Canadian Mining Journal December 2016

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December 2016

GOLD IN CANADA A LOOK AT NEW AND EXPANDING MINES ACROSS THE COUNTRY

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CANADIAN Mining Journal

DECEMBER 2016 VOL. 137, NO. 10

www.canadianminingjournal.com

FEATURES GOLD IN CANADA 8 A look at gold as money and not a commodity and why you need to hold a substantial part of your portfolio in precious metals in order to preserve savings.

10 A look at Goldcorp’s Borden project, Canada’s first totally electric underground mine.

14 Gold miner pushes forward to prove doubters wrong about

8

small New Brunswick project.

18 Merger between Toronto-based Kirkland Gold and Vancouverbased Newmarket Gold creates competitive mid-tier gold producer.

24 Highlights from

MINExpo 2016 in Las Vegas where delegates and exhibitors from around the world gathered to experience one of the largest equipment shows designed for the mining industry.

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DEPARTMENTS 5 EDITORIAL | Editor Russell Noble says “goodbye” in his last editorial as he announces his retirement after nearly 47 years in publishing.

6 FIRST NATIONS | Jason Batise, executive director, Wabun Tribal

Council, and Stephanie LaBelle, mineral development advisor, Wabun Tribal Council, give recommendations on improving meaningful engagement of First Nations in mineral resource exploration and development.

7 LAW | This month David Bursey and Sharon Singh from the law firm

of Bennett Jones, Vancouver, talk about managing environmental risk in British Columbia.

9 CSR & MINING | A regular column by Michael Torrance, a lawyer with Norton Rose Fulbright, Toronto, looks at sustainability risk culture and the mining executive.

26 MAINTENANCE | Picking the right parts are one of the ways operation managers can save money and increase profits.

30 UNEARTHING TRENDS | Michael Samis, EY associate partner, Transaction Advisory Services, looks at making good capital allocation decisions in a volatile market.

DECEMBER 2016

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18 ABOUT THE COVER

This month’s cover provided by Technosub.

Coming in January Canadian Mining Journal starts 2017 with a look at mining in British Columbia and North of 60.

For More Information

Please visit www.canadianminingjournal.com for regular updates on what’s happening with Canadian mining companies and their personnel both here and abroad. A digital version of the magazine is also available at www.digital.canadianminingjournal.com

CANADIAN MINING JOURNAL

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CANADIAN Mining Journal

EDITORIAL

Goodbye, or 30, as journalists say

December 2016 Vol. 137 — No. 10 38 Lesmill Rd. Unit 2, Toronto, Ontario M3B 2T5 Tel. (416) 510-6789 Fax (416) 510-5138 www.canadianminingjournal.com

Editor Russell B. Noble 416-510-6742 rnoble@canadianminingjournal.com Field Editor Marilyn Scales 613-270-0213 mscales@canadianminingjournal.com Production Manager Jessica Jubb jjubb@glacierbizinfo.com Circulation Manager Cindi Holder 416-510-6789, ext. 43544 cholder@glacierbizinfo.com Publisher & Sales Robert Seagraves 416-510-6891 rseagraves@canadianminingjournal.com Sales Western Canada, Western U.S.A. and Quebec Joelle Glasroth 416-510-5104 jglasroth@canadianminingjournal.com Toll Free Canada & U.S.A.: 1-888-502-3456 ext 2 or 43734 Group Publisher Anthony Vaccaro

Established 1882 Canadian Mining Journal provides articles and information of practical

use to those who work in the technical, administrative and supervisory aspects of exploration, mining and processing in the Canadian mineral exploration and mining industry. Canadian Mining Journal (ISSN 0008-4492) is published 10 times a year by BIG L.P. Mining.

BIG is located at 38 Lesmill Rd., Unit 2. Toronto, ON, M3B 2T5.

Phone (416) 510-6891.

Legal deposit: National Library, Ottawa. Printed in Canada. All rights reserved. The contents of this magazine are protected by copyright and may be used only for your personal non-commercial purposes. All other rights are reserved and commercial use is prohibited. To make use of any of this material you must first obtain the permission of the owner of the copyright. For further information please contact Robert Seagraves at 416-510-6891.

Subscriptions – Canada: $51.95 per year; $81.50 for two years.

USA: US$64.95 per year. Foreign: US$77.95 per year. Single copies: Canada $10; USA and foreign: US$10. Canadian subscribers must add HST and Provincial tax where necessary. HST registration # 809744071RT001.

From time to time we make our subscription list available to select companies and organizations whose product or service may interest you. If you do not wish your contact information to be made available, please contact us via one of the following methods: Phone: 1-888-502-3456 ext 2; Fax: 416-447-7658; E-mail: cholder@glacierbizinfo.com Mail to: Cindi Holder, BIG Mining LP, 38 Lesmill Rd, Unit 2, Toronto. ON, M3B 2T5.

We acknowledge the financial support of the Government of Canada through the Canada Magazine Fund toward our editorial costs.

By Russell Noble

Goodbye is a word that’s often difficult to say because it’s permanent. Unlike see you

later, or, until next time, and so on, it’s absolute. It means the end has come.

And for me, that’s exactly what goodbye means because I’m retiring from publishing after nearly 47 years in the business.

Like many you who have logged just as many years doing what you do, the time has passed quickly because I remember my first day working in journalism as if it was yesterday.

