It is customary, though not mandatory, for the evaluation of the technical feasibility and economic viability of production for a given mineral deposit to proceed through three stages of progressively more rigorous analysis:
- Preliminary economic assessment.
- Preliminary feasibility study.
- Feasibility study.
Preliminary Economic Assessment
The preliminary economic assessment (PEA), often referred to as scoping study, is typically the first and least rigorous analysis of the technical feasibility and economic viability of a proposed mining project. Canadian National Instrument (NI) 43-101 defines a PEA as follows: “Preliminary economic assessment means a study, other than a pre-feasibility study or feasibility study, that includes an economic analysis of the potential viability of mineral resources”. Companion Policy 43-101CP to NI 43-101 notes that: “A preliminary economic assessment might be based on measured, indicated, or inferred mineral resources, or a combination of any of these. We consider these types of economic analyses to include disclosure of forecast mine production rates that might contain capital costs to develop and sustain the mining operation, operating costs, and projected cash flows.” (link to 43-101 – Standards of Disclosure for Mineral Projects)
A unique feature of the PEA is that it is permissible to include inferred resources within the mining and processing production plans, provided that appropriate cautionary language is included with respect to the geologically speculative nature of those inferred resources. The standard language used for this purpose is: “This preliminary economic assessment is based, in part, on inferred resources which are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. This preliminary economic assessment is preliminary in nature and there is no certainty that the results of the preliminary economic assessment will be realized.”
The principal purpose of a PEA is to determine whether or not the mineral deposit in question has a reasonable prospect of being economically mineable and, if so, to make concrete recommendations as to the further work required to advance the project towards a production decision. Typically, the preliminary economic assessment will define whether the deposit will be mined by open pit or underground methods, and will include preliminary mine designs and equipment requirements. It will also typically define the most appropriate processing methods by which a saleable mineral commodity would be produced from the raw mined ore, based on a reasonable amount of metallurgical testwork, and the general requirements for service facilities and infrastructure. Capital expenditures to build the project, and the subsequent operating costs associated with mining, processing, services and administration, and, if appropriate, smelting and refining, will be estimated from preliminary designs, working drawings and sketches, typically to an accuracy of plus or minus 30% to 40%.
Ultimately, a PEA report is a very early measure of the potential economic outlook of a potential mining project, based on very limited work and very general assumptions regarding mining, processing and costs. A PEA report, however, will guide decisions as to whether or not to expend more money advancing the project towards production and will assist in defining the future work to be conducted on the project.
Preliminary Feasibility Study (Pre-Feasibility Study)
A preliminary feasibility study, or pre-feasibility study, is defined by the CIM as follows: “A Pre-Feasibility Study is a comprehensive study of a range of options for the technical and economic viability of a mineral project that has advanced to a stage where a preferred mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, is established and an effective method of mineral processing is determined. It includes a financial analysis based on reasonable assumptions on mining, processing, metallurgical, economic, marketing, legal, environmental, social and governmental considerations and the evaluation of any other relevant factors which are sufficient for a Qualified Person, acting reasonably, to determine if all or part of the Mineral Resource may be classified as a Mineral Reserve.” (link to CIM Definition Standards) A pre-feasibility study is at a lower confidence level than that of a feasibility study.
The distinguishing feature of a preliminary feasibility study is that it forms the basis upon which a portion of the measured and indicated resources may be converted to and declared as, proven and probable reserves, using current economic projections. Professional practice precludes the inclusion of inferred resources within the production plan for a preliminary feasibility study. The preliminary feasibility study will refine the preliminary designs outlined in the PEA, and will include trade-off studies of alternative mining and processing methods, as well as determining the optimum economic level of annual production. Capital and operating costs will be estimated to an accuracy of plus or minus 20% to 25%.
It is generally recognized that a positive preliminary feasibility study is sufficiently reliable to form the basis for significant financial decisions.
Typically, a preliminary feasibility study will be based on:
- A significant tonnage of identified measured and indicated resources.
- A mine design based on preliminary geotechnical analysis of safe open pit wall slopes or safe spans of underground openings.
- Extensive metallurgical testwork, sufficient to identify with reasonable commercial assurance the process by which a saleable mineral commodity can be produced.
- Definition and costing of all required infrastructure and service facilities.
- Design and costing of waste disposal facilities, with the design of the tailings disposal facility supported by appropriate geotechnical testing.
