`Due diligence’ a serious but behind the scene activity

In recent years there has been a great deal of money invested in gold mines — new project financing, mergers, acquisitions and the like. Normally, newspaper reports refer only to the size and financial terms of the transaction, the method of financing, and the number of ounces of gold in reserves, or to be produced annually. Not uncommonly the “projected cash operating cost per ounce” is trumpeted.

There is, however, a very serious but behind the scenes activity frequently carried out prior to or during these financings by technical personnel — geologists, mining engineers, metallurgists and others in an activity called ” due diligence.”

In this discussion I will be ad dressing “technical” due diligence and not activities covered by other people such as the lawyers and accountants.

You will note that the due diligence approach of my firm, Watts Griffis & McOuat, focuses on geology, mining and metallurgy. We believe these to be the vital factors and the costs of plant, etc., are less important. In our experience, failures occur because of flaws or omissions in these areas not because of major errors in capital and operating cost estimates.

The list of areas and topics about which we seek information falls under the general headings of:

A) Geology, Sampling and In Situ Reserve Calculations

B) Mining Reserves and Mine Planning

C) Metallurgy

D) Facility Locations

E) Capital and Operating Costs

A study of an operating mine has the same general headings but a slightly different set of questions. I will however give some examples under each of the major headings of the importance of some of the questions even though some appear initially to be innocuous. The examples provided represent both under- and over-assessment of a project. Geology, Sampling, Assaying and In Situ Geological Resources

Query: “What is your factor in terms of specific gravity or cu ft/ton?”

Answer: “We’ve assumed 13 cu feet per ton.” Specific gravity seems like a reasonably innocuous affair — after all most in Canada would likely say as a quick number for in situ reserves 12.0 to 12.5 cubic feet equals 1 ton. We have worked however on oxide gold deposits in the United States where it takes 16 cubic feet to make one ton of ore and the waste is 14 cubic feet per ton. The impact of either dealing with incorrect or assumed densities for ore and waste is pretty staggering. For example you have a deposit 1,000 ft long 500 ft wide and 300 ft deep — a volume of 10,000,000 cubic feet. At 12.5 cubic feet to the ton, this volume represents 800,000 tons. If the true number were, for exaggeration’s sake, 16.0 cu ft to the ton, then the tons involved shrink to 625,000, a loss of 22% of tons and contained gold. Massive sulphide deposits I should point out can go the other way. Aside from a great loss of “ore” the impact of using an incorrect specific gravity has a major impact on mining — 20% more trucks for example and mill capacity in terms of bins, conveyors, etc., to attain the projected throughput.

Query: “On what basis have you sampled?”

Answer: “We sample visibly mineralized material in the main zone.” We recently have been reviewing a proposed small scale high grade open pit heap leach operation. In reviewing the geology and sampling we noted that only the high quartz high grade “core vein” had been uniformly sampled. However, in spection of cores at the site, drill logs and assay records indicated that ancillary veins occurred, that the wall rock had pyrite and where sampled contained appreciable amounts of gold. A small resampling program has confirmed gold in the wall rock and ancillary veins to an extent that the total in situ gold resource is over four times that originally measured. The impact on waste: ore ratios, scale of operation and exploration opportunity is obviously major. We have recommended a complete resampling job. In Situ Reserve Calculations

Owners of open pittable deposits these days tend to utilize computers for reserve calculations whereas owners of underground deposits, currently, to a much lesser extent use computers for their calculations. Regrettably the computer reserves are often not constrained by the facts, if there is such a thing, of the geology. Query: (To the geologist on site) “What are the reserves?”

Answer: “I don’t know — they’re done by the head office.” On occasion there seems to be minimal if any input into computer calculations by the geologist who actually knows the deposit. As a result the computer is not properly constrained and merely goes about its mathematical functions be it krig ing, or whatever. We have seen gold averaged out of faults and veins into barren waste rock, we actually have seen “ore” made out of overburden.

The result of this can be to give the mining engineer a deposit whose grade has little relation to reality and perhaps equally important a deposit shape which also does not reflect reality.