It was in the sports department as a ‘copy boy’ with the old Toronto Telegram newspaper, the predecessor to today’s Toronto Sun. For those of you not familiar with the term ‘copy boy,’ or the Toronto Telegram and the unique ‘pink’ paper it was printed on, it involved gathering stories from writers in the newsroom when they yelled “copy” and delivering them to the editor.

It was the most junior editorial-related job at the paper, but it got me hooked on the excitement of journalism, and I’ve been involved with the publishing industry ever since.

That was 1969, and when I see that date, I guess it does put the 47 years into perspective because it is a long period of time no matter how quickly it seems to have passed.

From the Toronto Telegram, I moved to a small town weekly newspaper (also owned by the “Tely”) where I worked as a junior sports reporter for about a year until I saw an ad for an ‘assistant editor’ on a monthly trade magazine.

It was called Canadian Consulting Engineer, and by co-incidence, it was a magazine printed by my brother-in-law. I applied for, and got the job, and for the next 10 years, I moved from assistant editor, to associate editor, to finally managing editor.

Following that tenure, I moved to a magazine called Heavy Construction News (now On-Site magazine) as editor, and eventually associate publisher, to finally today, as editor of Canadian Mining Journal.

Ironically, all three of the magazines I’ve worked on during my entire career are now in the same building, but owned by different publishers. It’s as if I never left any of my former magazines because both Canadian Consulting Engineer and Heavy Construction News (On-Site) are in adjacent offices.

Publishing, like mining, is a rather small fraternity in that many of the players don’t stray far from their respective industries; they tend to turn up again in companies with different names, but in the same business.

It’s like a brotherhood of sorts. Mining people stick with mining companies, journalists stick with the media. It’s what we do, but more likely, it’s most likely all we know how to do.

I’ve often thought that I’d like to do something else, (don’t know exactly what that is however?) but when it comes down to it, writing and editing has been my life’s work and somewhat sadly, it’s about all I know I can do.

Thankfully I’m still mentally and physically healthy enough to work at something else, but quite honestly, I don’t think I want to. I hear about people retiring and either dying shortly afterwards, or regretting that they’ve left their jobs and wishing they hadn’t.

A month or two from now I may be in the same situation (not the dead one I hope) but for now, I’m at ease with my decision so on that note, I’ll just say goodbye.

CMJ -30(A numeral used by journalists to mark “The End”)

DECEMBER 2016

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FIRST NATIONS

The Wabun Model:

Meaningful engagement of First Nations in mineral resource exploration and development

By Jason Batise, executive director, Wabun Tribal Council, and Stephanie LaBelle, mineral development advisor, Wabun Tribal Council.

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n Tuesday, Nov. 1, 2016, the Wabun Tribal Council (WTC) was called to testify at House of Commons’ Standing Committee on Natural Resources as part of its study on The Future of Canada’s Oil and Gas, Mining, and Nuclear Sectors. Specifically, Wabun presented its recommendations to improve meaningful engagement of First Nations in mineral resource exploration and development.

With over 55 exploration agreements, seven impact benefit agreements and resource development agreements, with seven more in negotiation, the Wabun Model of resource development has become a best practice for First Nation communities striving to build meaningful relationships with the mining industry.

WTC is a non-profit regional council established in 1989, and based in Timmins, Ont., uniting five distinct Anishnabek First Nations (Brunswick House, Chapleau Ojibwe, Flying Post, Mattagami and Matachewan First Nation).

The Chiefs of the First Nations make up the WTC’s board of directors, advising and giving direction to the operation and initiatives of WTC. The council has played a key role in regional planning, public relations, political advocacy, and policy development. WTC has been particularly instrumental in advocating and facilitating dynamic relationships with the mining industry.

Roughly the size of France, the historic mining camps of Timmins and Kirkland Lake are located within the WTC territory. This is the busiest area for mineral exploration and development in Ontario, and arguably in Canada. At the present time, within the territory there are 10 operating mines, and two in development. Even though the mining industry is in a downturn, from January 2016 to date, WTC has processed over 50 exploration permits and 10 closure plans and amendments.

Our success is attributed to our WTC mining policy that is consistent, streamlined and result-driven. The goal is to facilitate dialogue between First Nations and mining stakeholders to encourage meaningful relationships that deliver results to all parties. To WTC and member First Nations, agreements are mandatory, and are at the foundation of free, prior and informed consent.

Exploration agreements, also referred to as memorandums of understanding (MOUs) are the requirement for support on all exploration projects seeking an exploration permit from the Ministry of Northern Development and Mines (MNDM).

WTC First Nations have signed 55 MOUs with companies like Probe Metals Inc., Gowest Gold, Osisko, Kapuskasing Gold, and Goldcorp’s Borden project. These agreements are consistent, and

are negotiated from a standardized template. They provide a commitment to the First Nations for financial compensation to accommodate for impact, business opportunities, employment and training, a committee of elders and knowledge holders, support for various studies (archeological, peer review, etc.) if required, and a commitment to IBA negotiations should a mine develop (and funding for the negotiations).

