Due Diligence & Financial Models Helsinki Johan Bradley, SRK Consulting Mining On Top: Helsinki 2013 16-17 September 2013 | Helsinki

1. Due Diligence & Financial Models
Helsinki, September 2013

2. Take Away Statement
1. SRK Overview of Services
2. Due Diligence & Financial Models
3. Summary

3. Offices Worldwide
SRK: >1600 Employees, >50 offices, 6 Continents
Cape Town
Port Elizabeth
East London
Brisbane
Sydney
Perth
Pretoria
Harare
Johannesburg
Durban
Rustenburg
Cardiff
Beijing
Vancouver
BeloHorizonte
Santiago
Toronto
Elko
Tucson
Denver
Fort Collins
Reno
Yellowknife
Pietermaritzburg
Newcastle
Saskatoon
Kolkata
Moscow
Sudbury
Melbourne
Kimberley
Anchorage
Nanchang
Skellefteá
Jakarta
Buenos Aires
Zacatecas
Ulaanbaatar
Almaty
Lubumbashi
Ankara
Accra
Mendoza
Skellefteå

4. Technical Services
• Full range of services
o Exploration – Mining – Closure
• Feasibility Studies
o Scoping
o Pre-feasibility Studies
o Feasibility Studies
• Due Diligence Reviews
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

5. Take Away Statement
1. SRK Overview of Services
2. Due Diligence & Financial Models
3. Summary

6. Mining Due Diligence
Definition...
• “Development of an operating plan in
accordance with industry guidelines
incorporating appropriate capital cost,
operating cost and revenue estimates
suitable to be used as the basis of
either a loan agreement between bank
and mine, or as the basis of an asset /
company valuation.”
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

7. Mining Due Diligence
• Debt Finance
o Assist lenders in reaching a decision
o Feasibility Study or Operating Mine
• Equity
o Assist investors understanding risks, opportunities
& potential returns of holding Company
o Any stages of project development
• Merger / Aquisition
o Relative value of projects owned by different
companies
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

8. Financial Model
Why do we need one?
• Look at the Project as a whole
o What happens if...
• Risks, opportunities & sensitivities
• Viability of the Project
o Benchmarking against similar operations
• Adjust inputs and quantify impact on
Project NPV
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

9. Financial Model
A financial model should be...
• Representative of the projected cash
flows of an operation
• Could be based on technical inputs
derived during a study (SS, PFS or FS)
• ...or historical performance in the case
of an operating asset
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

10. Financial Model
Financial Model is not...
• A Balance Sheet, Profit and Loss
Statement or a Cashflow Statement for
accounting purposes
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

11. Financial Model: Key Components
• Debt Finance
• Equity
• Merger / Aquisition
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW
SAME
PROCESS

12. Financial Model: Key Components
Starts with an audit of…
• Geology & Resources
• Mining & Reserves
• Mineral Processing & Plant Design
• Infrastructure
• Environment & Permitting
• Implementation / Construction
schedule
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

13. Financial Model: Key Components
MINING
STOCKPILES
PROCESSING
TAILINGS PRODUCT
ROCK DUMP
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW PHYSICALS

14. Financial Model: Key Components
• Revenue
o Commodity prices
o Royalties, TC/RC
o Export duty
• Operating Costs
o Mining, Processing, Tailings, Transport
o Environmental
o G&A
• Capital Costs
o Project
o Sustaining
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW
REVENUE & COSTS

15. Financial Model: Key Components
• Start – client model
• Re-build – check integrity
• Verify – consistency
• Adjustments – based on technical audit
• Finish – independent audited model
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW DUE DILIGENCE PROCESS

16. Financial Model: Typical Issues
• Model integrity
• Forecasts inconsistent with study or
historic performance
• Mining schedule does not match
Reserve
• Mining dilution/losses
• Plant recovery
• Construction schedule optimistic
• Closure & rehabilitation costs
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

