PRESENTED:

DATE:

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Dr IESTYN HUMPHREYS

27/11/2013

OPERAKÄLLAREN, KARL XII’s TORG, S-111 86, STOCKHOLM, KINGDOM OF SWEDEN

THE ROLE OF

TECHNICAL DUE

DILIGENCE IN MINING

FINANCE

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Copyright (and any other applicable intellectual property rights) in this document and any accompanying data or models which are

created by SRK Consulting (UK) Limited (“SRK”) is reserved by SRK and is protected by international copyright and other

laws. Copyright in any component parts of this document such as images is owned and reserved by the copyright owner so noted

within the document.

This document may not be utilised or relied upon for any purpose other than that for which it is stated within and SRK shall not be

liable for any loss or damage caused by such use or reliance. In the event that the recipient of this document wishes to use the

content of this document in support of any purpose beyond or outside that which it is expressly stated or for the raising of any

finance from a third party where the document is not being utilised in its full form for this purpose, the recipient shall, prior to such

use, present a draft of any report or document produced by it that may incorporate any of the content of this document to SRK for

review so that SRK may ensure that this is presented in a manner which accurately and reasonably reflects any results or

conclusions produced by SRK.

The use of this document is strictly subject to terms licensed by SRK to its Client as the recipient of this document and unless

otherwise agreed by SRK, this does not grant rights to any third party. This document shall only be distributed to any third party in

full as provided by SRK and may not be reproduced or circulated in the public domain (in whole or in part) or in any edited, abridged

or otherwise amended form unless expressly agreed in writing by SRK. Any other copyright owner’s work may not be separated

from this document, used or reproduced for any other purpose other than with the document in full as licensed by SRK. In the event

that this document is disclosed or distributed to any third party, no such third party shall be entitled to place reliance upon any

information, warranties or representations which may be contained within this document and the recipient of this document shall

indemnify SRK against all and any claims, losses and costs which may be incurred by SRK relating to such third parties.

© SRK Consulting (UK) Limited 2013

COPYRIGHT AND DISCLAIMER

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Contents

Section Page

1. INTRODUCTION TO SRK 4

2. DUE DILIGENCE: THE OPERATING ENVIRONMENT 7

3. TECHNICAL FOUNDATIONS 9

4. COMMON THEMES 15

5. CONCLUDING REMARKS 17

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1 INTRODUCTION TO SRK

● Mining and Metals Consultancy

● Operating since 1974

● Employee owned organisation

● Consulting Services

• Exploration

• Feasibility Studies

• ESIAs

• Acquisition/Vendor Due Diligence

• Independent Engineers Reports

• CPRs

• 43-101 Technical Reports

• Mineral Asset Valuations

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SRK OFFICE LOCATIONS

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KPIs

● Sales doubled to >US$200m

over the past five years

● One year growth (12%)

● Five year growth (average of

16%)

● Country presence 22

● 50 operating consulting

practices

● 40 year milestone in 2014

● 5 year milestone for SRK

Sweden in 2014

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ORGANIC GROWTH TO MEET DEMAND

• Argentina: 35

• Australia: 157

• Brazil: 16

• Canada:162

• Chile: 137

• China: 74

• Congo: 12

• Ghana: 5

• Hong Kong: 1

• India: 15

• Indonesia: 22

• Kazakhstan: 27

• Mexico: 10

• Mongolia: 10

• Peru: 134

• Russia: 53

• South Africa: 441

• Sweden: 8

• Turkey: 19

• United States: 127

• United Kingdom: 159

• UK-ES: 25

• Zimbabwe: 7

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2 THE OPERATING ENVIRONMENT The Ingredients

● The super-cycle and high commodity prices

● Capital intensive marginal Mineral Assets

● Growth focused strategy

● Integration is the only way – let us go fishing

downstream

The Approach

● Due-diligence light aka the “RBS Way”

● The view from the top: “those technical

people are really conservative”

The Results

● The perfect storm

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2 THE OPERATING ENVIRONMENT The Outcome