Impact benefit agreements or resource development agreements (IBA/RDA), are required on all developing mines. WTC successfully negotiated seven IBAs/RDAs (Goldcorp PGM, Northern Sun Mining, Tahoe Resources/Lake Shore Gold (two), Alamos Gold Inc., and Imerys Talc). The elements of the agreements are outlined in the exploration agreements. Then IBAs provide commitments for revenue sharing and profit participation, employment and training, enhanced workplace conditions for First Nation employees, business opportunities, and cultural and environmental protection and dispute resolution mechanisms. While they are similar to the exploration agreements in content, IBAs/RDAs are much more robust and prescriptive, are unique to each project, and can take years to negotiate.

For industry, agreements outline mutual commitments and expectations. They ensure social license to operate and describes a template for consultation. In doing so, communities assist proponents with required permit applications through confirming First Nation support. Furthermore, WTC has helped industry-partner efforts in securing financing for project development.

Agreements can significantly reduce potential for conflict at all stages by providing the project certainty, and is a first step in developing a meaningful relationship with the First Nations.

WTC continues to urge provincial and federal governments to make agreements between First Nations and mining companies for exploration and mine development/operation a legislated requirement. Agreements ensure economic development, and socio-economic deliverables to communities that have been – for too long – at the margins of development within their traditional and treaty lands. They deliver stability, consent, and certainty.

Agreements also provide a framework for consultation. Government and industry need to accept that First Nations expect dynamic deliverables from mining development.

WTC is proud of our progress in engaging the mining industry, and looks forward to continued dialogue with all industry stakeholders operating in the territories of their member First Nations.

CMJ

Front Row, left to right: Shawn Batise (Ministry of Indigenous Relations and Reconciliation), Jason Batise (executive director, Wabun Tribal Council). Middle Row: Chief Murray Ray (Flying Post First Nation), Chief Alex (Sonny) Batisse (Matachewan First Nation), Ron Clayton (president and CEO of Tahoe Resources), Chief Walter Naveau (Mattagami First Nation), Sharon Plourde (Wahgoshig First Nation) Back Row: Ken Peterson (negotiator for Wahgoshig First Nation).

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LAW

Managing environmental risk in British Columbia

By David Bursey and Sharon Singh

B

ritish Columbia is changing how it monitors and enforces the regulatory compliance of projects in its resource sector. The changes follow the May 2016 release of the auditor general of British Columbia’s (AG) audit report on the Ministry of Energy and Mines’ (MEM) and the Ministry of Environment’s (MOE) compliance and enforcement activities in the mining sector.

The report concluded that MEM’s and MOE’s monitoring and enforcement of the mining sector’s regulatory compliance is inadequate to protect the province from environmental risks. The AG recommended substantial changes, including the creation of an integrated and independent compliance and enforcement unit for mining activities. The report’s implications extend beyond the mining industry and will affect how the province regulates other resource industries.

Report Findings The AG found the MEM’s mandate to promote the mining industry conflicts with its role as a regulator, which reduces MEM’s regulatory effectiveness and risks regulatory capture. She also observed that the ministries: w Lack the resources and tools necessary to manage environmental risks and do not coordinate their compliance efforts. w Have approaches to permitting that do not reflect the “polluter pays” principle. w Do not adequately monitor and inspect sites to verify compliance. w Have deficient enforcement responses, and do not adequately evaluate the effectiveness of their regulatory programs.

Report Recommendations To respond to these findings, the report recommends the provincial government take 16 specific actions, including: 1. Ensure mining permits are written with enforceable and consistent language.

2. Ensure the security deposit collected from each mine will cover the mine’s potential reclamation liabilities.

3. Adopt a cost-recovery model for permitting and compliance verification activities.

4. Develop clear and comprehensive reclamation guidance for industry.

Government’s Response The government generally supported the report’s findings, but it took issue with some important aspects, including: 1) how to measure the operational effectiveness of compliance and enforcement programs; 2) the Mount Polley dam failure findings; and DECEMBER 2016

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the risk of regulatory capture.

The government has already implemented some of the report’s recommendations (some even before the report’s release) including: 1. Increasing the reclamation security deposits.

2. Amending the Environmental Management Act to include requirements for spill prevention plans, and adding new offences and penalties.

3. Amending the Mines Act to include administrative monetary penalties, increasing maximum penalties, and introducing permit fees.

4. Initiating a program to amend the terms and conditions in almost 1,000 MOE permits to incorporate consistent and enforceable language.

The government also committed to create a new formula for reclamation liability by 2017. This initiative is part of the federal, provincial and territorial efforts to develop a consistent and transparent methodology for calculating mine reclamation security.

3)

Resource Industry Implications The report is an audit of MOE’s and MEM’s compliance and enforcement, not an audit of the mining industry’s performance.

The recommendations and findings reflect an international trend to strengthen environmental protection and enforce the “polluter pays” principle. In particular, governments increasingly want assurances that mine and other natural resource developers will manage their project risks and minimize the risk that government funds are called upon to resolve environmental problems arising from private sector projects.

The changes pose financial and operational challenges for industry. For example, MOE’s initiative to refresh existing permits is not intended to change a permittee’s rights, but permittees and MOE may differ on the interpretation of existing permit terms.

To minimize the uncertainty for project owners and the public about existing development rights, MOE must issue clear policy statements to explain the initiative’s goals.

Changes to the regulatory tools are necessary to sustain public trust, especially following recent high profile mining incidents.

The mining industry will need to continue working with the regulatory agencies so the proposed changes achieve the desired improvements in regulation, without impeding responsible resource development by creating inefficiencies and unnecessary regulatory and financial burdens.