17. Financial Model: Results
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

18. Financial Model: Results
REVENUE V OPEX SENSITIVITY
DISCOUNT FACTORS 37,890 -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%
-25% 6,359 21,969 37,579 53,188 68,798 84,408 100,017 115,627 131,236 146,846 162,456
-20% (6,498) 9,112 24,722 40,331 55,941 71,550 87,160 102,770 118,379 133,989 149,599
-15% (19,355) (3,745) 11,864 27,474 43,084 58,693 74,303 89,913 105,522 121,132 136,741
-10% (32,212) (16,602) (993) 14,617 30,227 45,836 61,446 77,055 92,665 108,275 123,884
-5% (45,069) (29,459) (13,850) 1,760 17,370 32,979 48,589 64,198 79,808 95,418 111,027
0% (57,926) (42,316) (26,707) (11,097) 4,512 20,122 35,732 51,341 66,951 82,561 98,170
5% (70,783) (55,174) (39,564) (23,954) (8,345) 7,265 22,875 38,484 54,094 69,703 85,313
10% (83,640) (68,031) (52,421) (36,811) (21,202) (5,592) 10,017 25,627 41,237 56,846 72,456
15% (96,497) (80,888) (65,278) (49,668) (34,059) (18,449) (2,840) 12,770 28,380 43,989 59,599
20% (109,354) (93,745) (78,135) (62,526) (46,916) (31,306) (15,697) (87) 15,523 31,132 46,742
25% (122,212) (106,602) (90,992) (75,383) (59,773) (44,163) (28,554) (12,944) 2,665 18,275 33,885
REVENUE V CAPEX SENSITIVITY
DISCOUNT FACTORS 37,890 -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%
-25% (51,621) (36,011) (20,401) (4,792) 10,818 26,428 42,037 57,647 73,256 88,866 104,476
-20% (52,882) (37,272) (21,662) (6,053) 9,557 25,166 40,776 56,386 71,995 87,605 103,215
-15% (54,143) (38,533) (22,924) (7,314) 8,296 23,905 39,515 55,125 70,734 86,344 101,953
-10% (55,404) (39,794) (24,185) (8,575) 7,035 22,644 38,254 53,864 69,473 85,083 100,692
-5% (56,665) (41,055) (25,446) (9,836) 5,774 21,383 36,993 52,602 68,212 83,822 99,431
0% (57,926) (42,316) (26,707) (11,097) 4,512 20,122 35,732 51,341 66,951 82,561 98,170
5% (59,187) (43,578) (27,968) (12,358) 3,251 18,861 34,471 50,080 65,690 81,299 96,909
10% (60,448) (44,839) (29,229) (13,619) 1,990 17,600 33,209 48,819 64,429 80,038 95,648
15% (61,709) (46,100) (30,490) (14,881) 729 16,339 31,948 47,558 63,168 78,777 94,387
20% (62,971) (47,361) (31,751) (16,142) (532) 15,078 30,687 46,297 61,907 77,516 93,126
25% (64,232) (48,622) (33,012) (17,403) (1,793) 13,817 29,426 45,036 60,645 76,255 91,865
CAPEX v OPEX SENSITIVITY
DISCOUNT FACTORS 37,890 -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%
-25% 90,713 77,856 64,999 52,142 39,285 26,428 13,570 713 (12,144) (25,001) (37,858)
-20% 89,452 76,595 63,738 50,881 38,024 25,166 12,309 (548) (13,405) (26,262) (39,119)
-15% 88,191 75,334 62,477 49,620 36,762 23,905 11,048 (1,809) (14,666) (27,523) (40,380)
-10% 86,930 74,073 61,216 48,358 35,501 22,644 9,787 (3,070) (15,927) (28,784) (41,641)
-5% 85,669 72,812 59,954 47,097 34,240 21,383 8,526 (4,331) (17,188) (30,045) (42,902)
0% 84,408 71,550 58,693 45,836 32,979 20,122 7,265 (5,592) (18,449) (31,306) (44,163)
5% 83,146 70,289 57,432 44,575 31,718 18,861 6,004 (6,853) (19,710) (32,567) (45,425)
10% 81,885 69,028 56,171 43,314 30,457 17,600 4,743 (8,114) (20,971) (33,829) (46,686)
15% 80,624 67,767 54,910 42,053 29,196 16,339 3,482 (9,375) (22,233) (35,090) (47,947)
20% 79,363 66,506 53,649 40,792 27,935 15,078 2,221 (10,637) (23,494) (36,351) (49,208)
25% 78,102 65,245 52,388 39,531 26,674 13,817 959 (11,898) (24,755) (37,612) (50,469)
OPEX
CAPEX
Revenue
OPEX
Revenue
CAPEX
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW

19. Take Away Statement
1. SRK Overview of Services
2. Due Diligence & Financial Models
3. Summary

20. Summary
SUMMARY
FM: RESULTS
FM: KEY COMPONENTS
FINANCIAL MODELS
DUE DILIGENCE
SRK OVERVIEW
• Due Diligence: Independent
assessment of all Project elements
• FM quantify risks to Project viability
• Output - Independent Audited Model
• 80:20 Rule – 80% of effects come from
20% of causes

21. Ode to remember…
Some mines make me happy,
Some mines make me blue.
But the one that gave me the most joy,
Was the one I sold to you.