Had a good PDAC – Presenting the Study Survey

I flew to Toronto on the way home from my visit to Serbia. 2016 was my fifth consecutive PDAC (Prospectors and Developers Association of Canada) convention.

From my point of view, things were not nearly as grim this year as they were in 2015. A whiff of optimism was in the air and the news was upbeat. The price of gold was finally shaking off the doldrums and some M&A activity had folks feeling a bit frisky.

Venture companies are watching their G&A for sure. I went to one fancy shindig, but it was a financial house, not a miner. Boart Longyear, the drilling company,  had a fun party too. It was not a high-budget deal (no coat check) but was lively and the drinks were plentiful.

I was invited to present the results of my NI 43-101 study survey published in the September 13, 2015, issue of Exploration Insights and posted here.

My session was part of a technical program on Tuesday afternoon called “Feasibility study vs. reality: An investor perspective.” It was an honor to be on the program with these distinguished speakers and their insightful programs:

  • Stephen Quin, Midas Gold Corp., Vancouver, Canada: Stibnite, Idaho: A fireproof gold project
  • Lawrence Smith, Lawrence Devon Smith & Associates, Toronto, Canada: Reality cheques: from studies to constructed
  • Allan Brownrigg, Resource Capital Funds, Denver, USA: A private equity fund’s due diligence
  • Tom Bruington, Sandstorm, Vancouver, Canada: The feasibility study as a diagnostic tool of project success

Shawn Campbell, Director, Finance Canada & US for Goldcorp Canada Ltd. set up and chaired the program. He did a terrific job. Thanks Shawn.

My program was first. It was titled “NI 43-101 engineering reports from 2015 – how did they measure up?” Go to the link for a copy.    Oliver_PDAC_2016_r4

I didn’t name names or show scores for the 34 studies reviewed. I did, however, mention the one standout, perfect score: Orezone’s Bomboré project feasibility study.

The turnout was surprisingly high for a technical program, I suppose. It was a good-size room and was well over half full.

Best of all, the presentation received wonderful coverage in two of mining’s most prestigious and credible publications. Click on the links:

The Northern Miner – PDAC 2016: Survey of engineering reports fails to impress

The Mining Journal – Compliant documents mislead investors

Who could ask for more?

Adventures in Engineering – Serbia

Lest anyone forget, I am a working engineer, not a full-time blogger. You might have wondered. I post so rarely.

Most engineering is too tedious to write about, but I had an adventure this month worth describing. I can’t discuss the project itself due to confidentiality. But I can say describe my touristic detours.

I landed in Belgrade via Frankfurt. I can’t count Germany as a country visited since I only went to the airport. That’s the rule. So I can notch a total of one country visited outside the Western Hemisphere – Serbia.

My travel arrangements put me in Belgrade on Saturday morning, February 27 and Bor on Monday by car on the 29th. I returned to North America for PDAC late on March 5, 2016. PDAC is the Prospectors and Developers Association of Canada–the worlds largest mining conference. I’ll write another post about it.

The hotel was located semi-conveniently for walking to several points of interest. On Saturday I walked south along the Sava River from the Belgrade Fair.



I happened upon this quaint bike shop and asked if I could rent a bike the following day. Breathing through the butt of a cigarette (Serbia smokes), the owner said sure, it would be 135 dinars (US$1.21) per hour. Righteous price.IMG_0982

Unfortunately, the wind kicked up and I ended up walking a couple of miles the next day to the Belgrade Fortress. It’s a big city park now. I wanted to go to the Medieval Torture Device exhibition, but the directions to the ticket booth turned out to be wrong. Here’s a view of Belgrade from the park. That is the Sava River directly below its confluence with the Danube.




On Monday we drove about three hours to Bor, where the project is. Bor is an historic copper mining district dating from 1903. Several mines and a smelter are going strong and it is one of the hottest exploration districts in the world. Here’s a shot of Bor from a hill outside of town. The area is pleasant with rolling hills, running streams and hardwood forests. It reminded me of the Ozarks. The Bor smelter, shown in the distance on the right, was recently modernized. The locals are thrilled with the results. Apparently this clear view was a rare thing in the recent past.IMG_1009

Our hosts insisted we visit prominent Roman ruins not far away.

IMG_1026The discolored tiles and the third column in on the left side are original from about 250 AD.

I felt quite comfortable in Serbia. Our hosts were friendly and helpful. We shared a cultural affinity common in my experience among the worldwide engineer of mines fellowship.

Shame on BHP and Vale: Samarco Tailings Tragedy

On November 5, 2015, at about 5:00 p.m., two tailings dams failed at the Samarco iron ore mine near MARIANA, Minas Gerais, Brazil. Samarco is a 50:50 joint venture between BHP and Vale, the world’s largest and fifth largest mining companies based on market value. Details are sketchy, but we know the incident caused multiple deaths, numerous injuries and the near-total destruction of a small community located immediately downstream.

The enormity of this tragedy, once the full death toll is known, may be unprecedented. A limited research effort (an hour on Google) revealed 16 metal mine tailings dam failures worldwide since 2000. Six events caused deaths. The worst death toll was 17 in 2006 at a gold mine in China. The most recent was the September 10, 2014, incident at the Herculano iron ore mine, also in Minas Gerais, Brazil. I only went back to 2000. We absolutely should have known how to safely manage tailings since then. We certainly should know enough to relocate any communities potentially in harms way.

Neither BHP nor Vale responded properly in my opinion. Now it is too late. Failure to dispatch top brass to the site immediately means they failed to act properly.

Shame on BHP and Vale.

Both Vale and BHP CEOs and key executives should have traveled immediately to the site to oversee response actions. Both CEOs should personally participate in caring for the bereaved and dislocated. They should have made clear statements dispatching all needed corporate resources to the site including helicopters, search and rescue teams, medical teams and their best engineers.