CMJ DAVID BURSEY is a partner and SHARON SINGH an associate, Bennett Jones, Vancouver.

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IS MONEY, NOT A COMMODITY

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GOLD IN CANADA Special Report

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any investors and their financial advisors consider gold to be a commodity, and by doing so, they make it no different than copper, timber, pork bellies or orange juice.

What they do not understand, however, (or they’re simply unaware of) is that gold has been successfully used as money for more than 3,000 years, and although some people think it is an archaic relic, the facts don’t support this view.

Photos: Hadel Productions, iStockphoto

Y

So what is money?

Gold is traded on the currency desks of all major banks and brokerages, along with dollars, euros, yen and pounds, and not the commodity desks along with other commodities. The FX traders know gold is money.

On the balance sheets of all central banks, gold is classified as a monetary asset, along with their foreign currency reserves. The central bankers know gold is money. Central banks do not hold any other commodity as part of their reserves.

Alan Greenspan knows gold is money, as he laid out in his famous article “Gold and Economic Freedom”, written in 1966, before he became chairman of the Federal Reserve.

According to London Bullion Market Association (LBMA) statistics, the daily turnover of gold is $23 billion. Turnover is the difference between buys and sells, whereas the volume is the sum of the two.

Although volume is not published, estimates are that it is at least seven times the turnover, or about $175 billion per day. This magnitude of volume confirms gold is traded as money, not as a commodity. As a comparison, the daily volume of copper is less than $4 billion per day as traded on the Chicago Mercantile Exchange.

One of the more important attributes of gold is that it is negatively correlated to financial assets, such as equities and bonds, and non-correlated to commodities.

When financial assets decline, gold tends to move in the opposite direction, and increases in currency terms. What this means is that gold acts as portfolio insurance to reduce volatility, improve returns, and improve both Sharpe and Sortino ratios.

When I suggest that all portfolios should have at least 10% in gold, some people look at me as if I had recommended a 10% allocation to pork bellies. I realize that pork bellies no longer trade on commodity exchanges, but I used this as a commodity example, as most people have seen the movie Trading Places.

Many analysts write scholarly articles criticizing gold and pontificating on why gold is a bad investment, but invariably they start with the mistaken assumption that gold is a commodity.

Starting with an inaccurate assumption makes it impossible to reach an accurate conclusion.

In some respects this is understandable, as no university-level program in the world, other than the Mises Institute, teaches anything about money.

The investment advisor qualification courses in Canada, right up to the CFA, make virtually no mention of gold. This is like DECEMBER 2016

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You need to hold a

teaching carpentry without ever discussing the properties of wood. To me it seems absurd to give financial advice when you don’t understand the foundations of every investment – currency and money.

If people studied the history of money, they would realize that today what we consider money is nothing more than a debt-based currency, and that central banks have created unpayable levels of debt. They would realize that experiments in uncontrolled paper currencies have been tried many times in the past, and the world has experienced at least 56 hyperinflations as a result.

They would realize that gold-backed currencies have never experienced hyperinflation and have provided stability for hundreds of years, as was in the case of the gold-backed British pound. Gold cannot simply be created by typing digits on a computer screen without any limits or constraints. Tonnes of ore have to be mined just to get a few grams.

The importance of understanding the difference between fiat currency and real money is currently playing out in Venezuela, where desperate people are eating cats and dogs because the currency is worthless, inflation is rampant, and food supplies are extremely scarce.

For the sake of your financial well-being, take the time to understand what money is, its history, and how it is created through the fractional reserve banking system. You will then understand that this 44-year-old experiment with the U.S. dollar as the first global reserve fiat currency will assuredly end in disaster for those who hold their wealth in paper, just like all the other times when this was tried by individual countries.

You will come to the same conclusion that I and numerous other experts have come to: You need to hold a substantial part of your portfolio in precious metals in order to preserve your savings.

It is critical to take the time to understand that gold and silver are the most reliable forms of money for preserving wealth. When it becomes obvious to everyone that the system is failing, it will be too late. Unlike paper currencies, you can’t simply print more gold.

If even a small percentage of the $250 trillion in global financial assets tries to move into less than $2 trillion of privately held gold, the only variable will be the price, and even then the question will be availability.

That is how we will get $10,000 per ounce gold, and $250 per CMJ ounce silver.

substantial part of your portfolio in

precious metals in

order to preserve your savings.

Information for this Special Report provided by Nick Barisheff, founder, president and CEO of Bullion Management Group Inc. CANADIAN MINING JOURNAL

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GOLD IN CANADA

Goldcorp’s Borden project to be first allelectric mine

A BO T

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The MacLean 975 Omnia scaler-bolter in action. (photo: MacLean Engineering)

By Marilyn Scales

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oldcorp is building what could be called a stealth mine, if your definition of “stealth” includes the words underground, no mill, small footprint, diesel-free, and environmentally responsible.

The first totally electric underground mine in Canada is to be built in the pristine wilderness near Chapleau, Ont. This is an area long overlooked by the mining community, although the forestry industry has been the economic driver in the past. But with forestry in decline, a new mine will be an economic boon to the region. A new, environmentally friendly mine even more so.

