As Rick Rule recently discussed this has left a marginal industry.......more ......
Moving forwards at lower gold prices the industry will have to find and develop new higher grade lower cost discoveries or optimise value from current mines. The true NPV impacts of this can be dramatically impacted by controlling the optimisation to avoid crude high grading and reserve destruction.
Fundamentally however this work seems likely to accelerate reserve depletion by focus on cash flow sooner rather than later and sooner may be at lower gold prices than hindsight proves possible. If it helps companies survive it will happen but should remind us of the longer term importance of quality discovery to the industry.
At the Denver Gold Show Whittle Consulting's Richard Peevers presented more advanced cost modelling to optimise NPV of mines and projects. (Link HERE - Select Tuesday 7:30)
Essentially they are using refined resource models to understand the true Net Value of the different parts of the total resource. Understanding the true net revenue receiveable and the true mining and processing costs incurred they can look to model and mine more selectively.
Whittle are also taking long-standing advanced manufacturing processes and applying these to mining in more sophisticated identification of bottlenecks using theory of constraints. Performance at the constraining activity is critical.
Eli Goldratt's "The Goal" was the seminal work in this area. I read this book 20 years ago and it has significantly influenced my thinking in manufacturing.
Published in 1984 it questioned many "top level" accounting and costing conventions which drove businesses at the time and sought to elevate the constraint of the business above everything else. There was criticism that it closed managers' minds to eliminating constraints through investment but too many investments are made without understanding where the constraint in the business will move to, or optimising elements rather than the whole. In Capex constrained businesses, as miners are finding, the correct identification of, and focus on, the constraints is critical.
All NPV modelling depends most fundamentally on the outlook for metal prices.
Shareholders need to understand this properly as the industry looks to survive the price downturn do they want their company to
a) Maximise cashflows now, potentially using those cashflows to acquire struggling competitors or secure quality discoveries from juniors for the future.
b) Survive the downturn with minimum dilution to shareholders, minimising ore depletion at low prices but being prepared to ramp volumes into price increases.
The market seems most likely to give value to quarterly results from strategy a) and the business NPV of securing profitable growth, using a well supported stock price, may well out-weigh the benefits of strategy b).
If there are companies seeking to achieve b) these would be very interesting investments coming into a price upturn.
Whittle believe the ideal time to address NPV optimisation is at PFS stage as this will optimise the scale of the project and address trade offs.
We are seeing revised PEA / PFS models being worked through to reduce capex and focus on high grade starter pits but how many companies have the requisite data and modelling to go further?
- What is the value proposition for the gold industry. Net value model. Net revenue minus full costs. Resource models need more in them, hardness, sulphides etc to understand zonal rather than average costs.
- Theory of constraints. Fixed costs associated with time are applied to the constraint. Best value material to the constraint.
- Few miners understand theory of constraints. Conceptually understand the constraint but not how to optimise and leverage.
- Setting the right KPIs, management structure, change mangement is key.
- Low hanging fruit? 10% NPV improvement box. Cut off grade optimisation.
- Rather than cut off grade seek maximum value in each mining period.
- Incidental capex, small investments to support capacity at the constraint significantly impacts the overall capacity of a very large capital investment. In TOC this is building buffers ahead of the constraint so it is always maximised.
- Accelerate cashflows, ranking options by NPV, identify risk modelling.
- Increase mining rates, shortens mine lives and reduce resources but increase NPV. Stockpile low value material, support early cashflow. Reserve saved for later doesn't add much value, 3-4%
- Industry use a flat price, but can model with strategic planning variable prices.
- Copper industry model with declining prices.
- Utilise stockpiles, need space, add 2-5% keeps reserve intact - stockpile lower grade material.
- Processing levers, GTR, - Grind, Throughput, Recovery take lessons from copper business. Often better to increase tonnage throughput with lower grind reducing recoveries. Gold miners like to elevate recovery but may be at cost of lower throughput - or increased capex to increase grind. Early years often best to increase throughputs and accept lower recoveries.
- Heap leach, crushing and agglomeration towards run of mine trade off.