more detailed soil geochemical survey. The jasperoid areas were defined as large geochemical gold anomalies of values greater than 0.1 ppm and locally greater than 0.2 ppm Au. Soil samples from the area of mineralized Pilot Shale outlined a greater than 0.1 ppm gold anomaly 61 x 152 m (200 x 500 ft) in size. Further geologic mapping showed that elsewhere, even where bleached and silicified, the Pilot Shale areas were geochemically very low in gold (less than 0.1 ppm Au). In November, 1977 twelve rotary percussion drill holes were drilled to test the gold-bearing jasperoid areas and the mineralized Pilot Shale area. Drilling of the jasperoid areas showed that the jasperoids gave way at shallow depths [less than 24 m (80 ft)] to unmineralized unaltered Devils Gate Limestone. A five hole cross pattern was drilled to test the area of mineralized Pilot Shale. Four of the five holes re-

Jan 1, 1985

By Richard A. Boulay

The effects of capital, operating and debt cost variations on project performance criteria are examined using a theoretical model and an actual case history. On an after-tax basis, financial measurements are found to be most sensitive to operating cost changes, somewhat sensitive to reasonable changes in capital costs and relatively insensitive to interest rate fluctuations.

Jan 1, 1985

By Peter Tegart

The discovery of gold in the Toodoggone River area is credited to Charles McClair who mined placer deposits in 1925, reportedly valued at $17,500. After he and his partner went missing in 1927, efforts to relocate their workings resulted in the formation of Two Brothers Valley Gold Mines Ltd. in 1933, in which the legendary Grant McConachie (first president of CP Air) played an active role. This was the age when the prospector first utilized the airplane to reconnoitre remote areas. What greeted the observer from the air was an area rich in orange and yellow colours characteristic of gossans formed by the oxidation of sulphides. However, Samuel Black, a Hudson Bay Company fur trader, had also noted in his diary as early as 1824, the unusual and many gossanous colours in the headwaters of the Finlay River. These gossans, coupled with white limestone bluffs and the presence of placer gold, attracted the first reconnaissance of the area by Cominco in 1929. Cominco was ever active in remote areas at this time. They staked and worked several base-metal showings hosted by limestone at the margins of intrusive stocks. These early workers also obtained erratic high gold assays from chalcedony float samples found in creeks draining into the Toodoggone River. However, because the samples gave inconsistent assays, no concerted effort was made to locate their source. Except for the occasional horse-supported prospecting party of the late 1940s and early 1950s, the area did not receive much attention until 1968. Work until this time focused on the base metal lead-zinc showings which contained attractive silver credits. Gold was not an attraction because of the set price established by the US government. The late 1960s saw the northward expansion of porphyry copper exploration into the Toodoggone. A program of gossan soil sampling (gossans which had attracted the early workers) was carried out by Kennco Explorations (Western) Ltd. in 1966-1967. They analysed for base metals in the field, using a cold extraction method. The Kemess copper- gold prospect was staked as a result of anomalous copper values from this early geochemical program. In 1968, Kennco continued the program of silt traversing and field geochemical testing. The samples were further subjected to multielement analysis consisting of copper, molybdenum, lead, zinc, cobalt, nickel, and silver at Kennco's North Vancouver laboratory. Several anomalous creeks, high in combinations of copper, molybdenum, and silver, were outlined. Some initial soil grids were also established. The fall of 1969 saw the return of Kennco prospector Gordon Davies and geologist Bob Stevenson to check out a well-defined molybdenum, scattered copper and silver anomaly in soils from a grid on the Chappelle claims. The subsequent analysis of several selected quartz felsenmeer floats yielded one assay which ran in the order of 0.25 kg/t (8 oz per st) gold and 2.2 kg/t (70 oz per st) silver. Subsequent trenching on the Chappelle claims exposed the source of float in a 4- m (134) wide vein of high grade gold-silver mineralization. These results led quickly to the realization that the district had precious metal potential. Subsequent exploration in the period 1969-1974 by Kennco resulted in the discovery of most of the gold and silver occurrences on the Chappelle and Lawyers properties. Several other gold and silver occurrences were found in this district by Cordilleran, Cominco, and Sumitomo, working the district during this period. Conwest optioned the Chappelle in 1973 and explored underground by adit entry as part of a one-year program. In 1974, Du Pont of Canada Exploration Ltd. optioned the Chappelle claims and in March 1980, using reserves developed on the A vein, placed the Baker mine into production at a rate of 90.7 Vd (100 stpd). The Amethyst zone on the Lawyers property, 8 km (5 miles) north of Chappelle, was found in 1973 by Kennco using continued, persistent followup prospecting of silver silt geochemical anomalies. A silt anomaly in the order of 3.4 ppm silver occurred in a stream flowing 300 m (984 ft)