I heard the total volume of the spill was over 55 million cubic meters. That’s half of Manhattan Island buried a meter deep.

The next stage is a full investigation of the cause of the disaster and the adequacy of the tailings impoundment design, operation, and emergency procedures.

This investigation must be independent. Never mind Samarco. That’s a shell. BHP and Vale need to step up, man up, and find out what happened. The investigation needs to be conducted transparently, and without any input from the companies other than to answer questions truthfully, freely provide any requested information, and finance the effort.

Brazilian authorities are not the proper institution to oversea the study. It’s reasonable to believe they might be culpable as well. I suggest a prestigious university or consortium of universities and engineering societies.

The way I see it, tailings impoundments can fail for one or a combination of three factors: poor design, improper operation, or an act of God.

I’ve already heard some discussion about tremors. From what I understand, the tremors, if any, were extremely minor, less than 3.0 on the magnitude scale, considered “not felt except by a very few under especially favorable conditions.”

Here’s some advice to BHP and Vale: don’t even try to blame this tragedy on those tiny tremors.



In the news – TV and Press in one day


Yesterday was my day in the news.

First, Canada’s Business News Network (BNN) interviewed me about the demise of Rubicon Minerals’ Phoenix Project in the Red Lake district, Ontario. I called it a “mess” back in September and followed up with a few calls that turned out to be prescient. On October 5 I called the project “toast” and suggested “put a fork in it, it’s done.” Sorry about the mixed metaphors.

All this took place on a great forum hosted by CEO.ca. It’s an old fashioned chat room like back in the 90s. A lot goes on in this chat. The discussion is often high level with participation by investors, wanna be investors, mine company management, wanna be mine company management, consultants, newsletter writers and blabbermouths like me. Here’s a link: https://chat.ceo.ca/index.html.

A week later I predicted they would curtail the underground crusher installation to conserve capital. Turns out they curtailed the whole works early this week for the very reason I suggested. The stock was a C$1.00 when I spoke up in September and is C$0.17 now.

It’s like my September 2014 prediction about Midway Pan which came true six months later.

Here’s a link to the tv interview:

Second, Global Mining Observer ran an interview with me. The title was ominous: Tim Oliver’s Death List.
I had some reservations about such an extreme title, but that’s the term I use for my list of projects showing signs of pending doom, like Rubicon and Pan. So, why not go with it in public?

Here is the link:


Nearly half of development-stage NI 43-101 studies surveyed lack engineering rigor: Tim Oliver

Exploration Insights
by Brent Cook

Issue No. 342
September 13, 2015

This week our go-to mining engineer, Tim Oliver, discusses the results of his investigation into 34 recently published National Instrument 43-101 technical reports. These reports are mining disclosure standards implemented by the Ontario Securities Commission for Canadian-listed companies. As Tim points out, an NI 43-101 compliant report does not guarantee the results are accurate or correct, it only means the report is in accordance with the regulations regarding what is included and how it is presented in the document by a Qualified Person (QP). To be compliant, these reports must be filed with a Canadian securities regulator and are posted on SEDAR.com. It’s a long rant, but worthwhile for anyone not familiar with the positives and pitfalls of NI 43-101.

I also want to draw your attention to an excellent interview posted by The Energy Report, here, in which Blair Way (President Flinders Graphite) provides some very useful insights into the graphite market. As you may recall, graphite was the metal du jour a couple of years back, but it has since run smack into the realities of mining and marketing specialty metals. To its credit, Flinders actually has a functioning plant with a marketable product, and is ready to go when graphite prices increase.

A reminder, the annual New Orleans Investment Conference runs from October 28 to 31 this year. In my opinion it is one of the best, if not the best, hard asset-big picture investment conferences in the world for those interested in an alternative view to mainstream economic views with a bit of conservative-nut job politics thrown in. I will also be chairing the Insights into Exploration panel Wednesday afternoon. Detailshere.

Analysis of 34 Technical Studies

By Tim Oliver
First published in Exploration Insights on September 13, 2015.


In March 2014 I wrote a two-part series for Exploration Insights titled “Top 10 Signs of a Bogus NI 43-101 Study”. I presented a slide show on the subject to the crew at Sprott Global Resource Investments Ltd. in Carlsbad, California. The presentation went well until the end. Steve Todoruk asked me what percentage of posted studies is actually bogus. I made what I thought was a reasonable guess. It was pretty high, and I could feel the room drifting away. Most didn’t believe me, and I felt I lost credibility.

The subject haunted me from that day. So, having some time on my hands, and looking for a way to promote my services, I decided to find out.


This article describes the results of an analysis of 34 advanced NI 43-101 studies, Preliminary Economic Assessments (PEA), Pre-feasibility Studies (PFS) and Feasibility Studies (FS) that were posted on SEDAR during the period May 1 to August 31, 2015.

The purpose of the study was to:

  • Count how many of each category of study are issued by Canadian Junior Mining Companies during a given period of time,
  • Review the studies for adequacy and quality according to criteria discussed below, and
  • Collect data and prepare a snapshot picture about the companies, the mining and processing methods, the commodities, and the geography of the Canadian Junior Mine development world.
  • Equip investors with study analysis tools so they can avoid companies with projects facing cost overruns. Inevitably, cost overrun means some level of investment loss. An example is Midway Gold, a failure foreshadowed during the feasibility study review for the “Top 10 Signs” article referenced above. Midway’s FS scored 45.