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3 TECHNICAL FOUNDATIONS

Mineral Asset Development Stages

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SRK Consulting (UK) Limited [PROJECT TITLE - RHH] – [Report Title]

Exploration Property: properties where mineralisation may or may not have been

identified, but where a Mineral Resource has not been identified;

Advanced Exploration Property: properties where considerable exploration has been

undertaken and specific targets have been identified that warrant further detailed

evaluation, usually by drill testing, trenching or some other form of detailed geological

sampling. A Mineral Resource estimate may or may not have been made, but sufficient

work will have been undertaken on at least one prospect to provide both a good

understanding of the type of mineralisation present and encouragement that further work

will elevate one or more of the prospects to the resource category;

Pre-Development Property: properties where Mineral Resources have been identified

and their extent estimated (possibly incompletely) but where a decision to proceed with

development has not been made. Properties at the early assessment stage, properties for

which a decision has been made not to proceed with development, properties on care and

maintenance and properties held on retention titles are included in this category if Mineral

Resources have been identified, even if no further Valuation, Technical Assessment,

delineation or advanced exploration is being undertaken;

Development Property: properties for which a decision has been made to proceed with

construction and/or production, but which are not yet commissioned or are not yet

operating at design levels; and

Operating Mines: mineral properties, particularly mines and processing plants that have

been commissioned and are in production.

● Exploration Property;

● Advanced Exploration

Property;

● Pre-Development Property

● Development Property

● Operating Mines

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3 TECHNICAL FOUNDATIONS

Reporting Standards: Mapping to the CRIRSCO Template

SLIDE 10

International Reporting Template key concepts:

● Definition of a competent person and/or

qualified person

● Membership of recognised professional

institutions (enforceable Code of Ethics)

● Reciprocity “recognised overseas professional

organisations”

● Quality: competency, transparency and

materiality.

International Reporting Codes:

● JORC Code (2012)

● SAMREC Code (2007)

● CIM Guidelines (2010)

● SME Code (2007)

● PERC Code (2013)

● NAEN Code (2011)

● Peru cCode (2003)

CRIRSCOs International Reporting Template for

the Public Reporting of Exploration Results,

Mineral Resources and Mineral Reserves (2006)” Combined Reserves International Reporting Standards Committee

(www.crirsco.com)

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3 TECHNICAL FOUNDATIONS

Technical Studies: Key Criteria

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● Classification of Mineral Resources

● Study objectives

● Site specific technical information

● Degree of engineering completed (%)

● Design basis; cost estimation methodology

● Cost estimation accuracy (capex and opex)

● Level of contingency

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3 TECHNICAL FOUNDATIONS

Technical Study Standards

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SRK Consulting (UK) Limited [PROJECT TITLE - RHH] – [Report Title]

Item Scoping/Conceptual Study

Prefeasibility Study Feasibility Study Project Execution

Classification Indicated/Inferred Measured/Indicated Ore Reserves Ore Reserves

Study Objectives Generate a range of options. Provide information to justify a decision to proceed to a prefeasibility study, continue further data collection and assessments, or abandon the project.

Examine options and select the preferred option. Provide information to justify a decision to proceed to a feasibility study, continue with further data collection and assessments, or abandon the project.

Maximize the ‘value’ of the preferred option. Provide information to justify a decision to proceed to detailed design and construction, continue with further data collection and assessments, or abandon the project.

Percent Engineering Complete

2% to 5% 5% to15% 25% to 50% 100%

Quotations/Tenders - Supporting the Estimates

None – Benchmark Data from other projects and operations.

Equipment Quotes and benchmark material supply and construction rates. Contracts factorized from existing arrangements with preliminary negotiations as to the likely differences.

Multiple firm equipment quotes. Multiple material supply and construction quote and rates checked. Contracts negotiated to binding heads of agreement or near final agreements specific to the business case.

Equipment on order, tendered or firm quotes available. Tenders for equipment, material, supply and construction costs. Some contracts awarded. Completed and executed mine, rail and port contracts specific to the project.

