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The feasibility study.

Most of the major engineering companies, smaller engineering groups, as well as independent consultants serving the mining industry offer services in feasibility studies. This article reviews a classification system for these studies in the mineral industries.

On the author's first association with a major engineering firm, Kaiser Engineers, California, he discovered that if 10 people were discussing "preliminary engineering," or that old stand-by "definitive estimate," there were 10 different opinions. The lack of clear definition, especially when applied to feasibility studies was bothersome. Feasibility studies have different purposes for each client; and the depth of effort varies in accordance with the purposes of the study. In the proposal stage, failure to understand the client's purpose for the study could result in over- or under-scoping, costing the project too high or too low. One problem in major firms is that many of the people are construction oriented and have difficulty with a conceptual project that may never go beyond the paper stage. They see only erected steel on the job site. If put in charge of a feasibility study proposal they may be tempted to provide an effort that, be it ever so well executed, far exceeds than the requirements of the client.

The following is a discussion of two extremes in the requirements of feasibility studies. First, assume that the exploration department of a mining company has a property under lease and has taken a few outcrop samples and sunk a few pits. It has limited assay data, some concept of the magnitude of the orebody, and some idea of the process required. Some up-front money is paid to the owners of the property. Management wants to know if it should pay the next installment or abandon the property. Here a Type I feasibility study (described later) would be in order. It would give management some basis for a decision.

The second case is where the company owns a property outright and has drilled it extensively. The ore deposit is well defined and mapped in three dimensions. Extensive bench scale and pilot plant work has been accomplished. The grade and stripping ratio is about average for large copper deposits. Gold and molybdenum values are good, and the gold is higher in the upper levels giving better cash flow in the early years. This project is ready for a Type III or IV study (described later). Here an actual copper deposit in South America, where a Type III study was made, is described.

Obviously there are stages during a project where feasibility study efforts will differ in their detail and scope. In the first case the unknowns are covered with high contingency and in the second case contingencies are reduced. In order to provide a set of definitions and a system of defining feasibility studies at various levels of effort and for varying needs, the "pink sheets" were devised. They were printed on pink paper in order to make them stand out in the appendix of reports. The definitions are shown in a summary table and individual descriptions are given for each of the four types. The definitions apply only for feasibility studies and are not for general construction estimating. The "pink sheets" were suggested some years ago by the author and with the help of the staff and the approval of management they were adopted for use in proposals for feasibility studies. They define what depth and extent of the feasibility study is proposed. They are not a contract and are not intended to have legal status as a contract. They provide a means for the client to determine if what is proposed meets his requirements. They provide a better basis for a meeting of minds, the essence of any contract.

The contingencies employed on the pink sheets should not be interpreted as meaning an order of "accuracy" such as plus or minus 10%. The contingencies are all plus quantities and will be used. If four teams with no contact with each other provide four separate studies of I, II, III, and IV types each with declining contingencies, in theory they should all develop the same numbers at least for capital costs. Declining contingency simply means that more detailed studies have been made and better definition has been made. As the types progress from I to IV more drawings and detail is presented and less has to be covered by contingency. Each type requires more drawings than the previous type, and the cost if the study increases almost exponentially.

The pink sheets are not intended to have absolute boundaries. There can be Type I 1/4 and Type III 1/2. There can be a Type Zero, an example of which is "cyanide plants for gold recovery cost $10K/st of daily capacity." It stands to reason that a Type Zero estimate is worth about as much as it costs.

A set of the pink sheets includes a summary sheet (Table 1), and narrative descriptions of the four types each on a separate sheet. Referring to Table 1, it can be seen that better and more reliable information is required progressing from type I to IV. Often more information is available for a Type I than is needed but not quite enough for a Type II. Often a simple general arrangement sketch can be provided for a truck shop or a mill in a Type I estimate but this is more for illustration than for estimating purposes. Note under "Basis for Capital Cost Estimating" who prepares the estimates. When it indicates that the estimates can be prepared by the project engineer it is presumed that the project engineer knows something about estimating and that he knows a lot about the mineral industries. Of course operating costs must be determined by a project engineer with a good background in the mineral industries and preferably with on-the-job experience.

