Consultants benefit from risky business

AS HIGH quality coal deposits are fast depleting or being snatched up by large resource conglomerates, industry newcomers are turning their attention to opportunities in second tier deposits, according to Palaris Mining managing director John Pala.
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Staff Reporter

Pala said the development of second tier deposits was typically at a higher capital cost and increasing operating costs were also hiking the ventures to the higher end of the cost curve.

But the prospect of high returns means projects that have been mothballed for many years due to poor economics are now being touted as company makers.

“Increasingly, consultants will be called upon to provide impartial opinion on the technical and commercial merits of proposed developments. This will include IPOs, debt funding, JVs and independent monitoring of project execution and operation,” Pala said.

He said consultants were becoming a “one-stop shop” for mining companies looking for a full package of services.

“Consultants are now being called upon to provide specialist advice either for a particular issue or on an ongoing basis, to accelerate a project evaluation, provide experienced project management or supply a high calibre multi-disciplined team at relatively short notice,” he said.

Pala said the skills needed to economically exploit the second tier deposits were basically the same as any deposit, but one of the key issues was the increased risk and complexity of the operation, which required more technical resources to complete an appropriate level of analysis than first tier deposits.

“Technical issues such as gas management, spon comb and strata management will have an adverse impact on productivities and unit cost assumptions,” he said.

Pala said assessing the technical and financial merits of a second tier deposit required an in-depth scrutiny of a greater range of factors because of the increased risks.

He said this also contributed to an increased time and cost in project evaluation.

In terms of project management, Pala said good management could enhance value by bringing a project in below budget cost and ahead of time but conversely, poor project management could destroy shareholder value.

“There is a greater imperative to get project management right as second tier deposits are proportionally more adversely affected by poor project management,” he said.

“Companies who undertake detailed project execution planning during feasibility phases seem to have greater success in effective project management.”

Pala said an important factor to consider was that data should be appropriately benchmarked to ensure that second tier deposits do not assume first tier deposit productivities and unit costs.

He also found that increased pressure could be placed on consultants to use overly optimistic base assumptions.

In the current mining climate, Pala said his firm had seen an increased need for consultancy in a number of areas:

  • Due diligence – both in Australia and overseas
  • General project evaluation
  • Business improvement programs
  • Project management
  • Fully packaged services

He said most investors were pretty sophisticated and wanted consultants to use the full suite of investment analysis tools. Some of the evaluation parameters include:

  • Sensitivity analysis
  • Net present values on a real and nominal basis – at a given discount rate
  • Internal rates of return
  • Payback periods
  • Capital efficiency ratios

Pala said the tight labour market would continue to drive the demand for consultancies providing a full suite of products and services.