According to the methodology discussed below,

  • 13 of 34 studies are not suitable as a basis for an investment decision. Another 6 are borderline.
  • The target audience, investors, would benefit from studies with more engineering rigor, especially in the areas of project execution planning, engineering documentation and, in particular, scheduling.
  • Investors would also benefit from more complete explanations of the basis for operating and capital costs.
  • Investors need to be alert to contingency calculations. Too low a contingency means the financial model results are too rosy.
  • Counter to what I had previously thought, overstating metallurgical recovery does not appear to be a major cause of concern.
  • 23 of 34, or 67%, passed the “qualified” part of Qualified Person. That number should be 100%. Investors should closely examine the QP credentials. Beware if one person wears too many hats.


This paper evaluates development-stage studies. It does not address the deposit/the resource.

In my experience, investors focus most closely on the geology and resource statements, and that is proper. It’s impossible to engineer a profitable mine without a good deposit. Unfortunately, I find investors take a leap of faith on the project development engineering, assuming the signoff by a QP engineer guarantees the soundness of the engineering.

I first set out to show how QP signoff doesn’t guarantee engineering rigor, and to offer some tools for investors to peer into the “black box” of engineering studies.

This paper ventures further, by actually evaluating a selection of studies based on standards by which I judge the reports as objectively as I can. Those judgments are the subject of the report.

Ironically, since I don’t evaluate the geology and resources, I must make my own leap in assuming geology and resources were adequately addressed in the resource reports prior to the owner launching the development study.

It’s a catch 22. Perhaps a reader will offer a remedy.


The first task was to figure out a methodology. Well, I already had the “top ten” list. Here it is:

  1. QP Conflict of Interest  (10)
  2. QP Qualifications (10)
  3. Commodity Price Deck (5)
  4. Unrealistic Metallurgical Recoveries (6)
  5. Signs of Desperation (5)
  6. Lack of Engineering Documentation  (10)
  7. Unrealistically Low Contingency (7)
  8. Cost Basis Discussion (10)
  9. Missing or Unrealistic Project Schedule (10)
  10. New or Exotic Technology (5)

I decided to use these ten criteria as the basis for a grading system. The numbers in parentheses are weighting factors, or relative importance, for each item. For example, a good cost basis discussion is worth 10 points, while using new or exotic technology costs five points.

I then went onto SEDAR and began the tedious process of downloading studies. The system is set up for search by various means. You can enter the company, or leave it blank, which I did; I specified “Technical Report” and started with May 1.

The query results included all the PEAs, PFSs and FSs posted during the specified period. The query also included every Resource Report, Property Assessment and all QP Consent Forms for the reports caught in the search net.

By various means I streamlined the process and eventually settled on a sample universe of all the reports spanning the period from May 1 to August 31, 2015. That gave me about 39 reports. I culled out some that were irrelevant such as the slick FS produced by non-Junior companies to fulfill the regulatory requirements and to justify their budgets to Management. They are interesting but not relevant to my survey. I also discarded a report on a sand and gravel operation, and some studies designed only to report on a specific aspect or change to an ongoing project or operation: for instance, adding a flotation stage to a Mother Lode district mine to improve recovery. I wanted studies by Juniors for greenfields projects.

I reviewed each report in considerable detail. Sometimes I could get through a good PEA in just a few hours. Many FSs require more than a full day. Good quality studies are easier to review than poor-quality studies, as it’s easier to find information. With a lousy study I would waste a good deal of time making sure what I was looking for wasn’t there. Did they call it a schedule, timeline, execution plan, what? Is it there or not? Usually if you need to search hard, it isn’t there.

I gave each study a 1 or a 0 for the ten items: pass/fail.

Each item received a weighting factor. Those are the numbers in parentheses next to each top ten item in the list above. The weighting factors are based on how important I think the criteria is and how well I am able to assess it. For example, I know when a metallurgical recovery is comically high, but I can’t distinguish between 96.8% or 97.8% gold flotation/CIL recovery. I might look through the testing and find a flaw, but unless the stated recovery is obviously wrong, I score a 1.

I use a different standard for each level of study. PEAs don’t require much engineering or detailed infrastructure plans. FS require specific engineering drawings, criteria and specifications.

RugePincockMinorco (RPM) published an excellent guide (click on title) to the differences between the study levels in their June 2015 Newsletter: “Minimum Engineering Study Requirements Update.”

My guide and the source of my checklists is, “Project Management for Mining-Handbook for Delivering Project Success, Robin J. Hickson and Terry L. Owen, 2015, SME.” (“Project Success Handbook” hereafter) I swear by this resource and have hardcover and electronic editions so I’m never without it. The book succinctly lists nearly everything required for each level of study and explains why.

As it turned out, the maximum score possible is 78. Two of the 34 studies achieved perfect scores.

Anything lower that 50 flunks the test. If the score is between 50 and 60, be cautious. Four studies scored 51. Be very cautious.


Figure 1 shows a frequency distribution for the score ranges in increments of 10 points.

Tim Fig 1
Figure 1

Scoring Summary

Tim fig 2

Weak Areas

Tim fig 3

The points shown are the total number of studies, out of 34, that pass the test question.

Project Schedule

Fewer than half (14 of 34) the studies presented acceptable and believable project schedules. Not only is this the weakest area, but it is also, in my opinion, the most crucial criteria.

Schedule trumps all. Frequent readers know my belief that a project on schedule will likely be successful and on budget, and a project off schedule almost certainly won’t make budget and has a poor chance of success.

All projects, even PEAs, should be considered in terms of what it will take to make them successful—a project execution plan. The first thing in the plan is a schedule. It’s very rare to see a Project Execution Plan in a PEA, but even the PEA needs a coherent project schedule.

To fail in this category, a study must either have no schedule at all, or have an unrealistic schedule. A PEA need only have a narrative describing estimated time lines for permitting, design, procurement, construction and commissioning. This is not difficult. In my opinion, no seasoned study engineer should release a study without a clear project schedule.