“We’ve been welcomed by the Chapleau community,” project manager and general manager of Goldcorp’s Porcupine Gold Mines Marc Lauzier told CMJ. The Borden project will be overseen from the PGM offices in Timmins, Ont., 160 km northeast of the mine site. Having grown up in Chapleau, Lauzier is the perfect choice to head the effort.

The time is right The time is right for embracing electric vehicles.

“Batteries have come a long way in the past five years,” said Lauzier. “Older batteries had to be swapped out of the machine and took a long time to charge. Now they can be quick charged on the machine in an hour.”

A healthier workplace is a welcome benefit of going all-electric. No longer will miners be surrounded by a soup of diesel emissions that require large volumes of air to ventilate.

There is also a safety factor associated with not storing diesel fuel underground.

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Dave Drake at the controls of the MacLean 975 electric scaler-bolter. (photo: MacLean Engineering)

MacLean’s goal is to offer a battery tramming and operating option on all units across the company’s ground support product line, its ore flow line, and its utility vehicles.

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Lower capital and sustaining costs are associated with electric equipment. Principally, much less ventilation is needed so the fan installations on the surface will be smaller than conventionally possible. The savings continue as less power is needed to run smaller fans. Smaller fans are less noisy, too.

Goldcorp secured the Borden property as part of its acquisition of Probe Mines in March 2015. Although the project was highly prospective at the time, there was a compliant resource report for the property.

Probe put the numbers at 1.6 million oz in the indicated portion and 400,000 oz in the inferred category. Expressed otherwise, there were 9.3 million indicated tonnes averaging 5.39 g/t Au and 3.0 million inferred tonnes at 4.37 g/t (using a 2.5 g/t cut-off).

The plan is to develop a ramp access operation. The Borden project is permitted for underground exploration, and hopefully the permanent permits will be received in a timely fashion and the mine will reach commercial production in mid2019. Ore will be trucked to the PGM mill in Timmins for processing.

The company is preparing a prefeas-

ibility study to be completed in the first quarter of next year. The plan is to take a 30,000-tonne bulk sample and provide a platform for underground exploration drilling. The deposit is known to be open at depth and laterally.

Beginning with the adit and ramp, the electric option is the only option.

Sandvik and MacLean Engineering take up the challenge Two suppliers – Sandvik and MacLean Engineering – have stepped forward with battery powered solutions.

Sandvik is supplying its DD422iE, a two-boom jumbo, for advancing the ramp.

This is the first jumbo that trams on battery power, not diesel. Then while it is plugged in to the electric grid during drilling, the batteries are quick charged at the same time. Or the batteries can be charged when the jumbo is tramming downhill by using energy generated by the braking system.

Goldcorp has already purchased one unit that will be delivered early next year when portal and ramp construction begins.

MacLean is supplying two scaler-bolters, scissor lifts, and cassette carriers – all 100% battery powered. They feature the comWWW.CANADIANMININGJOURNAL.COM

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Sandvik’s DD442iE jumbo is going to the Borden gold project to drill the access ramp.

pany’s EV battery technology offering high power, high efficiency, and long cycle life battery chemistry. The vehicles are equipped with sophisticated battery management and vehicle monitoring capabilities as well as onboard charging compatible with existing mine infrastructure. The engineering of the integration of the battery power and drive train components was developed in collaboration with MEDATech, a specialized engineering firm.

MacLean’s goal is to offer a battery tramming and operating option on all units across the company’s ground support product line (bolters, shotcrete sprayers and transmixers), its ore flow line (water cannons, secondary reduction drills and mobile rock breakers), and its utility vehicles (boom trucks, scissor lifts, Anfo/emulsion loaders, cassette carriers, personnel carriers, water sprayers, and fuel-lube trucks). The company has set a goal of 2017 to electrify the full line of its equipment.

The challenge going forward, said Lauzier, will be to find battery powered trucks and load-haul-dumpers capable of operating underground for production. Such vehicles have had to be tethered to their power source in the past with a cumberDECEMBER 2016

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Sandvik is supplying its DD422iE, a two-boom jumbo, for advancing the ramp. This is the first jumbo that trams on battery power, not diesel. Then while it is plugged in to the electric grid during drilling, the batteries are quick charged at the same time. some electric cord. New battery technology is allowing manufacturers to created battery powered LHDs, for example, as Sandvik is currently doing. There is no doubt that all production equipment can be battery powered in the near future.

The battery powered, environmentally

responsible mine is about to become a reality. We applaud the forward thinkers at Goldcorp who are pushing to make it happen. In the end a green Borden mine will only happen when the company, its suppliers and the local community embrace what is possible and put it into action.

CMJ CANADIAN MINING JOURNAL

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small gold

goes looking for respect

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GOLD IN CANADA

A

By Correspondent David Godkin

guy spends $150,000 on a jaw crusher and hammer mill, pours blood and sweat into an operation to prove there really is something worth mining here, and still he can’t get respect. That’s how Slam Exploration CEO Mike Taylor felt after learning of remarks from Arizona minerals engineer Tim Oliver who maintains a watch list on mining projects he thinks are destined for the ash heap. His assessment of Taylor’s Menneval gold mine in northwest New Brunswick?

Well, not especially flattering: “This reminds me of the TV show Gold Rush. A couple of dudes scraping out some colour and putting it through a makeshift gravity mill …

“What is recovery? What are operating costs? Did they get the title to the claims they talked about in the financial report? Is there a flow diagram? …

“I’m sure they don’t have a furnace, so they must ship the con somewhere for treatment. They can make more as Uber drivers in Toronto.”

