Operational Risk Assessment Of Mining Enterprises

INTRODUCTION The time period from the detailed feasibility study to the post investment audity usually ranges from three to eight years depending upon the nature of the mining project considered. It is the only after the post investment audit that we know the adequacy of the assumptions made concerning operational risk assessment in the detailed feasibility or acquisition economics. The post investment audit results from numerous mining projects can best be described by a verse by John Greenleaf Whittier's Maaud Muller. It reads "For all sad words of tongue or pen the saddest are these 'It might have been!"' Dissecting the negative results of numerous mining projects we find faulty assumptions concerning markets, geology, capital investment and operational risk assessment. Although in hindsight many of these assumptions could have been considered impossible or impracticle to have forecast with any degree of certainty, we find that refined assumptions concerning operational risk assessment could have been made with only a modicum of additional "Due Diligence". Anyone who invests in a mining property should employ a much higher discount rate of future cash flow, (usually in the minimum range of 25%-30%), than he would expect from such safe investments as Treasury Bills or high grade Utility Bonds. The nature of this steep discount translates to a large uncertainty concerning the timing and actualization of assumptions contained in the detailed feasibility study. We must remember that when a project gets beyond 20 years, any contribution to the value of the project of cash flow is minimal due to the nature of the discounting process. Thus for each full or partial day lost in the development or early operation stage of a project, the financial impact will be greater than similar lost days later on in the project. Adequate operational risk assissment is particularly critical when bidding on competitive tenders for coal deposists in remote locations such as the Bowen Basin in Queensland, Australia. Because of the market attractiveness of these coal deposits for supplying end users in the Far East, Middle East and Europe, state governments require competitive tender biddings via the Authority to Prospect process. Front end bonuses and super royalty payments must be commited before the actual mining conditions are known. Time to submit firm offers from the actual request for proposal vary from 90 to 120 days. Thus any operational risk assessment must be detailed, realistic and reflective of the actual project. When one searches the literature, one finds limited qualitative data on operational risk assessment in valuation papers. Usually this facet of valuation takes a secondary role to such areas as reserves, markets, and environmental considerations. When one comes to the question of operational risk assessment more often than not one finds the use of "rules-of-thumb", such as tons per man shift, average production, average seam height, etc., are used to forecast results on which banks and other financial institutions are required to make investment decisions. Because of the extremely competitive environment of the 1970's and 1980's numerous financial institutions approved loans without adequate "Due Diligence", and are currently paying a steep price in terms of non performing loans and charge offs. One must always remember that each operation is unique with its own characteristic