Near the bottom of Table 1 there is the line item "Economic Analysis, DCF" (discounted cash flow). When studies are being performed for large operating companies it can best be done "in house" by the clients own staff. The client know its source of finance and its own internal accounting procedures and may not want to reveal this information to outsiders. On the other hand, such work provided by the engineering firm or consultant may be more welcomed at the bank. For Type I and II studies the author has used a simple, totally unsophisticated exercises referred to as a "spot" cash flow analysis. It gives a quick indication of limited reliability, of feasibility or lack thereof (see Table 2).

Referring to the following descriptions of the four study types, two subjects should be discussed in greater detail; these are "skills employed" and "use of estimates." All of the estimate and study types should be assigned to knowledgeable mining people. In a Type IV estimate the team leader may be an engineer more skilled in design-and-engineering management but he should be supported by staff with a broad understanding of mineral economy and technology and with on job experience in the industry. For Type I and II studies it is imperative that the study be conducted by a person with an understanding of, and experience in, the mineral industries. In addition, and perhaps the most important requirement, is that the person have imagination. They have to be able to visualize what the project would be like. Engineers from design disciplines and professional estimators often lack the imagination required for Type I and II studies. Yet, they are indispensable for the more detailed Type III and IV efforts. Most estimators and estimating departments must have something tangible and this usually means drawings, specifications, equipment lists, and firm quotations. There are however, some senior estimators who can be of great assistance on the lower order studies, by providing unit costs and equipment erection factors.

The last item on the narrative sheets is "use of the estimates" (or feasibility study). Some people in and out of the engineering business can only understand a Type IV study, complete with 35-50% of the design drawings that will ever be needed. There are varying depths of effort that vary from studies that afford management with the basis for simple decisions to studies that are the basis for bank financing. A Type I is often for "comparison" or "rejection" meaning comparison with other alternatives. Years ago the author was involved with a comparison study using Type I methods (the information was better than required for Type I) at the old Braden Copper Co. in Chile. During an expansion study the comparison to be investigated was between three stages of crushing followed by ball-mills and two stages of crushing followed by rod-mills and ball-mills (years before SAG mills were in general use). The results were a stand-off inasmuch as the differences were less than the contingencies employed in the studies. When the expansion finally came to pass SAG mills were used.
[TABULAR DATA OMITTED]
Table 2
            A Typical "Spot" Cash Flow Analysis(1-7)
                                                 Total Cost/yr
                                                      ($M)

Gross Revenue                                         $78.661
Direct operating cost                                 $35.667
Operating profit                                      $42.994
Depreciation $114.498M, 20 yr straight line(2)        ($5.475)
Interest -- rate 12% on 80% of investment(3)          ($5.498)
Depletion -- 22% of $ 8.286M(4)                       ($1.823)
Subtotal, tax base                                    $30.198
Tax -- assume 48%                                     $14.495
After-tax profit                                      $15.703
Add back depreciation and depletion                   $7.298
Sub-total cash flow                                   $23.001
Return on investment(5)                               15.30%
Return on equity(6)                                   76.54%
Pay-out time(7)                                       4.98 yr


Notes:

(1) This table is from an actual Type II study of a titanium-and-rare-earths project, mine, mill, and pigment plant.

(2) The depreciation rate was the client's suggested figure and may have been unrealistic.

(3) The client proposed to provide 20% of the total as equity capital

(4) Depletion could only be taken on mechanical concentrates at the flotation mill and not on refined pigments and rare earth compounds from the chemical plant.

(5) ROI based on dividing after tax profit plus depletion by total investment.

(6) ROE After tax profit plus depletion divided by 20% of total investment

(7) Pay out time, Total investment divided by cash flow.

The "spot" cash flow analysis is indicative only. It assumes some hypothetical "nth" year in the future when everything is "normal" a condition which never actually exists, but it can gave a preliminary indication of feasibility.

A Type II is required to establish the likelihood of a feasible project, but may only indicate the need of a Type III or IV. Type III should indicate that the project can be budgeted with a fair assurance of completion within the budget with the contingencies employed. Type IV provides the basis for higher management or board of directors approval and outside financing if needed. If internal financing is involved a Type II or III may be sufficient to approve a project but of course these studies do not by any means provide more than just an idea of what the facilities will be like, they do not provide engineering design from which plants can be built. Outside financing may require Type IV-plus to convince a financier. The Type IV contains many final drawings and is the basis for detail design. There are few "waste basket" drawings in the Type IV. Professional design engineers, estimators and engineering-and-construction managers are involved in this effort.