Cost estimate accuracy In the order of ±50% In the order of ±30% In the order of ±10% - ±20% In the order of ±10%

Contingency >30% 20% to 25% 10% to 15% 5% to 10%

Typical time required to submit draft report

3 - 6 months 6 - 12 months ±18 months n/a

Typical cost to complete report

0.2% of project value 0.5% to 2.0% of project value 4.0% to 8% of project value n/a

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3 TECHNICAL FOUNDATIONS

Valuation Standards

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SRK Consulting (UK) Limited [PROJECT TITLE - RHH] – [Report Title]

Approach Method Method Ranking Comments

Income Discounted Cash Flow Primary Very widely used

Monte Carlo Analysis Primary Less widely used

Option Pricing Primary Not widely used and not widely understood

Probabilistic Methods Secondary Not widely used, not much accepted

Market Comparable Transactions Primary Widely used with variations

Option Agreement Terms Primary Widely used but option aspect commonly not discounted

Gross “in-situ” Metal Value Secondary Not acceptable

Net Metal Value or Value per unit of metal Secondary Widely used rule of thumb

Value per Unit Area Secondary Used for large Exploration Properties

Market Capitalization Secondary More applicable to Valuation of single property asset junior companies than to properties

Cost Appraised Value Primary Widely used but not accepted by all regulators

Multiple of Exploration Expenditure Primary Similar to the Appraised Value Method but includes a multiplier factor

Geoscience Factor Secondary Not widely used

SRK Consulting (UK) Limited [PROJECT TITLE - RHH] – [Report Title]

Valuation Approach Exploration Property Advanced Exploration Property Development Property Operating Property

Income No In some cases Yes Yes

Market Yes Yes Yes Yes

Cost Yes In some cases No No

International Valuation Standards:

● Valmin Code (2005)

● Samval Code (2007)

● Cimval Code (2003)

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3 TECHNICAL FOUNDATIONS

Environmental and Social

SLIDE 14

● The International Finance

Corporation (“IFC”) Performance

Standards on Social and

Environmental Sustainability

(2006; updated January 2012).

● The Equator Principles (“EPs”) is

a risk management framework

adopted by financial institutions.

The EPs require that the mining projects (Category A projects) undertake an

ESIA, produce an ESIA report, develop an ESMP, establish and maintain an

ESMS and undertake effective stakeholder engagement. Address

compliance with host country legislation and observe the relevant IFC

Performance Standards and the World Bank Group EHS guidelines.

The IFC Performance Standards are complemented by the World Bank

Group Environmental, Health and Safety (“EHS”) Guidelines (April 2007),

comprising a series of General EHS Guidelines and Industry Sector EHS

Guidelines.

National legislation and international standards require that an environmental and social impact assessment (“ESIA”) is

undertaken for a mining project, during the planning of the project. Complemented by an environmental and social

management plan (“ESMP”). The ESIA and ESMP are often used to set legally binding conditions of environmental approval.

Implementation of ESMP/s requires an environmental and social management system (“ESMS”).

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4 COMMON THEMES

Classification: mathematical approach and the spotty dog effect

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4 COMMON THEMES

Anecdotal Evidence

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● “But those are not the forecasts which we used to agree the Transaction Basis”

● “It will take too long and it costs too much”

● “You would not believe what we had to do to convince non-execs to take the due-diligence light

approach”

● The addiction to differentiation: Final Feasibility Study; Definitive Feasibility Study; Bankable

Feasibility Study

● Unrealistic expectations

● Mining Selectivity and dilution

● Overly aggressive ramp up schedules to name

plate capacity

● Manufacturer operating efficiencies, not

tempered for local environment

● Too much factoring and not enough

engineering based on site specific data

● Non-representative samples for metallurgical

test-work (sample grade vs RoM)

● From Concept to Front End Engineering

Design

The Usual Suspects

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5 CONLCUDING REMARKS

A Reflective Poem

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.

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5 CONLCUDING REMARKS

The Mining Finance Guide - 2014

“The technical aspects a company needs

to consider to meet the expectations of

the mining finance community”

Anonymous Quote

“To make a friend of assumptions is to

make an enemy of due diligence”

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