Some of the PEAs received credit only because the economic model table showed two years for construction. After some debate with myself, I decided, at PEA level, allotting construction time on the economic model spreadsheet is the bare minimum amount of scheduling to pass. If the economic model shows one year for construction, I usually give no credit. Ordinarily a mine can’t be built in a year. There is one small heap leach with less than a year of construction shown on a well-presented schedule for a FS. It is really small, has a CEO with solid credentials in building mines, and has no real infrastructure challenges. So it passed.

Cost Basis Discussion

Just half of the studies included an acceptable cost basis discussion. Some studies simply list costs in a table. In my opinion, even a PEA needs a narrative description of the origin of the cost numbers. For example, PEA-level capital costs for a simple heap leach project in Nevada with no major infrastructure challenges can be estimated by benchmarking similar projects. If the PEA says, “Project x, y and z are very similar to the subject project. We used the as-built cost for Projects x, y and z, escalated for inflation, and scaled for the difference in project size, as the basis for a $/tonne processed factor to calculate the likely cost for the subject project.” That’s fine. Benchmarking is a legitimate cost estimating tool and is accurate enough for a PEA. The reader will know exactly where the cost numbers came from.

A more obscure commodity might require more work. For example niobium is the sought-after commodity in one of the projects studied. The PEA for that project required a bottom-up approach with extensive test work, process design, equipment specification and price quotes; a similar procedure as required for advanced studies (PFS, FS) of more common commodities.

A PFS or FS should declare what percentage of the total equipment cost was derived from vendor quotes. That isn’t difficult to do. A few pieces of major equipment easily make up the majority of the equipment cost. Vendor quotes are the best source of up-to-date equipment costs.  In a PFS or FS, at least 90% of the total mechanical equipment cost should come from vendor quotes.

The vendor will also provide the lead time for the equipment. A PFS or FS Project Schedule should indicate lead times for major equipment. As of today, the lead time for a large SAG mill gearless motor, the longest lead time item for most large projects, is about 18 months.

tim fig 4The point is, there is no set formula or template for the cost estimates, and that is why a clear, detailed explanation is essential. The explanation narrative is typically called the “Basis of Capital [Operating] Cost Estimate.”

Engineering Documentation

It should be obvious that an engineering study needs to show a little engineering. Yet only half of the studies showed adequate engineering support. Even a PEA needs a site plan, including plant layout with locations for major buildings, equipment installations, infrastructure features, mine facilities including shafts, adits and other openings. The engineer must demonstrate that the facilities required to exploit the deposit can actually fit and function on and in the surface topography.

PFS and FS should show detailed annual pit plans and cross sections along with General Arrangements and select cross sections for process plants.

A PEA can assume a pit slope angle. A PFS may refine the estimate by evaluating the rock type. A FS must conduct geotechnical studies including cell mapping and oriented core drilling to calculate expected actual slope angles.

PFS and FS should show road alignments and cross sections. The FS should show storm water best management practices (BMPs).

A simple block diagram is sufficient for a PEA Process Flow Diagram, but a PFS or FS requires separate flow diagrams for each process stage such as crushing, grinding, flotation, etc.

PFS and FS require a detailed equipment list. What equipment will be used, what size, how many, what size motors? The FS should include a Quote Log showing which vendors submitted which quotes, which were selected and why.

PFS and FS require design criteria including mass balance numbers, specific gravity, pulp densities, residence times, etc.

PFS and FS need electrical one-line diagrams and load studies.

These are just a few examples, not a full list.

Some documentation might be too large (in terms of bytes) for posting on SEDAR. The posted study should list all appendices so the reviewer knows the work was done and can access the documents if necessary. That said, with a bit of care the posted study and all appendices can be made to fit within SEDAR document size guidelines.

Odds and Ends

Here are some fun facts reflecting on the current status of the business.


I once jokingly characterized Canadian Juniors as three geologists with a mail drop in Vancouver. One is too old to travel, one is drilling in the jungle and the third is somewhere raising money.

If that was ever correct, it is not correct today. Of the 34 companies whose project studies were reviewed, nine CEOs were engineers, ten were geologists, 13 were financial types and two were either professional administrators or mine operations professionals not otherwise specified.


21 of the 34 studies were gold projects. Two were primarily silver, two were primarily copper, two were frac sand, and two were rare earths. Lead/zinc, phosphate, niobium, alumina, and scandium, added one each.


Surprisingly, the USA hosted the most projects, with eight. Ghana and Canada tied for second with three each, Mexico and Ghana had two, and the hot bed of mining, Peru, only had one.

Continent              Count

North America        16

Africa                     8

South America       4

Europe                  3

Oceana                 1

Greenland             1

Australia               1



This semi-qualitative analysis showed nearly half of the development stage NI 43-101 studies lack engineering rigor. A Qualified Person’s signature does not guarantee reliable results. Investors can avoid losses if they undertake an independent engineering review of a project’s NI 43-101 study before handing over their money.

If and when investors demand more rigor in these studies, the owners and engineers will need to step up their game. Everyone will benefit.

My next move will be to prepare a detailed report including names of companies and projects, and the raw scores. If I can generate enough interest, the report will become a regular, quarterly, service available for a cost to be determined.

Tim Oliver


A Mine is a Terrible Thing to Waste

In the preceding discussion Tim makes the point early on that, ironically, “I must make my own leap in assuming geology and resources were adequately addressed in the resource reports prior to the owner launching the development study.”

The geology and resource estimate form the basis of any mining study. If there is a mistake there, it is highly unlikely the mining and cost sides of a technical study will be right.

By coincidence, Goldcorp published a presentation on its Eleonore gold deposit in advance of an analyst tour that revealed a few surprises related to its resource modeling.

