According to NI 43-101, a feasibility study is a “comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production.”
So, when we talk about feasibility, we don’t mean practical feasibility (“Can silver be mined here?”) but economic feasibility (“Can silver be mined here at a profit?”) – because if nobody can make a buck doing it, it just not going to happen. Demonstrating economic feasibility is the objective behind every rock chip collected, soil sample taken, diamond-drill hole bored, metallurgical test conducted, and everything else we see our junior companies working on. In other words, there’s gold and uranium and some level of all the naturally occurring elements in almost every gulley, gulch, gorge, and goat pasture in the world but what’s rare is economic concentrations of many of them, especially the precious and other low-occurrence metals.
Feasibility studies are not unique to mining, of course, but in the mining world they boil down to: What do we have? What’s the best way to get it out of the ground? How much money can we make doing that?
Let’s look at some typical topics in a summary of hypothetical feasibility, as they fit into our three main categories:
- What do we have? Typical topics include property description and location, history, geology and exploration, mineral resource estimates, and mining and mineral reserves. Things to look out for are infrastructure advantages (or disadvantages) in the property description, litigation in the history (may resurface as the project advances), and price sensitivity of the resources (how much larger or smaller the amount of the commodity contained in the deposit becomes if its price goes up or down).
- What’s the best way to get it out of the ground? Typical topics include mineral processing, metallurgical test program, process plant design, permitting, environmental, tailings and water management, infrastructure and support facilities, and, occasionally, community resettlement. Community resettlement happens, but not often, and is usually a red flag. Even if well-handled, it usually carries a high-price tag. The details of the mining and processing will vary greatly, as will the red flags associated, but the most common among them are: long distances to roads or power; high strip ratio in an open pit mine; refractory ore in lower-grade sulfides; the presence of deleterious elements (arsenic, mercury, etc.); recoveries requiring very fine grinding (uses more equipment, more circuits, more energy); very hard rock that takes more work to crush; unstable rock that makes steeper pit walls (which reduce strip ratio) dangerous or requires leaving more ore in place underground (to prevent collapses); the lack of a good place for tailings and waste; the presence of animals species considered rare or endangered by the authorities etc.
- How much money can we make doing that? Typical topics include capital costs, operating costs, financial analysis that shows the bottom line Internal Rate of Return (IRR) and Net Present Value (NPV) figures, and conclusions and recommendations (43-101 technical reports always have these). Things to watch for are mainly unreasonable assumptions (e.g., a high price for gold or a low price for oil), especially if the IRR and NPV are sensitive to (drop drastically on) commodity prices and other costs you can foresee fluctuating over the life of the mine (LOM). Suppose, the price of tungsten is going to the moon this year, yet if a proposed tungsten mine will take many years to reach the payback point, the project is vulnerable to corrections in tungsten prices before then, and more so over the LOM. If there’s any chance that the price of tungsten (or whatever the mined commodity) could drop below the level the project requires for significant profitability, it’s not going to get any bank funding. So no matter how exciting the project may seem at the moment, the smart money won’t jump in and the shares are likely to languish. Thinking long-term is critical.
Lastly, even a fully engineered, bankable feasibility study is only an estimate, and is never completely right: the more assumptions and the fewer facts in such a model, the more obscure it ends up becoming.