A little harsh? Perhaps. Numerous Canadian gold mining operations have struggled in recent years. Many started small and have remained that way. For his part, Taylor admits he’s not Barrick or Kinross. His aim at Menneval is to prove there’s gold there that is recoverable and economical. A 43-101 technical report underwritten by a massive drilling project is not necessarily required.

And yes, says Taylor, Slam does own the claim, a licence of occupation entitling it to the ground at Menneval. He acknowledges Oliver has valid questions, some the company can answer, some at this stage it can’t.

“This is a test program. We don’t expect we’re going to get positive remarks from your average mining engineer. But we’re going to have to prove a few things. To me we’re off to a good start,” he said.

Going back to basics Back in January 2015 prospects at the Menneval mine site really did look grim: operations at a standstill, an accumulated deficit approaching $24 million with only enough money to meet minimum property expenditures for five months. More money was CONTINUED ON PAGE 16

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GOLD IN CANADA going out, none coming in, casting “significant doubt about the company’s ability to continue as a going concern.”

A year and a half after that financial statement, this: “Slam Exploration Ltd. is pleased to report it is processing gold ore from the Maisie gold deposit through the turnkey gold plant at its wholly owned Menneval gold project in northwestern New Brunswick.”

One hundred thirty tonnes of crushed ore extracted from a high grade section of a gold zone known as the Hook, and 150 tonnes of quartz material stockpiled and ready for crushing.

What happened? Taylor was asked. A change in priorities, he replied.

“In January we’d finished our permitting process and were still making our plans and unsure how receptive the market was going to be. But gold was certainly on the uptick and so we optioned out our Superjack zinc deposits at Cache Creek to Callinex Mines and focussed on our gold project.”

Finances boosted, Taylor put in an

order for equipment purchases, signaling to financial markets Slam was back in business. “I think the key for us was focussing on a gold project and one where we had a bit of control over the outcome.”

Again, Oliver was not impressed by the bulk sample permit to take 2,000 tonnes over two years. “They will mine and mill the allowed amount, and then what? It isn’t likely to make them money. Seems they just don’t have time or money to drill.”

But hold on, says Taylor. It’s because so many ventures fail due to overly optimistic resource estimates, that he took a measured, conservative approach to exploiting the Maisie gold deposit – putting away the diamond drill bits in favour of bulk sampling.

“Now there’s going to be a stage where we will have learned about all we can about the deposit from both our excavation and bulk sample program. At that stage, it will become important to revert back to the drill to see where it goes at depth,” Taylor said.

First things first What Slam wanted its test pit to show was

that despite little historical evidence in the region “the area was capable of producing recoverable gold.” Why such confidence?

Well, for one thing, Taylor said they could see the gold coursing through the vein, with an initial discovery trench producing a bonanza grade chip sample assayed at 1,100 g/t Au over 1.1 metre in 2012, followed by reports of high grade mineralization channel samples ranging from 5.17 g/t over 1.0 metre up to 49.5 g/t over 0.45 metre.

Rather than spend more money on expanded drilling the company decided to spend it on actually producing gold and evaluating it. Taylor’s plan: bring in small scale mining equipment to exploit a vein system at Maisie deposit striking over 700 meters and containing a series of high grade shoots.

To test the equipment, Slam sent a 42-kg ore sample last winter to Mount Baker Mining and Metals LLC in Bellingham, Wash. While further processing was required, the company announced the shaker table had produced 100 grams of gold‐bearing concentrate, with two additional tailings samples returning assays of 32.5 and 34.2 g/t Au.

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Once again, results were encouraging. By September the turnkey plant was operating at full capacity, the hammer mill pounding vein material to pass through a 0.8 mm screen and separating heavy minerals and visible gold passing over the shaker tables to produce a gold-bearing concentrate at a rate of 1 to 2 tonnes per hour.

“This is free gold that is discreet ranging from 5 μm up to 2 mm,” Taylor said, “unencumbered by sulphides or other minerals.”

This, Taylor said, had real potential to add significant tonnes to the deposit already being processed. “Some of its oversized material that we need to break down with the hydraulic hammer. But it’s sitting there ready to be processed.”

Go deeper?

“We’ve already drilled the Hook to a depth of 30 metres. Our next step is to ask: Can we take this to 60 or 100 meters?” And that goes for the other shoots as well, Taylor adds.

“We know at both the smaller and bigger scale it has classic features of a California motherlode type of vein. These generally run deep, we’ve proven that there’s recoverable gold there so we’re confident that we’re going to be able to advance the project.”

At the end of the day details potential backers will want are ore mining and daily production rates as well as projected mine life, i.e. Can Slam establish a sustainable mining and processing program and expand that into a longer term operation?

“Those are out two key goals,” said Taylor.

Is he setting his sights elsewhere in the region? You bet. The Maisie discovery came as a result of a one-year option taken on a site 30 km to the southwest of the town of St. Quentin.

“There was significant gold there in an area that hadn’t really been explored before and my first impulse was that they’re must be more of these things in this environment,” Taylor says.

Another potential plus: the area consists of sedimentary rock along the footwall of a major fault. “I think that fault structure is the key to these deposits.”