Eleonore is a high-grade underground mine with proven and probable reserves of 4.97 million ounces grading 6.30 grams per tonne gold (plus inferred 2.8mil oz @ 7.19g/t Au) that reached commercial production in April. Development and construction were supported by an in-house, 43-101 compliant technical report that ran 246 pages plus supporting documentation. Initial capex came to about US$2.04 billion and Goldcorp paid US$420 million for the deposit.

In the deeper portion of the orebody, Goldcorp is encountering more structural complexity than was modeled in the resource estimate. Specifically, the ore zones that were interpreted as relatively planar are, in fact, ductilely folded (Figures 2 and 3). The folding affects about 20% of the deeper reserves (~10% of total reserves).

(Fig. 2: Modeled vein shape vs. developed vein shape)
(Fig. 2: Modeled vein shape vs. developed vein shape)
(Fig. 3: Complexly folded vein and drill hole traces. Note how the three drill holes each seem to demonstrate a different vein character. These are spaced about 25 meters apart.)
(Fig. 3: Complexly folded vein and drill hole traces. Note how the three drill holes each seem to demonstrate a different vein character. These are spaced about 25 meters apart.)

The net affect of this newly recognized structural complexity is that in these zones the mine dilution increases, which means head grade drops and mining costs increase on a per ounce basis. In figure 2, Goldcorp estimates the grade drops by 25% and tonnes mined increases by 60% because of the additional rock that has to be mined to extract the ore.

A word on dilution:

The prime objective of any mining operation is to mine as much ore and little waste as possible–ore makes money, waste costs money. When mining an ore body there is almost always uneconomic rock that has to be extracted in order to efficiently mine the deposit. When mined it is called dilution because it is processed with the ore and lowers (dilutes) the grade going to the processing plant. For instance, if your ore zone is a 1-meter wide vein that grades 30 g/t Au but the mining width is 2 meters, that extra meter of rock dilutes the grade going to the mill. For simplicity, if the additional meter grades 0 g/t Au then the mined grade is diluted to 15 g/t Au.

I find it instructional that even a top group of estimators and engineers in one of the largest and most successful gold companies did not recognize the structural complexity until they were in it. It seems that, more often than not, when a problem arises in a resource estimate or engineering aspect of a mine it has a negative effect on the mine’s economics. That is just how Earth works and why one has to be especially diligent when assessing marginal or technically difficult deposits. If Eleonore were a marginal deposit owned by a junior miner (it’s not), it could go the way of: Adanac Moly, Mercator, Midway, Jaguar, Carpathain, Great Basin Gold, Orvana, San Gold, Allied Nevada, Colossus, Royal Oak, Aurcana, Equitorial, South Deep, Tabakota, Twin Buttes, Lisbon Valley, Oracle ridge, Silver Lake. . .you get the point.

There are of course, many many more mines that work than don’t but we still must be very diligent when reviewing a resource estimate, folks.

Letter to the NYT on the General Mining Act of 1872

Sent on August 14, 2015 to letters@nytimes.com

Here is a link to the Editorial

The NYT has a limit of 150 to 175 words. I wish I could have written more.

On August 13, the NYT posted an opinion about the recent spill of acidic mine water to a tributary of Colorado’s Animas River. In my opinion, the mess in the Upper Animas has been neglected for too long. EPA and other responsible parties need to quit playing patty-cake and get the problem fixed.
The NYT chose to use the tragedy to trot out the tired old arguments against the General Mining Law of 1872 (the mining law) suggesting a comprehensive reform might somehow remedy this and similar problems.
Wrong. The mining law is specific to the location and registration of mineral claims. Arguing the mining law is bad because it doesn’t require abandoned mines cleanup is as silly as arguing the Rural Electrification Act of 1936 is flawed because it doesn’t regulate greenhouse gases.
We have a complete set of laws, rules, regulations and standards to address the problem of abandoned mines.
It has absolutely nothing to do with the venerable and effective General Mining Act of 1872.
Timothy S. Oliver, PE
4612 N Cheyenne Trail
Tucson, AZ 85750
(520) 603-9258

The Black Box of NI 43-101 Reports

Note to Readers: This is the July 26, 2015 Issue of Brent Cook’s Exploration Insights. “EI” is the premier newsletter devoted to early discovery, high-reward opportunities, primarily among junior mining and exploration companies. I occasionally contribute articles to Brent’s weekly newsletter. My articles focus on the engineering aspects of early stage mine development projects. I will post the entire EI newsletter issue when my pieces appear.

The article includes a description of a benchmarking exercise I use as a reality check on mine capital cost estimates. In the future I’ll offer similar tools for readers to use in their evaluation of investments in companies with early stage mine development projects in general and NI 43-101 reports in particular.

Exploration Insights by Brent Cook www.explorationinsights.com

Issue No. 335 July 26, 2015

An ugly, ugly week in which the gold price dropped 3.2% (now -15% for the year), silver ended marginally lower (-1.3%, now -28% for the year), copper -4% (now -25% for the year), and the Bloomberg Commodity Index fell to its lowest level in 13 years. The Gold Miners index (GDX) dropped 9%, the Junior Miners index (GDXJ) was down 7%, and our EI portfolio declined 5%, finally taking it into negative territory for the year (-3%). The major indices were also hit, with the S&P 500 off 2.2%, NASDAQ off 2.3%, and the Russell 2000 down 3.2%. Yep, ugly.

On Friday we did see an afternoon bounce; and although it’s just possible that we maybe, just might possibly, have seen the final capitulation (the bottom) early Friday, I am not convinced, nor am I adding any positions. I intend to hang on to my cash and see where all this leads. If it goes at all like the 1997-2001 mining rout, we should be able to buy real companies run by honest and competent people with solid properties for something close to cash in the bank. We are close, but not there yet.