Jan 1, 1985

By Canada Ernst & Whinney

INTRODUCTION The principal objective of this chapter is to provide guidance in understanding and making effective use of published financial statements of mining companies. Although financial statements only represent a gathering together of information relevant to an enterprise's financial position and results of operations, they increasingly reflect the complexities of the modern day business environment. In the mining industry, a wide variety of accounting practices have evolved to deal with the unique aspects of the business in the absence of authoritative accounting pronouncements from standard-setting bodies. Given such complexities and divergent practices, financial statements of mining companies are not easily understood and cannot be used effectively as a tool in decision-making without a basic knowledge of fundamental accounting concepts, generally accepted accounting principles and their application in the mining industry. As such, this chapter is not restricted to a discussion of the accounting for the unique aspects of the mining industry. These aspects are dealt with at length but the text also includes a discussion of general accounting concepts and practices which have wide application in the mining industry. Frequent references are made in the text to international practices and to specific rules and requirements of individual countries. In this respect, the scope is restricted to four major mining environments, Canada, the UK, the US and Australia, all of which have made significant contributions to the development of generally accepted accounting principles. Acknowledgements This chapter was prepared under the direction of Ian Murray of Ernst & Whinney in Toronto, Canada. Contributions were received from Graham Butt, Mark O'Sullivan and Dominic Robinson, all from Ernst & Whinney in Toronto and Bill Duvall and Tom Schoenbaechler from Ernst & Whinney in Louisville, Kentucky, US. The authors would also like to acknowledge the assistance received from David Ferguson, Don MacLean, David Taylor and Susan Zoutman from Ernst & Whinney, Toronto, from the UK and Australian practices of Ernst & Whinney and from Ernst & Whinney International. FINANCIAL STATEMENTS - ELEMENTS AND CONCEPTS Financial statements were originally a stewardship report to owners to satisfy them that management had given a proper account of the resources with which it had been entrusted. Today, the number of users of financial statements has expanded to include the following groups: - shareholders, present and prospective; - lenders, present and prospective; - financial analysts; - regulatory authorities; - taxing authorities; - labour unions and employees; and - creditors and customers. The expectations of these user groups differ. For example, investors and lenders require information that will indicate the adequacy of their security and the profitability of the enterprise; taxing authorities will be concerned with the concept of income; labour unions and employees will focus on the profitability of the enterprise. Ground Rules for Preparing Financial Statements Responsibility for Financial Statements Financial statements are the representations of management. This may strike the reader as a rather obvious statement. It is important to remember, however, the role of judgment in accounting. Notwithstanding the promulgation of accounting standards in the developed countries, considerable flexibility remains in the selection of accounting practices and methods and in their presentation. Arguably, there is more flexibility in the mining industry as few countries have developed standards to deal with its unique aspects. Accordingly, financial statements are as much a product of management's perspective and philosophy as they are a compliance document.

Jan 1, 1985

By Charles E. Glass

The stabil ity of engineered embankments subjected to earthquakes has received considerable attention in the last 10 years, but most of the effort has been directed toward stability of earth dams. Based upon past performance, earthquake- induced failures on non-impounding mine waste structures will likely correspond to small, local slumps or debris slides, and their stability should be considered as an integral part of mine economic planning. As such, stability considerations should include earthquake hazard, characteristics of earthquake ground motion, dynamic slope stability, and the impact that waste-dump failures have on mine operations. Numerous techniques have been proposed for analyzing the stability of embankments subjected to earthquakes. Before choosing an analysis technique, it is worth noting two important differences between the dynamic response of waste embankments and natural slopes. First, waste embankments respond as structures having unique modes of vibration, which causes embankment motions to differ from nearby ground motion. Second, because of embankment response, accelerations can be different at embankment crests than elsewhere in the structure and occur at frequencies that do not correspond to input ground motion. Because of these factors, embankment response should be calculated prior to slope stability assessment. In this paper several analysis techniques designed to calculate slope stability are evaluated, and conventional pseudostatic techniques are shown to be inappropriate for dynamic considerations. Techniques to calculate dynamic stability should include embankment response, all characteristics of earthquake motion, and roughness along failure planes as input, and should provide a displacement time-history of the slide mass as output. Two techniques satisfy this criterion, and in this paper the LADRS technique is recommended for its versatility and simplicity.