Manual calculations seem to have less problems because they are more frequently done by the project geologist working from geological sections but again we have not very long ago seen calculations where, while it was said over 100 holes were drilled, only a small percentage say 20 actually intersected what might be termed ore and of those two or three carried 30% of the estimated gold — a pretty shaky base. Mining

To a large extent the miner is hostage to the geological reserve estimate he is given and the shape and dimensions of the deposit as interpreted by the geologist on the computer. Nevertheless mining decisions have a major impact on a project.

Query: “What’s the problem?”

Answer: “Hanging wall dilution.” An example to illustrate this is a recent study for the buyer of an underground gold mine which was in trouble. The original mining method selected had been cut and fill. When production commenced in spite of very serious attempts to control the mining, major dilution was occurring and the daily tonnage was not being met. As a result mining costs were high and the milling costs had increased because of lack of throughput and gold production was down. Following a study it was recommended that long hole mining be undertaken — a seemingly unusual recommendation in light of the dilution. The result however, seems to be that the dilution factor did not materially change — there was a naturally occurring limit beyond which the rock seems stable. As a result mining costs are down, tons are up and mill throughput has increased.

Query: “What’s the preproduc tion stripping material like?”

Answer:”It’s a sandy hard gravel.” The mining engineers were wasting this material until it was determined it was in fact a, nearly in situ, placer — down slumped over a barren waste rock — now this material is an economic resource. The common operating problems in mining seem to be: for open pits lack of identification of in pit waste and on occasion overly optimistic plans about selective mining with large equipment. On occasion lack of rock mechanic and hydrogeo logical studies of waste rock cause major problems — resulting in increased ore to waste ratios due to forced flattening of walls. Underground the recurring nightmares seem to lie in the areas of ore continuity and, even if continuous, in regularity of shape; internal and external dilution and overly optimistic projections of costs and time required to get stopes developed to support full production. Overly optimistic projections on grade are caused by these factors and also by often the extent of cutting or not of high grade assays or zones — a task properly assigned to a geologist. Metallurgy

A recent advertisement by an assaying firm says: “Fact: half of gold heap leaching operations fail due to inadequate testing.” The text of the ad goes on to say that virtually every failure is “traceable to inadequate or incomplete test programs.” Whether or not the percentage is correct, I can’t say. But certainly in some cases the apparent simplicity of heap leach has led to problems. There seems to be a bit of a mind set about heap leach in the same way there is about placer. In the first just dig it up and sprinkle and in the second dig it up and shake and out pops the gold. I, as a geological engineer have a lot of sympathy for the oft abused metallurgist. He can only report upon the samples he is given and more often than not he is not given representative samples. You’ll note that I use the plural SAMPLES. Mineral deposits are not homogeneous nor are they mined to the average grade or mineralogy. Any proper metallurgical testing program should be planned by the geologist, mining engineer and the metallurgist. If they don’t disaster looms and guilt is inappropriately assigned.

Query: “What sort of metallurgical testing program did you undertake?”

Answer: “We ran a 2,000-lb bulk test.” As it turned out this one large sample was taken from one trench and only from the “ore” zone. It was known that the “ore” was associated with a crosscutting structure traversing more than one rock type. In addition there were internal waste/low grade zones which would have to be mined. The metallurgical results on the sample tested were fabulous. In the feasibility study even a few recovery points were knocked off. But no one could answer whether or not the be haviour would be the same for “ore” in the other rock types and mineral assemblages; what effect dilution would have on timing of recovery or over-all recovery or what would the response be for samples becoming progressively less oxidized with depth. Suffice it to say more work was recom mended.

A fairly common problem is to have metallurgical testing of heap leach deposits conducted upon drill cuttings. Regrettably these may give false impressions because just by the nature of the sample collection system much of the fines, i.e. The Bad News Clays, etc., may not be in the sample in their true quantities. Proposed underground mines have similar problems particularly with dilution. Not uncommonly the dilution is caused by or comes from weak rocks and these are often weak because of the presence of talc and or other bad news minerals to the metallurgist. In addition grade surges are a problem more common with underground mines.