I want to draw your attention to the independent rant below from our go-to engineer Tim Oliver. In it he discusses technical studies and two projects in Latin America. If there is a project/company whose technical report you particularly need an independent and serious opinion on, contact Tim—that is what he does for a living.

The Rant

The Black Box of NI 43-101 Reports By Tim Oliver tim@timoliver.us

“I’m just comparing numbers and have quite a bit of experience, reading Feasibility/Pre-feasibility Studies, etc., since a few years, but sure I have to trust the official numbers and I know how many will fail/are already failing; it’s for sure a black box in a few parts until they really reach production, hopefully on time and on budget.”

The preceding quote from a recent conversation with an experienced industry investor and advisor stuck in my mind. He asked my opinion of a single-project company developing an underground gold mine in South America.

I took a quick look at the project’s feasibility study and found significant problems. I suggested he dig a bit deeper here and there. Do some benchmarking and consider the unrealistic construction schedule. He made the statement quoted above, and went forward, happy with his investment and that of his clients.

Here at EI we tend to be a bit more circumspect and not inclined to “trust the official numbers”. We are usually more inclined to unlock the mysteries of the “black box” these studies often appear to be–hence the following discussion.

Opening the Black Box: A Primer on Reviewing Advanced NI 43-101 Reports

National Instrument 43-101 came to be in 2001 in the wake of the 1997 Bre-X scandal where unscrupulous promoters parlayed an imaginary Indonesian gold deposit into a blockbuster stock with a share price of CAD$286 and a market cap over CAD$6B. The scam collapsed and so did the Canadian mining stock market. In order to prevent a recurrence, the Canadian securities regulators issued NI 43-101, which requires public disclosure of mining data and studies; it also requires that the studies be sanctioned by a “qualified person” (QP), as defined in the instrument.

Overall, NI 43-101 has been a good thing for Canadian mining and investors. NI 43-101 compliant reports contain valuable information and, to the savvy reviewer, reveal important facts and other important, but less tangible, information about the deposit owner. The reports are easily accessible through www.sedar.com.

At the same time, the program has serious shortcomings, described in more detail below. The main takeaway for readers is: Do not take these studies at face value; there are a myriad of motivations behind these studies. Use this guide to peer into the black box, assess the motivation of the owners and engineers, and divine the truth between the lines.

NI 43-101 covers a variety of disclosures. Here we examine the sequence of three engineering studies used to assess, with increasing detail and accuracy, the potential value of a mineral property.

The three studies are:

  • The Preliminary Economic Assessment (PEA)
  • The Prefeasibility Study (PFS)
  • The Feasibility Study (FS).

As illustrated in the chart below, the studies are conducted in the sequence listed. No set scope exists for any of the study levels.

rpm figure 1 EI BB(Fig. 1: From “Minimum Engineering Study Requirements” by RungePincockMinarco [RPM])

These studies are not new. They have a long history as the engineering basis for the orderly development of mining and other capital intensive projects. The study series spans the gap between exploration and construction. Fundamental to the practice of mine development is the principle that rigorous engineering breeds project success. The corollary is true as well: weak or sloppy engineering leads to project failure.

NI 43-101 codified the traditional study contents and added requirements for public disclosure, plus oversight by a “Qualified Person.”

Generally the PEA (often termed “scoping study” outside the coverage of NI 43-101) takes less time and costs less than the PFS or the FS, mostly because less drilling, lab work, and engineering are required. A PEA might require from several weeks to a year to complete and cost from $100,000 to $2.5 million. A more detailed PEA might reduce or even, in very special circumstances, eliminate the need for a PFS. The findings are suitable for either rejecting the project or approving funding for the PFS. They are not adequate for full project approval. Estimate accuracy is no better than ±40%.

The purpose of the PFS is to evaluate all the available options for mining, processing, and infrastructure in order to fix the plan to be evaluated in the Feasibility Study. The Pre-feasibility study is the first stage with enough financial resolution to determine and declare mineral reserves. Like the PEA, the PFS provides sufficient information only for project rejection or approval of the next study phase—the FS. The PFS might take six months to two years to complete and will cost from about $500,000 up to $10 million or more for a major, multi-billion dollar capital project. Estimate accuracy is no better than ±25%.

The FS describes and evaluates the complete project to be built. The design work is sufficient to support cost estimates at ±15% accuracy and is the proper vehicle for approval to construct. The time required to complete the study will range from at least one year to as many as five years; and, it will cost between $1 million and $50 million for large capital projects in remote, inaccessible areas.

Some noteworthy aspects of NI 43-101 studies are:

  • All three studies must follow the same cumbersome NI 43-101 Table of Contents.
  • Studies must be sanctioned by one or more “qualified persons” (QP).
  • The study report, or an extensive executive summary of the report, must be posted on the SEDAR[1] web site for public access.

The March 1 and 23, 2014, issues of EI contain a two-part series titled “Top Ten Signs of a Bogus NI 43-101 Report.” This is worth a read.

Why is the report being undertaken?

The March 1 piece described three types of owners and their motivations for performing the study. Discerning the motivation for the study is the first evaluation step. The three types of owners and their motivations are:

  1. Management is serious: The owner wishes to objectively assess the development potential of the deposit through a rigorous engineering analysis. Let’s use the term “real” here.
  2. Management seems lost: That is, the owner seems to desire only to comply with the NI 43-101 disclosure requirements. The study is superficial and meets minimum requirements. This will be referred to as “misdirected.”
  3. The owner wants to promote a marginal property: Put lipstick on a pig. This will be called “sham.”

This week we have a look at NI 43-101 in general, and then compare two studies. In upcoming issues, we may take a close look at each of the three study levels.

