The Global Mining Symposium’s final panel brought together experts from across the industry to discuss the merits and shortcomings of feasibility studies and how they can be improved to add value.
Moderated by Mark Noppé, managing director and corporate consultant in geology at SRK Consulting, the panel featured Jo-Anne Dudley, chief executive of Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ), Catherine Farrow, chair of Exiro Minerals, Michael Spreadborough, chief executive of Metals X, and Anna Nahajski-Staples, executive director at Paloma Investments.
“In my role as a CEO of small- to mid-cap sized companies, feasibility studies play an essential part in the growth of the company, and, I believe, that it’s the prefeasibility study that is the most important in decision making at the board level,” Metal X’s Michael Spreadborough said.
Feasibility studies link the technical and economic and, in particular, the environmental and social aspects of a project, he said, but more work needed to be done to better inform the board on the technical aspects of feasibility studies and improving the communication of their findings to shareholders.
As mergers and acquisitions gain pace in the junior- and mid-tier sectors, Paloma’s Anna Nahajski-Staples noted that it would be interesting to see how feasibility studies come to the forefront of the decision-making process as to whether or not to acquire a company.
Turquoise Hill’s Jo-Anne Dudley, who has worked on prefeasibility, feasibility, and scoping studies over the last 20 years in a variety of roles, from mining engineer to project lead, said it was essential to ensure that the studies are representative of the entire project and should accurately describe the business case and associated risks.
“I was motivated to join the panel today, as we have just released an updated technical report for our Oyu Tolgi mine in Mongolia, so this topic is quite near and dear to my heart at the moment,” she said. The report was triggered by an updated new mine design and formed the basis of a recent discussion Dudley had with investors, where she walked them through the technical details of the report.
“To the educated investor, the feasibility study provides the information that is required to base investment decisions upon,” Dudley said. “So, from my perspective, I like to think that they are a worthwhile endeavour and that they do add value, but it ultimately comes down to their quality and content.”
Noppe emphasized that a feasibility study should be a trusted document, be informative and reliable, and a solid indicator of a project’s future performance. He acknowledged, however, that not all feasibility studies are created equal.
Noppe asked the panel to describe what they thought their client’s expectations were from each phase of a feasibility study.
“By the time the reports are released, the investors, for the most part, have very set expectations on what those figures should be,” said Nahakski-Staples. “It’s quite unusual to see these reports come out and they are drastically different from what the markets were expecting.”
In many cases, she added, a feasibility study provides a stamp of approval and is also a stress test for a company’s business model, which has been pitched to the investors for quite some time.
“I think it’s important to note that investors would have been following the story closely and will have their assumptions already well in place, for the most part, prior to the release of the actual feasibility study,” she said.
Turquoise Hill’s Dudley noted that there was a misalignment of standards related to study definitions across different companies. For example, some companies may have higher internal standards than others, she said.
“A study would at least need to meet the CIM [Canadian Institute of Mining Metallurgy and Petroleum] standards before discussions around any significant amounts of funding could be started,” she said. The prefeasibility study, she added, is an essential step in which critical decisions need to be investigated before the “go-forward” decision can be taken. So, she said, it is a vital step in the project’s life.
Catherine Farrow, chair of Exiro Minerals, commented on managing expectations. “It depends on who the audience is as well as who has been contracted to prepare the study,” she said. “A junior company that is looking to sell a project may have a very different expectation of a prefeasibility or feasibility study to someone who’s looking for financing.”
The discussion, she added, comes back to standards. If a company, for example, is undertaking a standard bank financing or is engaging with a private equity firm, then it will have varying degrees of rigour around due diligence, she noted.
Turquoise Hill’s Dudley also noted that “different contractors have different standards … We’re not dealing with auditors services, which are now highly regulated.”
Spreadborough noted that one of the challenges for smaller companies “is being able to demonstrate to stakeholders that they have used a structured process going from a scoping study to a prefeasibility study to a feasibility study to narrow down the decision making by carrying out a qualitative and thorough investigation of the risks,” adding that, “I’m not sure that we get to that point with many of the studies that I’ve seen.”
The prefeasibility study, he continued, is the “engine house” of the process, and that is where companies should spend a lot of time and energy to analyze the data correctly.
“We’ve all seen prefeasibility studies that have been shoehorned into a feasibility study, where the proper step should have been to have put up your hand and say, ‘I need to do some more drilling or more test work’ and come back to re-work the prefeasibility study.”
Noppe asked the panel why some companies fail to deliver on their promises and why there is sometimes a disconnect between the study phase and reality.
Spreadborough replied that studies that fail are often poorly scoped, which is the most critical aspect of the study.
“A feasibility study is a project. It needs resources and timelines, and as the project starts, is there project discipline, execution, and management,” Spreadborough said. “These are things that we generally don’t do a good job on.”
He pointed to the importance of advisory boards, which can provide oversight of how the execution of a feasibility study is progressing. Bringing in independent people to work alongside the management team could also provide an additional level of governance, he said.
Farrow flagged the importance of the geology.
“We rely heavily on automated statistical approaches to preparing mineral resource estimates,” she said. “By the time you get to reserves, you’ve added another level of engineering on the estimate, with any errors passed through the process.”
In many cases, she argued, companies are not looking at the rocks any more but interpreting and integrating detailed metallurgical test work into the planning at the feasibility level.
“I’ve had many discussions around estimates and estimating practices with geologists and geoscientists, but there’s no standardization around cost estimating, and usually we don’t have specialized cost estimators as part of the process of putting together estimates for feasibility studies,” she said. “No matter what we do, if we don’t get the rocks right, we can’t move forward.”