METHODOLOGY

from Mining Journal Intelligence Project Pipeline Handbook 2022 ePublication

WELCOME

The basis of selection and presentation of project metrics is investor relevance and like-for-like comparisons. That is, we’re aiming to present only data that is fundamental to investment decision making in a transparent and consistent way, which allows our audience to hold two equities/projects up against each other and compare apples with apples, and oranges with oranges. All currencies are expressed in US dollars and converted between mid-April and early May, 2021, including spot pricing.

THE BASICS

Project and company name, commodity and by-products, exchange listing, along with the ownership percentage require no explanation. We include whether the project is being developed by a single-asset company because it speaks to the need for finance and we record whether it’s openpit or underground because, as our ratings are refined, this may have a bearing on how grades and resources are perceived, among other potential uses.

We also provide the lead director, be it chief executive or managing director.

We stop short, for now, of attempting to deliver a judgement on management quality for two reasons: first, this is at risk of presenting as a largely subjective measurement and; second, the level of interrogation required to unearth the details of past project management results needed to provide a qualified management rating is a major project in its own right.

MARKET CAPITALISATION

Mainly used as an indicator of ability to finance development through equity.

MINE LIFE

Determines whether the investment is looking longer or shorter term and, potentially, the tolerance around the payback window.

JURISDICTION

Where an asset is located has an enormous bearing on the likelihood of it making it into production and, in fact, vies for top spot among investors as the primary factor in asset evaluation, according to Mining Journal Intelligence’s Investor Sentiment Survey, featured in the Global Finance Report.

COMMODITY-PRICE ASSUMPTIONS

The commodity-price assumptions being made have an obvious and significant impact on any economic evaluation.

Image: Frank Busch on Unsplash

CAPITAL EXPENDITURE

How much a company has to spend to move an asset into production speaks to how likely the project is to be financed and is an indicator of fiscal risk. We look at only the initial capex as sustaining capex and secondary phases of construction are generally aided by cash flow.

OPERATING EXPENDITURE

The lower the opex, the fatter the margin and the greater the theoretical profitability and comfort for investors ‘through the cycle’.

NPV & IRR (POST-TAX)

These are the headlining economics in reviewing project value. Most companies provide post-tax numbers, though some provide both pre and posttax figures or just pre-tax figures. There are few scenarios in which companies are operating in a taxfree environment over the project life and we are yet to hear a palatable explanation as to why a company might be comfortable to guide the market on the dozens of assumptions made ahead of project development but reluctant to provide a post-tax figure. So, we state only post-tax numbers for a likefor-like comparison.

Where post-tax numbers are not presented, even on direct request, we have used the jurisdiction-specific corporate tax rate on the NPV and a discount to pretax IRR as indicated by a 10-company sample of post versus pre-tax numbers.

This is likely to be adjusted in future years to offer investors a more conservative view for assets that can’t provide post-tax guidance.

DISCOUNT RATE

The discount rate, theoretically a reflection of the cost of capital and a function of risk, is more practically applied as an arbitrary, standard or strategic – and usually understated – discount to a 10-year discounted cash flow model. This effects core economics and is therefore relevant.

MATURITY & AGE OF STUDY

The stage of the economic or technical study – from scoping study to bankable feasibility study – suggests a level of work and therefore confidence in the numbers being presented. Likewise, studies completed using inputs of increasing age should be treated with greater scepticism by investors. RESOURCE & GRADE

The size of the resource, as opposed to the reserve, can indicate the scale of the mineral system and is often larger than the numbers on which the proposed development is based, suggesting a starting point for upside. The grade, meanwhile, speaks to the overall quality of the asset. We look at only Measured and Indicated resources (and neglect inferred, for investor confidence), and take a weighted view on grade, adjusted for commodity.

PROVEN TECHNOLOGY

Whether the investment is also a view on a new processing technology is a key consideration for investors.

CASH AND EQUIVALENTS

Largely irrelevant in terms of the quality of the asset but relevant in terms of how imminent a request for investor support may be.

RATINGS

While we would consider all the metrics presented relevant, we use only a selection in various combinations. These provide ratings across three primary, investor-sensitive categories that make up 75% of the project score, and then three more subsidiary categories that are viewed as important but have, at least in part, been factored into the primary categories.

PRIMARY

CATEGORY: ECONOMICS

WEIGHTING: 40%

The economic credentials of a development project are the best description of the asset’s total opportunity. From that point, we would suggest most other factors investors need to consider essentially act as discounts on that underlying value proposition.

We measure project economics with three metrics: NPV, IRR and the ratio of NPV to capital expenditure. Each constituent contributes equally to the category score.