 The QP

The fundamental tenet of NI 43-101 is that an official, written sanction from a qualified, independent person will ensure the integrity of the study. Unfortunately the program, as implemented, often misses that mark widely.

First, any schmo can call him/her self a QP. NI 43-101 requires:

  • A university degree (or “equivalent accreditation” whatever that means) in engineering or geoscience,
  • Five years of “relevant” experience in mining or a related field, and
  • Membership in good standing in a professional association.
  • Foreigners have a couple of ambiguous additional requirements, easily met.

Second, recent (2011) amendments to NI 43-101 changed the requirements for QP independence so the QP need only be independent (no financial interest in the report findings) in the case of a PEA. PFS and FS may use employees and corporate officials as QPs.

So, NI 43-101 neutered the single provision that should give comfort to the poor investor: the sanction of a qualified and independent expert.

No successful operating company would put a scoping, prefeasibility, or feasibility study solely in the hands of a marginally qualified and compromised individual. A somewhat less genuine company may.

The point is, sham QPs are just as widespread as sham NI 43-101 reports. Don’t trust either without independent verification. The inverse is true as well. If the QP is credible, qualified, and independent, chances are the study findings are sound. This is the hallmark of a “real” study.

The most important quality in a QP is integrity. An honest, ethical QP will produce a credible NI 43-101 study.

Here are two examples.

The first is the December, 2014 PFS for Condor Gold’s La India Project. SRK authored the study with contributions from several specialty subcontractors. Each subject matter chapter was authored and vouched for by one of four QPs, with education, certification, and experience in each area for which the authors certify.

The second is the October, 2014 PEA for Troy Resources’ Karouni Project in Guyana authored by two full-time Troy employees, clearly at odds with NI 43-101 Part 5.3(1), which requires a maiden PEA be done by a completely independent QP. We review the project PFS later.

Cast of Characters

The Owner


Owners have strong incentives for positive study economics. The most obvious is the hoped-for bump in the stock price. Look what happened when Excelsior Mining released a very positive Pre-feasibility Study in January 2014 (Figure 2).

Figure 2 exc stock(Fig. 2: Excelsior chart)

Investors are often told to demand “skin in the game” on the theory that it lends incentive to grow the project, not just draw a paycheck. Insider ownership can, however, also drive an intense desire for positive study results, often regardless of the project’s true value. One should consider the insider’s priorities—short-term gratification or long-term value.

The Engineer/consultant

Owners typically contract advanced NI 43-101 studies to a consulting or engineering firm with expertise in the key study areas such as mine design, metallurgy and mineral processing, environmental and social issues, hydrology and water resource management, geotechnical engineering, etc.

The consultant will serve as overall QP, manage the study, and provide specialty QPs as appropriate. Subcontractors fill subject matter specialty gaps (water resources, social impacts, etc.). Subcontractors supply specialty QPs and report either to the owner or the Consultant.

Engineering and Consulting firms also have potent incentive for positive study results.

Large Engineering and Construction (E&C) firms build mines. A study can earn the firm a few $MM in fees. Building the mine can earn several tens of $MM in fees.

Non-E&C consulting firms want the project to graduate to the next study level to keep the project alive. “Study mills” are firms with a reputation for producing positive studies, even for marginal projects. It’s a successful business model, if not a particularly ethical one.

Each type of firm is perfectly capable of delivering fully “NI 43-101 compliant” studies, signed by legitimate QPs, showing economically “robust” economics for perfectly worthless projects. It happens all the time.

No immediate incentive whatever exists to produce a study finding the project has little or no value. However, over the long run, a firm’s reputation is its calling card.

Provincial Securities Commissions

Provincial Securities Commissions implement and enforce regulations such as NI 43-101. The commissions are sparsely staffed and do not routinely review NI 43-101 reports. They will process complaints and will take action when violations are brought to their attention, but there is little active oversight. The regulators have little or no effect on the preparation or outcome of the studies—that is not their role.


Both institutional and retail investors rely on the NI 43-101 study financial results for investment decisions. Typically, a summary of the financial results appears in a news release published up to 45 days prior to posting the study itself on SEDAR.  Investors naturally want to buy in as early as possible. Consequently, the news release summary triggers many investment decisions well before the investor can critically review the study to determine if it supports the announced results.

The important lesson for investors is: do not believe that the phrase “NI 43-101 Compliant,” or the signature of a QP in any way guarantees the soundness of a study. You must dig deeper.

A Tale of Two Projects

This is a comparison/contrast of two different NI 43-101 studies for mining projects in Latin America.

Condor Gold is a London listed Junior (CNR.LON) with a single asset in development stage. The La India Project is a small-scale gold project at PFS level in Nicaragua. Condor management has strong incentive to produce a positive study. Competition for capital is so fierce that only the very few most outstanding projects will find funding.

SRK was selected to manage the study and is a well-established consulting firm with a long history of NI 43-101 study production. A positive PFS could lead to a full FS and more fees.

The stage is set.

Considering the highly charged circumstance, the Condor PFS shows restraint. The estimated initial capital cost of $110 million for a 2,200 tonne per day underground mine and mill is spot on the cost curve, compared to other small to mid-size open pit gold projects with mill recovery (not heap leach). See Figure 3. Had Condor Gold and/or SRK so desired, they could have trimmed the initial capital estimate and improved economic model results considerably, by using low equipment bids, adjusting productivity, squeezing installation cost factors, etc. It is quite possible to massage figures to attain the desired initial capex.

I worked on a project once where the owner declared, at the FS kickoff meeting, his expectation that the project would not work with an initial capex over $100 MM. It was clear he expected the team to achieve that number. Ultimately the project was built, but it exceeded the construction budget and struggles to make money.