Type I estimate

Basis. A Type I estimate can be based on assumed flowsheets and process requirements. Test work is desirable but not an absolute requirement if the process is generally well known. A visit to the actual plant site would be helpful but not essential. Design drawings are not prepared beyond sketches made by the project engineer. Equipment lists are prepared from the assumed flowsheets and priced on updated former quotations, telephone quotes from vendors, and occasionally letter quotes. Most Type I projects do not last long enough to get formal proposals from vendors. Strict specifications are not required. Shelter volume and machine foundation concrete volume can be roughly estimated from project engineer's sketches, and unit costs applied. Percentage factors are applied to determine the cost of machinery erection. Electrical costs other than motors (included on equipment lists) and substations are estimated as unit cost per unit connected-horsepower. Percentage factors can be applied for contractor's field overhead, plant, camp, and profit. Likewise, percentage factors can be used for engineering procurement and construction management. Overall turnkey fees may be added where appropriate.

Information Required. It is necessary to know the geographical area of the project, the capacity required by the client, and some idea of the gross value of the ore to be processed. For calculating operating costs the range of local labor rates should be known including any union contract provisions if unions are involved. Replacement parts can be estimated as a percentage of the first cost of machinery. Wear parts can be estimated from handbooks. The approximate cost of basic supplies such as fuel, power, explosives, grinding media and liners, reagents, etc. should be determined for a Type I study.

Use of Estimates. A Type I estimate and feasibility study contains high contingencies. These may amount to 20-30% on structures and 15-25% on machinery. If contingencies of over 30% are required, the project may not have been well enough scoped/defined to warrant an estimating effort. A Type I may frequently be suitable to reject a project but is not adequate for positive acceptance of a project. It may indicate that a Type II or III study should be undertaken. A Type I may be useful for preliminary comparison of alternate possibilities.

Type II

Basis. For a Type II estimate and study the orebody (if involved) should be well delineated with reasonable estimates of tonnage and grade, but the study can be undertaken well before the completion of the overall maximum exploration effort. There should be sufficient bench scale test work to allow for probable flowsheets and material balances as well as machinery size with a fair degree of accuracy. Visits to the plant site are mandatory. Simpler plot plans, balanced flowsheets, and minimum general-arrangement drawings are prepared. Major equipment lists are based on letter quotations from vendors, but did documents, specifications, and formal proposals need not be involved. Usually only a single vendor for each item is contacted. Facility costs are estimated by making limited quantity take-offs from the general arrangement drawings and applying current unit costs for erected steel and concrete in place. Machinery installation and electrical costs must still be estimated as a percentage of the first cost of the machinery and as a unit cost per connected horsepower for electricals. Percentage factors are used for indirect costs as described in the Type I study.

Information Required. It is necessary to know the geographical location of the project and topographic maps should be available in order to located the facilities on optimum sites. Capacity required and gross value of the ore should be known. Reports from metallurgical laboratories should be available. Labor rates and union contracts should be acquired. Power rates should be solicited from the local source. Firm prices should be obtained insofar as possible for supplies. Replacement and wear parts may still have to be estimated from handbook data and indirect experience factors. If the client has a similar operation actual experience data may be available--but use with caution.

Use of Estimates and Studies. A Type II still contains heavy contingencies amounting to 15-25% on structures and 10-15% on machinery. A Type II may be suitable to indicate feasibility, but may not be adequate for budgeting the project. A Type II study usually describes a conceptual project that might be built rather than one that will be built. It is indicative only and seldom provides a base for final design. If feasibility is indicated a Type III or IV should be considered.

Type III

Basis. A Type III study requires that the orebody be well defined and there is little doubt concerning tonnage and grade, stripping ratio and mineability of the ore. Mining plans are developed in some detail and annual projections of mining operations are prepared. Advanced bench scale tests and preferably pilot plant work has been accomplished. Several visits to the plant site by most of the members of the project team should be made. Very good maps should be available. In addition to detailed general arrangement drawings, piping and one line electrical drawings are prepared. The project team now consists of most of the design engineering disciplines and professional estimators. Bid documents are not prepared but written formal proposals are solicited from more than one vendor who have received performance specifications. The drawings permit quantity take-offs of structural elements and piping an electrical runs. Detailed estimates are made of indirect engineering and construction-management costs as well as indirect field costs.