- Complete baseline environmental data and at least a preliminary environmental and social impact assessment, including mitigation and remediation measures.
- A site layout drawing, showing the proposed location of all project facilities.
- General arrangement drawings of the metallurgical processing plant, piping and instrumentation diagrams, and single line electrical diagrams.
- Capital expenditure estimates, with the cost of major equipment items supported by budgetary quotations from potential suppliers.
- Operating cost estimates, with labour costs based on preliminary assessments of personnel requirements and consumable costs based on testwork or factored estimates.
- A preliminary analysis of the market for the saleable products to be produced.
- A comprehensive discounted cash flow analysis of the economics of the proposed project, including allowances for all relevant royalties and taxes, and the cost of ultimate closure and reclamation.
A preliminary feasibility study report presents an advanced view of the potential economic viability of a proposed mining project, based on advanced exploration and development, as well as advanced, though not definitive, technical studies. A preliminary feasibility study report provides the bedrock upon which a feasibility study can be undertaken.
The feasibility study is the final and definitive analysis of technical feasibility and economic viability. It is used as the basis for a production decision by the company owning the deposit, and also as the basis for securing funds from banks, other lending institutions or equity investors, in order to finance construction of the project. In the feasibility study, the project and its individual components are fully defined, and sufficient engineering and design work has been completed to permit capital expenditures and operating costs to be estimated to a level of accuracy of, typically, plus or minus 15%.
The CIM defines a feasibility study as follows: “A Feasibility Study is a comprehensive technical and economic study of the selected development option for a mineral project that includes appropriately detailed assessments of realistically assumed mining, processing, metallurgical, economic, marketing, legal, environmental, social and governmental considerations together with any other relevant operational factors and detailed financial analysis, that are necessary to demonstrate, at the time of reporting, that extraction is reasonably justified (economically mineable). The results of the study may reasonably serve as the basis for a final decision by a proponent or financial institution to proceed with, or finance, the development of the project. The confidence level of the study will be higher than that of a Pre-Feasibility Study.” (link to CIM Definition Standards)
Occasionally, feasibility studies are entitled “Bankable Feasibility Study” or “Definitive Feasibility Study”. The words “Bankable” or “Definitive”, however, are superfluous. The term “Feasibility Study” implies, by definition, that the study is definitive and that it may be used for the purpose of securing financing for construction.
A feasibility study report will address all of the topics covered in a preliminary feasibility study report, but in more definitive detail. Typically, in order to achieve the desired accuracy of plus or minus 15% in the capital or operating cost estimates, approximately 15% of the detailed project engineering is completed during the feasibility stage. It is not necessary, at the feasibility stage, for all required construction and operational permits, agreements with local communities, or contracts for the sale of the commodities to be in place. There must, however, be reasonable commercial assurance that all required permits will be obtained, and all required contracts and agreements finalized, in the normal course.
It is to be noted that any feasibility study (and any PEA or preliminary feasibility study) has a somewhat limited shelf life. The prices of mineral commodities and currency exchange rates fluctuate over time, while capital expenditures and operating costs are occasionally subject to steep increases. All of these factors affect the economics of a proposed mining project and may render even a relatively recent feasibility study out of date.
Prepared and used appropriately, each of the evaluation steps outlined here provides a sound basis for managing project development. The temptation to fast-track a project by skipping one or more steps is strong, but carries with it the risk of sub-optimal returns or worse, an expensive failure.
Don’t you think your sentence on the principal purpose of a PEA is too similar to the definition of reasonable prospects that has to be established for a resource anyway? I would say as a CEO who speaks to investors all the time the PEA’s prime goal is to see whether a feasibility study is justified.
We can agree that, by definition, mineral resources must have reasonable prospects for eventual economic extraction. Where a PEA Technical Report differs from a mineral resource statement, though, is that it requires additional sections that set out the expectations of the project proponent as to: the potential mining and processing methods; the scale of operation; labour, equipment and infrastructural requirements; environmental and social aspects and permitting requirements; product marketability; the potential economic viability of the presented scenario; and, equally important, the QP’s recommendations for future work on the property, including any trade-off studies that would perhaps be better addressed in a PFS than in a definitive FS. So, if the recommendations are to proceed with further drilling (to convert inferred resources) and/or engineering development (to reduce uncertainty in revenue and cost estimates), then in providing investors with a conceptual view of the property’s potential, we agree that positive PEA results will justify further work the project.