EI looked at initial capital cost estimates from NI 43-101 studies for six small to medium size (<7000 tpd) open pit gold operations. Figure 3 shows a plot of the initial capex against the feed capacity for the six properties. The two properties being examined are shown in red.

fig 3 BB(Fig. 3: Benchmark capex for open pit mines)

The benchmark model predicted initial capex for La India at $86 million– about 22% lower than the PFS estimate. Clearly, the study did not thumb the scale on the capex estimate. Likewise, the estimated operating cost of $58.50 per tonne milled is on the high side for open pit gold mines. We did not run a benchmark on opex.

The estimated financial performance is healthy, but not over the top. The study base case NPV5 at $1250 gold is $92 M over a mine life of eight years. Project IRR is 22%– moderately strong.

Condor Gold and SRK clearly fall into the motivation category “real.” They objectively assessed the economic potential of the deposit through a rigorous engineering analysis.

Troy Resources Ltd. (TRY.ASX) is an Australian Company, which up until last year maintained registration on the Toronto Stock Exchange. We reviewed the PFS for the Karouni Project in Guyana. Karouni is a 2750 tonne per day open pit gold mine project with milling recovery.

The PFS was nearly indistinguishable from the PEA. The same two employees wrote it; and it contained the same lack of engineering support and scarcity of information. A PFS should contain a great deal more engineering and information detail than a PEA. By all appearances, this PFS was no more than an update, covering the change to open-pit only operation and a slightly higher production rate.

Troy, like Condor, has ample incentive for a strongly positive FS.

Troy’s PFS shows lack of restraint. The study report states the capex is $73.3 million (Figure 3), not including $11.3 million for pre-production mining. The $11.3 million does not appear in the cash flow model either. We assume this cost is considered sunk and therefore not part of the project economics.

Our benchmark model (see Figure 3) calculates initial capital for a 2750 tonne per day open pit mine and mill would be $112 MM, over 50% higher than the PFS estimate.

In a mid-2014 report (dated June 30, 2014) Troy announced construction had commenced on the Karouni Project, predating the publication of the PFS.

One other item bears mentioning. Condor reasonably estimated a two-year construction period. Troy, on the other hand, unrealistically estimated only one year for construction. Troy issued a project update on July 10, 2015, noting that startup had been delayed from June 2015 until September 2015 due to a variety of fairly serious problems with mill installation and alignment. This type of problem and resulting delay are typical of poorly engineered and executed projects.

Troy’s economic model predicts an after-tax NPV6 of $72 MM with gold at $1250 over a mine life of just over three years. The predicted IRR is an eye-popping 50%. Troy presents a sensitivity analysis showing a 20% increase in capex drops the NPV6 from $72 million to $54 million. If we plug the modeled $112 million into a cash flow model, the NPV6 drops to about $30 million and the IRR goes to a quite modest 20%.

By our reckoning, the Troy effort falls into the motivation category “misdirected” with some elements of “sham.” The study is superficial and fails to meet minimum requirements. At the same time, it equips the company to promote the project based on unrealistic, though attractive, financial results.

Troy successfully raised the projected capital with this study. In April 2014 they received a revolving credit facility of $100 million from Investec Bank. Stand by to learn if the project can survive the mill problems and limited funds when faced with the current gold price crash.


We have two projects under study. Condor Gold’s PFS demonstrates a realistic, sound engineering evaluation resulting in a healthy economic forecast. The project has the hallmarks of success.

Troy Resources’ Karouni PFS demonstrates a lack of engineering rigor, resulting in an apparent underestimation of costs and an unrealistically rosy economic forecast. We can already see some results of the lack of engineering rigor with the mill installation problems. It’s reasonable to anticipate that these delays, coupled with unrealistic initial capex forecasts, will force Troy to find additional funding, weakening project economics and lessening or even wiping out investment returns.

Brent here again…

Tim put this rant together with very little input from me. I think it is a useful, albeit cursory, look at the technical and economic studies upon which most of the folks in the mining sector base their investment decisions. His points are very legitimate– one must really consider the objectives and competence of the people behind any technical study.

The foundation of these studies is of course the resource estimate, and you will note that Tim’s commentary focused on the mine and costs that are meant to exploit said resource. It has been assumed by SRK that their estimate of Condor’s resource is a fact. The PFS only exploits the probable 675,000 ounces grading 3 grams per tonne gold out of a total resource of 2.3 million ounces grading 4.0 grams per tonne gold indicated and inferred (Fig. 4).

fig 4 resource BB(Fig. 4: Mineral resource estimate by SRK, Sept 2014)

Although Condor’s market capitalization is £24 million (US$37 mil), the PFS NPV5% is US$92 million (@ $1250 gold), and there are another 1.7 million ounces in the resource, you will note we do not own it in our EI portfolio.

Why not?

It’s simple. Without belaboring the point, I have issues with the resource estimate, particularly the indicated and inferred. The deposit is comprised of epithermal veins of variable width and grade. Much of the resource is attributed to single and isolated high-grade drill intersections that are often pretty far below the surface. The life of mine strip ratio (tonnes of waste moved per tonne of ore) for both the FS and PFS is ~13:1—pretty high. If that 1 tonne of expected ore is not as expected, the operation suddenly becomes uneconomic. Given what I saw when parsing through the deposit, cross section by cross section, I will hesitantly concede that the probable reserve (675,000 oz) may work, but am unwilling to bet that the remaining ~1.7 million ounces will be economically recoverable.

This discussion brings home a much broader point, one we have made numerous times here at EI (see Nov. 16, 2014): the interpretations and economic projections in 43-101 studies are only as good as the initial data upon which the resource is based. If the sampling is bad, the geology wrong, the interpretation flawed or disingenuous, then everything that comes after is illusory. The follow-on economic studies are essentially worthless and it is usually the resource estimate that got it wrong.

That’s the way I see it.

Brent Cook


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