Finally the metallurgical reports are often done on perhaps high or at best average (non-diluted in situ) grade samples. The projected “mine” recoveries are then based upon these tests. If the deposit is one with a “fixed rather than variable tail” then recoveries can be and have been overstated.

Finally we have worked on a deposit in which a metallurgi cal “dogma” was present. It was assumed that a large unoxidized gold resource, lying below an oxidized orebody undergoing active mining, would not leach. Because of the dogma no testing had been done. When it was the resource turned to reserve and the number of mineable ounces went up dra matically. Facility Locations and Testing

I’ll only touch on this briefly and mention the oft experienced fact of the “ore” extending below the tailings pile, building foundations settling, etc. Capital and Operating Costs

These do not now represent the problems they did a few years ago when rampant inflation and a booming economy caused runaway capital costs and delays in project schedules. Current problems seem to be more in achieving projected plant throughputs than in over- runs of capital. These problems arise because of overly optimistic assumptions re the time and energy required to crush and grind to liberation size or undergrinding to get daily tonnages up, or greater quantities of bad news minerals affecting performance. Normally capital and operating estimates have been prepared by “outside engineering groups” particularly the process plants, surface facilities and underground access (shaft or decline).

Not uncommonly the owner provides the outside company with reserves, metallurgical test results, flowsheets and proposed mining methods and rates. It can been seen that if the “outside” engineer is given these basic assumptions and if his terms of reference have not included the sorts of basic data and reviews I described under geology, ore reserves, mining and metallurgy then faulty premises creep in. While most of the capital and operating cost studies are competently done, care has to be taken to ensure that proper lead times and costs for permits, and plant tune up are appro priate.

For example, financing of a deposit was being arranged and the project was technically sound. The derailment came about when it was pointed out that permitting scheduling likely would delay the planned start of construction by 10 months or more — assuming the permit was given. Needless to say the financing was deferred. Existing Operations

Assessing these is somewhat like post mortems. In one hand you may have the original “Final Feasibility Study” projections and in the other actual operations reports. Normally they’re not identical. When assessing a going concern a number of additional investigations and reviews are needed. These include:

— Comparison of actual versus projected mine production in terms of shape, tons, dilution, grade, and the like.

— Determining whether activities such as underground development and waste stripping have been maintained in accord with the original projections. If they have fallen behind historical profitability may look super but future production may well fall and more capital have to be injected.

— What revisions to reserves and operating plans as a result of operating experience have been made.

— Mill performance and metallurgical balances in terms of grade, recoveries, throughput, reagents and other costs — down time and many other factors.

We have found on occasion that the only projections still in use at a mine may be those from the feasibility study and other than monthly operating projections no over-all revisions have been made. Obviously once all questions and answers are exchanged and the data required are gathered, and analyzed then realistic financial projections can be made.

Finally some general observations; it is my impression that major established companies have as big a problem covering all the bases and getting it right as start-up companies. Most of the problems are caused by omission rather than commission and I have never heard any of our people voice reservations about the integrity or intent of any project’s technical people. We do bump into the “its not my area” mentality and/or the corporate boxing of responsibility in which dialogue between the disciplines is almost frowned upon.

The most recurring problems seem to be a) A misunderstanding of the care which must be taken in sample selection and processing — not, assaying; b) Blind reliance upon computers; c) Inadequate to non-existent dialogue between the geologist and metallurgist, and therefore reliance upon metallurgical test work obtained from non- representative samples and d) projections based upon too optimistic projections of average grades, metallurgy and costs, not on an as-to- be-mined basis.

The root causes seem to be — first experience — after all for nearly 40 years there weren’t too many new gold exploration and development programs, a second has been lack of funds or the difficulty in raising investigation funds vs production funds and finally shortcuts taken to take the “fast track” to production. I hope that the preceding discussion helps you to understand the rather complex information search and analysis that a “due diligence” team has to go through and all the questions it has to ask before it can verify X tons of Y grade with a capital cost of A and an operating cost of B.004 Jack F. McOuat, president of Watts, Griffis and McOuat Limited, a mining consulting firm based in Toronto.