Information Required. All of the basic information required for Types I and II should be acquired. A Type III may be the result of expanding a Type II and the information will be at hand. The test work should be complete and problems if any identified. Letter quotes should be obtained from vendors of operating supplies unless these are obtainable from published sources. Copies of actual union labor contracts should be obtained if union labor is involved. Written schedules from public utilities should be obtained. Local tax structure should be investigated. Any serious public objection to the project Should be identified. Environmental problems and concerns should be identified and addressed. All pollution and other regulations should be identified. The permitting process should be started by experts in this field. Environmental base-line studies should be started if not already completed.

Use of Estimates and Studies. A type III should provide conclusive evidence of feasibility sufficient to permit the client to budget the project however it may not be quite enough to obtain finance if required. A Type III generally describes the project that probably will be built rather than the one which is conceptual only. There is a large amount of design engineering yet to be accomplished before the project can be built and a Type IV may be indicated.

Type IV

Basis. When a Type IV study is undertaken it is usually an extension of a Type III and feasibility is no longer in doubt. However some clients and sources of finance may demand more detailed engineering as positive proof. It is the beginning of a complete engineering design and 35-50% of all the drawings for the project may be completed in a Type IV. Formal specifications and bid documents are prepared. Sub contracts are solicited. Estimates are made by professional estimating departments based on general arrangement, piping and electrical, and some structural drawings. Vendors have provided firm quotations for all machinery items including the machinery suite for the mine and maintenance facilities. Operating costs were finalized in a Type II or III study and only minor changes would occur. The capital cost estimate will be a thick extra volume in the report presented in great detail.

Information Required. This would include all information gathered in the Type III effort. There should be few unknowns. All public regulations should have been addressed and permits obtained. Environmental impact studies should be well underway or completed. Everything should be in writing and documented to the fullest extent possible.

Use of Estimates and Studies. A Type IV estimate contains minimum contingencies but never less than 10%. The Type IV may be suitable for funding the project but clients and sources of finance may differ in the depth of detail which they require. It can be the basis for detailed construction drawings and for a contract for design and construction management. The Type IV is concerned with the facilities that will be built with only minor modification if the project proceeds. The effort may have been the follow on of Type III, however some clients having been assured of feasibility may have retained an engineering firm to begin with a Type IV.

The bottom line

What is the cost of preliminary engineering and feasibility studies? One thing is for sure! They are generally underestimated, even by people in the business. To begin with they are often research efforts; no one can predict where research will lead. In the previous comparative study of crushing and grinding circuits the study led nowhere; it was a research effort. However no one wants to sign a blank check and following is a set of wide loose estimates for a project involving an open pit mine and a simple flotation mill:

Type I $8,000 to $15K Type II $30K to $60K Type III $75K to $150K Type IV $ 350K to $700K and up

These broad numbers are somewhat independent of the size of the mine and mill involved. Of course a project involving a mine, mill, smelter, refinery, railroad, port, and townsite is going to cost much more. An old rule of doubtful worth says a Type IV will cost 1-1-1/2% of the total capital cost of the project. Of course if a Type IV is involved, feasibility may have already been established.

Large engineering companies may charge more, small firms less, and independent consultants even less. However, the independent consultant is seldom in the position to offer more than Type I and Type II feasibility study.

Again the author would point out that the "pink sheets" are for feasibility studies where projects are more often than not infeasible. Estimating departments have various guide lines for types and reliability of estimates. It usually has its mind set that it is estimating something that will probably be built and demand more information than is available or is justified for collecting.

Two other uses for the system might be mentioned. The first is a case where a Type III study was being made and one of the operating supplies was burned lime. None was being produced in the area and imported lime would be quite costly. There were limestone deposits a short way down river. A Type I study was made on a hypothetical lime plant in order to fix a price for lime for the main study. The second is a case where a study was being undertaken for a government agency investing magnesium metal costs in one of the Scandinavian countries. The operators of the plants in this country were certainly not going to reveal their costs. Much was known about this country and its economics. The technology of magnesium metal production in the country in question was well known. It was a simple job to put together a Type I or better study, and develop the costs within acceptable limits.
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Author:Thompson, James V.
Publication:E&MJ - Engineering & Mining Journal
Date:Sep 1, 1993
Words:3782
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