Why Technical Mining Reports are Inaccurate - 1 New Comforting Quick Fix
This week, we have chosen to focus on how much it costs to run an open pit mine, and how Technical Reports tend to underestimate actual costs by 10-15%
Before making comments, please ensure you have read the whole article and the FAQs at the bottom.
We thought it would be a good idea to do a similar study for open pit mines but it has proved to be much harder, principally due to a lack of information. Very few companies provide detailed information on production and performance, and some (Teck Resources and Agnico Eagle for example) make sure they do not publish any information that will allow the reader to establish how one of their mines performs.
Whereas the article on underground mines used a lot of actual performance data, here we had to rely on NI 43-101 technical reports to determine unit costs.
Usually, the information given in the Management Discussion and Analysis (“MDA”) is barely sufficient to calculate the total unit cost per tonne milled. And even then it is not always clear how much expense was dropped out as “capitalised waste stripping”. Although the companies may be adhering to proper accounting practice, it does not make for a comparable cost metric between companies. The problem with an overall cost rate is that it is very much determined by the applicable waste strip ratio.
For this note, our objective morphed into a determination of the trend in unit costs for activities as a function of production rate, similar as for the underground mines. Unit costs per tonne treated, unit costs per tonne mined. This kind of detail can only be found in technical reports, which hopefully draws on actual cost rates achieved at these mines just before the publishing date of the technical report.
Action Points and Takeaways
- Open pit mining costs in Canada can be as low as US$2/t for very large operations, rising to approximately double that when mining rates are below 15 Mtpa. Treatment costs are sensitive to throughput rate, and typically range from US$5-10/t milled.
- Our key findings are that Technical Reports tend to underestimate actual costs by 10-15%. If a Company says that mining and processing costs are going to be $X/t, you would do better to consider $(X + 15%)/t in your model.
- If you do not build your own financial models, then please use these conclusions as a reminder to temper your faith in management. Confirmation Bias is a powerful thing, and it may serve you well to pare back your expectations by 10-15%, say.
As we did for our analysis of underground operations, the first thing to decide was on the sample group which would give a representative picture of open pit mining.
To compare apples with apples the mines must have exposure to fundamentally the same cost structure, which would not be the case if including mines in different countries. Items such as staff remuneration and fuel differ greatly in cost between countries such as Mexico, the USA and Canada.
We once again settled on Canada as the jurisdiction of choice as it provides for a sufficiently large sample set and the relatively complete and accessible reporting of Canadian listed companies on the Sedar website.
Table 1, below gives details on the sample group initially considered for analysis. We have kept in the Meadowbanks and Highland Valley operations as the technical reports were interesting, even though little of use could be gleaned from the financial statements and MD&A. We also had to mix and match the years a bit, so we included information from 2018 for Red Chris, Mount Polley, and Detour, and from 2019 for Canadian Malartic.
The last column in the table shows if companies give specific information on amounts for capitalised waste stripping. For this report, we have allocated this investment to operating cost so that we can compare operating cost as per technical studies where such reallocations are normally not done.
The companies represented in the table also have a wide range of plant production rates, which helps us to ascertain trends, if there are any. However, the table also highlights a wide range of strip ratios, which are one of the main determinants for the overall unit cost rate. With strip ratio largely dictated mother nature and therefore not within the control of management, comparing overall costs per tonne processed between companies is not that useful.
To be able to get into the nitty-gritty, we need to be able to look at the cost of each of the various activities, and how those costs vary with throughput. And so we realised we had to create a second group of companies to analyse.
The second sample group consists of companies where recent technical reports provided details on the unit costs of the main site activities: mining, processing and general and administrative site services. These operations are shown in Table 2, below.
Whereas the financial reports of companies are usually expressed in US Dollar, the same companies will generate their technical reports expressing monetary values in Canadian Dollar. The CAD:USD exchange rate used in the technical reports is shown in the final column.
When we crunched the numbers, we established a relationship between cost and throughput. As you would expect, unit costs rise as throughput drops, and unit costs fall as throughput increases. Figures 1 and 2 show the unit cost rates for mining (expressed US$/t mined) and processing (US$/t treated) respectively as a function of annual mill production derived from information in technical reports.
The diagram shows a power (non-linear) relation for cash unit mining cost as a function of the treatment rate. The graphs shows that economies of scale eventually cease for mining, and that the cost stabilises at around US$2.0/t mined for Canadian operations. The lowest forecast or projected per tonne cost is for the Copper Mountain Expansion at US$1.55/t mined and it is optimistically 26% lower than the costs for Copper Mountain pre-expansion, and below the US$2/t ‘reasonable lower limit’ of the industry. We suggest that Copper Mountain should prepare for disappointment when it comes to achieving its forecast mining cost rate. Note that in some other countries, such as the USA, lower fuel costs will enable large operations to achieve operating costs below US$2/tonne mined.
At the small end of the scale, Rainy River, Meadowbank, Amaruq, and Moose River show the lowest throughput rates in the sample set. The key outlier here is that Moose River’s (marked in blue) forecast cost of just above US$2.0/t mined, looks over-optimistic and incongruent with other small operations.
When looking at the treatment costs, the unit cost rate for processing shows a steady decline with higher throughput, reflecting the economies of scale over the whole range. Once again the Moose River forecast is an outlier. The cost rate of US$8.37/t milled at a treatment rate of 2.0 Mtpa is very low compared to other operations. Without Moose River numbers the trendlines give excellent fits with the data points for relationships that are:
Cash Mining Cost (in US$/t mined): US$202 x (treatment rate in ‘000 t) -0.41
Processing Cost (in US$/t treated): US$229 x (treatment rate in ‘000 t) -0.38
Sustaining CapEx Costs
Figure 3 shows the relationship between sustaining capital cost per tonne milled as a function of treatment rate as forecast in technical reports.
Without the three very low values associated with Gibraltar and Copper Mountain (pre- and post-expansion), the rate is approximately US$3.5/t milled for small operations treating below 10 Mtpa and US$2.5/t milled for operations treating 20 Mtpa or more.
Pulling it all together
We looked at forecast versus actual numbers where possible. We adjusted, where we could for bumps in the data such the purchase of new mining equipment at Detour, or a ramp-up stage at Rainy River. It seems that both forecast and actual numbers plot roughly between US$10/t milled for the largest operations and US$20/t milled for relatively small operations. Given a paucity of data, we could only plot total unit cost as too few companies report unit costs for mining, processing and G&A as separate items.
The relationships show a close correlation with actual operating cost on average slightly higher (almost 9%), with (Opex + Capex) per tonne milled 28% higher than forecast. Rainy River and Detour show the highest deviation between actual and forecast, which may be due to exceptional sustaining capital cost incurred in the reporting period.
After all of the number-crunching, we can draw the following broad-brush conclusions:
- In Canada, very large open pit operations mining in excess of 50 Mtpa the mining cost rate can be expected to be US$2.0/t mined. Should the mining rate drop to 15 Mtpa or less, the cost rate quickly increases to about double this number.
- Processing costs show a wider range both for any particular treatment, which reflects differences in process flow with the sample group including base metal mines, and as a function of the treatment rate. As to be expected, economies of scale are achieved at higher throughput. In absolute terms the unit cost varies between approximately US$5/t and US$10/t.
- Sustaining capital expenditure is relatively unimportant compared to cash operating cost, usually below US$4/t milled.
- The forecast rates have an optimistic bias for both operating expenses and sustaining capital expenditure. It is prudent for analysts to add another 10-15% to suggested rates. This is particularly important when valuing shares based on Technical Reports.