The inclusion of NPV and IRR logically assesses the total value and profitability of the asset model, respectively. The ratio of NPV to capex attempts to capture the overall value as a function of the fiscal risk in pursuing development. Given we look at initial capex only, projects with a staged approach tend to score better because cash flow is assumed to partly or wholly cover future stages of development/expansion. Journal Intelligence World Risk Report (feat. MineHutte ratings). We have assessed 111 jurisdictions for our IRI.

The IRI score is pulled through as the only constituent of the Jurisdiction category but is itself the product of 10 established, risk-related metrics and our annual World Risk Survey. For projects in jurisdictions not covered by the IRI, we use a regional average.

CATEGORY: JURISDICTION

WEIGHTING: 20% CATEGORY: CONFIDENCE

WEIGHTING: 15%

Each jurisdiction presents a different level of risk to project development with some determined as mining safe havens, while others are pursued by only those with a high risk tolerance. We evaluate the quality of jurisdiction by drawing directly from the Investment Risk Index (IRI) within the Mining We use the term ‘Confidence’ to summarise the variability of study numbers that are presented, which investors need to account for when assessing an opportunity. Constituents are the commodity-price assumption, discount rate, age of the study and stage/ maturity of the study. The commodity-price assumption

Image: George Drachas on Unsplash

is weighted at 60% given its bearing on headline economics and our ability to measure how reasonable assumptions are against current pricing.

We understand it may be appropriate to factor in a future view on commodity-price movements, however, banking on rising commodity prices presents risk and investors generally want to be able to assess projects based on their value at current pricing. We therefore reward economic models factoring in conservative commodity prices and discount those using prices ahead of present levels. Sensitivity analysis should help investors understand both the upside and downside to commodity price movements but this is currently beyond the scope of our ratings.

Though we acknowledge discount rates should vary depending on project risks as assessed by financiers, the rates used in published studies regularly fail to reflect risk in a consistent fashion and therefore fall short in providing reasonable guidance on the cost of capital. To adjust for this, we give more value to more conservative discount rates.

An older study by definition will make assumptions that are out of date. This can work for or against a project assessment but, in terms of confidence, we reward more up to date numbers with a higher ‘confidence’ score and discount older works. Studies older than 10 years are not considered.

The maturity of the study refers to the various stages of published economic and technical modelling, with the more advanced the study, the higher score it receives in a ‘confidence’ context. A scoping or preliminary economic assessment are most severely discounted, a prefeasibility study receives a moderate discount, while bankable, definitive or straight feasibility studies are not discounted.

SUBSIDIARY

CATEGORY: FINANCEABILITY

WEIGHTING: 10%

How likely a company is to attract finance to a project is a function of the primary categories cited above but there are other, more specific ways to measure whether finance might be secured. Given the failure to finance equates to a lost investment to those already committed, this deserves some attention.

The ratio of market capitalisation to the initial capex takes a view on the ability of companies to raise equity for project finance, while the operating margin implies a level of comfort for investors that development capital provided is likely to be secure ‘through the cycle’. This is calculated using current commodity prices rather than companies' published assumptions.

Both have equal weighting in this category.

Image: Micheile Henderson on Unsplash

CATEGORY: GEOLOGY

WEIGHTING: 7.5%

The geology is, of course, the underpinning element of the development.

A model doesn’t always factor in all of a resource that may prove economic once initial costs are paid back and so there is some value in appreciating the size of an overall orebody as delineated by measured and indicated resources, adjusted for commodity type. In subsequent years we may

refine this further by using a ratio of global resources to the resource being used in the scoped mine plan.

The grade, meanwhile, presents as an indicator of overall quality and, while already factored into other categories, warrants specific reference as an indicator of error margin.

Both have equal weighting.

CATEGORY: ENGINEERING/METALLURGY

WEIGHTING: 7.5%

There are several engineering or metallurgical factors that, while incorporated elsewhere, could warrant a separate, if diluted, mention. Strip ratio and recovery rates are at the top of that list but the lack of consistency in reporting these figures makes comparisons prohibitively difficult. Instead, as a starting point, we look to establish simply whether a development plans to use an established technology or is relying on a technology breakthrough to process ore. This is a major risk in the latter’s case and so non-proven technology receives a 0 in our formula, while proven technologies receive a 10.

With most of these categories, a ratings continuum is applied where a range is defined and 0 applied to the lower limit and 10 to the upper limit. The obvious shortcoming of this approach is outliers are not given an accurate score because values start and are capped to cater for the range dictated by the majority.

This usually affects projects with outstanding positive values rather than negative values. Ivanhoe’s Kipushi zinc project for example with a grade of 35% zinc simply scores the maximum value for grade. There is a silver lining, however, in that this quality is already baked into the ‘economics’.