We’re all in this together So just how unlikely is it that Slam’s work at the Menneval gold mine in will come to nothing, as Tim Oliver suggests? Well that DECEMBER 2016

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depends. In many ways, its experience in the past year and a half reflects the situation larger junior gold mining companies specializing in small scale mining have faced over the same period. In March 2015, the Wall Street Journal reported that Gold Canyon Resources Inc. with 5.1 million oz of gold and a camp of more 60 staff at its mine in northern Ontario were down to “a couple of guys” keeping intruders out.

That same month more than 2,300 companies, mostly from the junior sector, looked for private financing at the annual Prospectors & Developers Association of Canada conference in Toronto. Most came

away empty handed. The WSJ opined that Gold Canyon and other junior miners were “part of a generation of junior mining companies that has gone into hibernation.”

And Slam Exploration? Well, they weren’t exactly sleeping.

“We were able to raise enough money to start the project,” says Taylor. “And we’re still optimistic going forward that we’re going to dig up a significant amount of gold.”

And by the way, he added, he still loves Gold Rush. “Everybody who visits our site tells us ‘You remind us of the TV show.’

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GOLD IN CANADA

Merger money

By Correspondent D’Arcy Jenish

I

n mid-June of this year, Tony Makuch was named president and CEO of Toronto-based Kirkland Lake Gold. However, before he officially took office, someone came knocking with one of those proposals that was – well – hard to resist. That someone was Doug Forster, president and CEO of Vancouver-based Newmarket Gold, and what he had in mind was a merger with Kirkland Lake.

As it happens, Newmarket owns three underground gold mines in Australia while Kirkland Lake owns four producing underground mines in Ontario, and a merger would create a mid-tier gold producer with over 500,000 oz of production in 2016.

“I hadn’t officially started with KL, but I thought why sit on my hands for six months if there’s value to create for shareholders,” Makuch recalled in an interview. “I always say the company belongs 18 |

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to the shareholders. We just get the pleasure of doing this stuff.”

The two executives and their teams concluded a definitive agreement in late September that will create a company with a market capitalization of approximately $2.4 billion and plenty of upside potential.

Kirkland Lake shareholders will own 57% of the new company while Newmarket shareholders own the balance. Makuch will remain as CEO and his management team will run the merged entity, but the Newmarket group will retain two seats on the nine-member board.

“I feel very confident handing the reins to Tony,” says Forster. “My vision for Newmarket and Tony’s vision for Kirkland Lake were very much aligned. This will give us the strength in the CONTINUED ON PAGE 20

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GOLD IN CANADA

During 2015, Newmarket Gold discovered the Eagle Zone within the Fosterville mine which contains high grade, visible gold. This new discovery has been the key driver of recent success in terms of improved reserve grade, production and decreased costs. capital markets that you wouldn’t have as smaller companies. We’ll have the ability to finance and explore more aggressively.”

The new company’s portfolio of properties includes five small producers and two core assets – the Macassa mine (average reserve grade of 19.2 g/t gold) in the Kirkland Lake camp and the Fosterville mine (average reserve grade of 7.0 g/t gold) in the Australian state of Victoria.

Macassa was in production continuously, although under various owners, from 1933 until June 1999 when Kinross Gold wound it down. It was one of four mines along a geological formation in the Kirkland Lake area known as the Main Break and those operations collectively yielded over 50 million oz of gold.

In 2001, a junior company called Foxpoint Resources, later re-named Kirkland Lake Gold, acquired Macassa along with the three other mothballed operations on 20 |

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the Main Break – the Lakeshore, TeckHughes and Wright-Hargreaves mines.

The new owners de-watered the Macassa down to 1,340 metres and embarked on an ambitious exploration program that yielded a promising new discovery that runs roughly parallel to the Main Break and south of it and hence was named the South Mines Complex.

“It’s a pretty exciting discovery and we’ve still only touched the potential of that deposit,” says Makuch. Even at that, the SMC and Main Break deposits contain proven and probable reserves of 1.46 million oz.

Late last year, Kirkland Lake added to its already hefty portfolio of properties when it reached a merger agreement with another junior producer named St Andrews Goldfields, which had revived three historic producers in the Timmins area – the Holt, Holloway and Taylor mines.

With that acquisition, Kirkland Lake boosted its annual production to the 200,000 to 225,000 oz range.

That’s where things stood when Newmarket came knocking. Forster and five partners formed Newmarket in 2013 for the expressed purpose of acquiring producing gold mines. They focused their efforts on North America and Australia and visited dozens of mines before settling on a small Australian company called Crocodile Gold that owned three producing properties.

“It was an odd company,” says Forster.

“They were doing great on site at the three mines. Their costs had decreased 40 % over the previous three years and they had very good operational teams at the mines, but they were almost unrecognized in capital markets. They never traded more than 50,000 shares a day on the TSX.” Newmarket acquired Crocodile in July, 2015 and its three mines – Fosterville, WWW.CANADIANMININGJOURNAL.COM

2016-11-14 2:12 PM

Newmarket’s Fosterville mine has had a tremendous amount of exploration success with a total of nine drill rigs in operation during 2016.

Stawell and Cosmo – in a complex cash and stock deal with shareholders and a New York hedge fund, which controlled 56% of the company’s equity.