Jan 1, 1985

By James H. Boettcher, W. Durand Eppler

INTRODUCTION In the second quarter of 1979, Rapid Mining Co., Inc. ("Rapid") inquired whether Crocker National Bank ("CNB") would provide $4 million in term loan financing to help ("Dry Creek") acquire the outstanding shares of the Dry Creek Coal Company ("Dry Creek") in West Virginia. Prior to approaching CNB, Rapid had sought financing with the assistance of a financial advisor from a number of commercial banks without success. A summary of the initial terms requested by Rapid is shown in Table 1 compared with the actual terms on which the transaction closed. It is not difficult to note that the two sets of terms differ significantly. This is often the case when financing requests based on the expectations and vision of a mine developer are juxtaposed with more pragmatic requirements of a commercial bank. The "art" and fund of structuring financing plans for mining ventures (highly leveraged acquisitions or grass roots) comes in working with mine developers to arrive at a final financial structure that meets their objectives and constraints as well as those of the bank or other financial institutions providing much of the financing. Beginning with the terms requested by Rapid and ending with the terms that closed the transaction, this article briefly describes the process we went through with Rapid Mining. The Seller and Buyer The Dry Creek Coal Company was established in 1961, after its owner acquired the coal leases from Republic Steel. Republic has mined the primary coal seam from 1948-1961. Dry Creek was owned as a subchapter S corporation (i.e., for federal income tax purposes, income is taxed at the shareholder level) and had been run on a low key basis. Since the company had virtually no debt and limited cash needs, the owner produced primarily when rail cars were available and income was required. Output was therefore erratic as is shown in the top of Table II, but the result was a profitable little company with an attractive free cash position. Because the owner wished to retire and enjoy his wealth in a more readily spendable form, he had put the mine, with stated recoverable reserves of approximately 13 million tons, up for sale. In contrast, Rapid Coal's investors consisted of a number of investors of disparate financial situations. They had agreed upon a primary objective of income maximization and planned an annual production rate of 120,000 TPA which they and the current owner believed realizable. The Formulation of a Financing Structure Figure 1 presents a simplified overview of the sequence of steps taken in the financing process which lasted approximately three months from start to finish. Since banks see many requests for funding and considerble time is required to follow up on each, an important step was determining, after a brief review of the materials provided to us, whether the basic "eonomic entity" was viable. In this case, the size and quality of the reserves, the inherent operating cost characteristics, the sales arrangements, the management/labor situation and Rapid's principles all appeared to be sound enough to warrant investing the time necessary to do a thorough analysis of the project. Once this decision was made, the evaluation and analytic process shown in Figure 2 was initiated. The first and most fundamental concern of any banker is whether the loan will be paid back as scheduled from the cash flow generated by the project. The amount of debt relative to the owner's equity is of course crucial in such a determination. Before the debt/equity issue was addressed, however, a number of more qualitative factors had to be studied and if

Jan 1, 1985

INTRODUCTION Trade financing is a particularly important component of short-term financing for a minerals company since errors, extra costs, or payment delays/defaults can easily wipe out the profit margin on a particular shipment or can cause problems when arranging purchases of e.g. reagents. It is required to make any minerals operation function and does not have to be cross-border to require proper management. Sources of working capital are as follows: 1. Extended credit terms from suppliers 2. Inventory loans from banks, finance companies 3. Accounts receivable financing or factoring 4. Credit lines or overdraft facilities from banks. TRADE CREDITS These are provided under the familiar terms "net 10 days" or payment due by the "10th day of the following month." Thirty days for payment is usual but longer periods can be negotiated with regular suppliers. Shipment may be made on open account with specified periods for settlement. In the mining industry, a custom smelter gains trade credit by paying for concentrates three months after the month of shipment. INVENTORY LOANS Various forms of inventory finance are provided via "floor-plan" or warehouse financing. A set percentage, usually 60%-80%, of a good-quality, readily saleable inventory item (e.g. bullion, concentrates, ingots) will be provided by a bank or finance company which will usually have security over these products and has a right to inspect the goods from time to time. Legal security will he achieved by warehouse receipts, floating liens, chattel mortgages, trust receipts, or through collateral management service companies. The latter certify control over stock or distribution outlets and often carry insurance against fraud. Costs range around 1.5% - 2.0% p.a. or more plus some fees to cover out-of-pockets or other costs. ACCOUNTS RECEIVABLES Accounts receivable financing is based on the company's generation of satisfactory receivables which are continuously assigned to a bank or finance company ("factoring"). Because of the risks in being able to collect receivables, such as payments to a smelter for its blister copper shipments to a refinery, this form of financing costs as much as 3% - 5% of the debt amount purchased plus an additional charge for processing paperwork. Receivables can be purchased with or without recourse and on a notification or non-notification basis to the client's customer to, respectively, pay the invoice directly to the bank or not. LETTERS OF CREDIT Letters of Credit ("L/C's") are a common feature of international trade finance whereby a bank, at the request of the buyer, issues a written undertaking to an exporter to pay a specified sum of money within a set time on presentation of previously specified documents. This undertaking means that the exporter is no longer relying on the credit standing and integrity of the foreign importer. A dispute about shipment does not otherwise affect the obligation to pay upon presentation of a "clean" set of documents. These documents include the hill of lading and other documentation, often on standard "form" bases. There are a number of conventions and techniques in L/C's such as irrevocable/revocable L/C's, time L/C's, confirmation/advising L/C's and transferable L/C's. These are tools to adjust for the varying risks that the importer will not pay. Other routes where one is comfortable with an importer include documentary sight hills (D/P hill), documentary term bills (D/A bill), and, of course, open account.

Jan 1, 1985