Key Points on Examining Mining Studies for Stock Exchanges and Investment Banks

Competency of the Qualified Person

• Competent or qualified person should be able to justify their opinions and be cross-examined in court.
• Caution with Endorsements:
  • Example: Exploration geologists endorsing reserve estimates.
  • Risk if they lack engineering exposure.
  • Metal geologists endorsing coal resources often lack specific experience, leading to flawed estimates.

Resource and Reserve Estimation

• Formulation Approaches:
  • Non-western professionals may use formulaic methods, inappropriate for unique ore bodies.
• Consultant Depth:
  • Single operators or small consultancies might lack the depth for complex estimates.

Financial Considerations

• Capital Payback Period:
  • Should be well-defined, typically 3-8 years.
  • Discounting reduces long-term cash flow value.
• Cutoff Grades:
  • High initial cutoff grades to have high head grades and margins.
  • Must vary with capital needs and market conditions.
• Discount Rates:
  • Minimum 8% is advisable; HK Stock Exchange minimum is 10%.
  • BHP Tier 1 projects apply a 12% rate.

Market and Pricing Forecasts

• Metal Price Forecasting:
  • Forecasts beyond a few years are unreliable.
  • Very few banks forecast gold prices more than 5 years ahead.
• Effect of Contaminants:
  • Penalties applied for ore concentrate contaminants.
  • Recent shift in iron ore market to higher quality inputs due to evolving needs.

Technical Aspects

• Geotechnical Parameters:
  • Critical for the stability of mine structures.
• Operating Costs:
  • Derived from energy use, primarily diesel.
  • Limited variation due to energy costs.

Productivity and Fixed Costs

• Productivity Factors:
  • Varies by local context; manufacturer estimates not always applicable.
• Opaque Fixed Costs:
  • Include head office, baseline power, and interest on loans.

Resource Models and Reserves

• Critical Evaluation Needed:
  • Reporting codes require informed criticism of resources.
  • Poor factoring of dilution (waste rock) impacts estimates.
• Reserve Estimates:
  • Reserves should not exceed reliable forecasting period (5-8 years).
  • Schedules and sensitivity analysis are vital.

Valuation Influences

• Licensing and Rehabilitation Costs:
  • Must be treated as fixed costs in financial models.
• Documentation:
  • All assumptions and estimates need supporting documentation.

Regulatory Environment

• Australian Market:
  • Investors assumed to have knowledge; self-responsibility emphasized.
• Hong Kong and Singapore:
  • More regulatory oversight due to less informed investor base.
  • This regulation is deemed appropriate for market maturity stages.