The Fosterville mine, located 130 km from the city of Melbourne in southeastern Australia, is the largest producing gold mine in the state of Victoria and commenced production in 2004. This year, Fosterville celebrated an important milestone of pouring its 1 millionth oz of gold. “We made a major discovery there just after the deal closed when we discovered the new eagle zone containing high grade, visible gold,” says Forster. “This was a major inflection point in terms of the reserve grade, the production and in terms of costs. We now have nine drill rigs active at Fosterville and will publish new resource estimates before year end.” Fosterville is targeting annual production of 130,000 -140,000 oz this year.

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The Stawell mine, 250 km northwest of Melbourne, has produced non-stop since 1984. The mine yielded, on average, slightly over 100,000 oz annually from 2000 to 2009. However, production has since fallen off and output this year is expected to come in at 35,000 ounces.

Commercial production at the Cosmo mine in the Northern Territory, south of the city of Darwin, commenced in 2013 and will yield 60,000 oz this year, but the company has been exploring aggressively and Forster predicts that: “We see many years ahead for that mine.”

As for his own future, he plans to start from scratch all over again. “My expertise is in building companies,” he says. “I’ll go off, find great assets and great people somewhere in the world and build value for shareholders.”

Meantime, Makuch and his team will run the larger company and he foresees no difficulty merging two operations spanning two continents and seven mines.

“If I were underground in Australia I

could just as easily be underground in Kirkland Lake except for the accents of the workers,” he says. “It’s the same drill bits, same trucks, same scoop trams, same rock bolts.

It’s almost like you’re in the same mines.

Instead, he sees exceptional opportunities ahead. The larger operation is starting with $270 million in cash and its mines will generate over $200 million free cash flow per year, which can be used to finance exploration and development.

“We can inject money into diamond drilling and find new deposits or extensions of existing deposits,” says Makuch. “It only bodes well for increased organic growth.

Furthermore, the company’s mills both in Australian and Canada, at Macassa, Holt Holloway, Fosterville and Cosmo are all operating below capacity and can handle any increased output from the mines.

“As a larger company, we have more financial strength and the ability to do more exploration,” Makuch adds. “We can take a longer view and build a long-term sustainable operation.”

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ADVERTORIAL

By S. D. Richard

Technosub started 34 years ago in the pump industry and is now well established in the Canadian mining market as the dewatering specialist.

Today, with over 150 employees, they’ve become the gold standard in water management. Unlike many others in similar fields, they’ve succeeded in becoming a fine tuned organization where selling pumps is only one component of their daily activity.

Technosub has managed to combine a master distributorship with a manufacturing facility which is supported by their own engineered solutions department to face the most challenging jobs anywhere in a diverse climate driven country.

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A MINE DOESN’T NEED TO ADAPT TO MUDWIZARD, MUDWIZARD ADAPTS TO IT. - Mr. Patrick Martel, P. Eng., V.P. Technosub

One exceptional challenge common to many companies in the mining world is managing mud. Where there is water, there is mud.

The solid particles found in mud vary in size, weight, with very abrasive characteristics. This is the root cause of many pump failures, and a burden to high pressure pumps as well as a huge dilemma in sump management.

Technosub made it their goal to find a solution that would reduce maintenance downtime and improve the underground conditions.

Over the years, the final creation was an efficient mud treatment system, entirely operated by miners: The MUDWIZARD®.

This revolutionary system is unique, simple, patented and provides remarkable results.

It uses a compact concentrated system which allows the collection of solid particles.

The MUDWIZARD® system is installed underground, providing an immediate solution at the source. Solids found in the water are separated underground therefore, the pumps have less deterioration due to abrasion. As a results, pumps require less energy and the hydraulic wear is greatly diminished, increasing the pumps’ lifespan and reducing maintenance costs.

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ADVERTORIAL

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Load up the basket with patented clarification tablets

The system uses unique patented clarification tablets, made of 100% organic and non-toxic agents developed by Technosub.

The tablets are inserted into canisters alongside the system on a regular basis - varying from once a week to once every 3 weeks, - and that’s it! This is very simple and can be operated by everyone; minimal training is required.

The system operates independently by itself with the dirty water flowing through the canisters and the clarification tablets magically accelerating the process of solids settling inside the system.

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Insert the basket in the Mudwizard dispenser

The water is now clean and can be easily recirculated for other uses. The remaining waste, which now has up to 90% less water volume, is easily transported by mining vehicles, or can be potentially reprocessed. What a clever way to reduce maintenance costs while significantly improving the underground conditions.

Since the launch of this new product in 2016, there have been about 25 systems installed in Canadian Mines and the results are impressive; the interest for this system is now building throughout the industry and worldwide.

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MINEXPO 2016

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WWW.CANADIANMININGJOURNAL.COM

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BEYOND BELIEF I

t took four years to plan, and only three days to execute, but the thousands of hours of hard work that went into this year’s MINExpo in Las Vegas were evident and well appreciated as once again the event proved to be a very popular attraction to mining and equipment people from around the world.

Over the course of the three-day show and conference, over 40,000 mining enthusiasts from about 130 countries attended dozens of technical seminars and wandered the aisles looking at more than 1,950 exhibits ranging in size from table-top displays to vast spaces containing massive pieces of heavy mining equipment.

In fact, some of the machines shown at this year’s show were scaleddown versions of some equipment that was too big to display. As one exhibitor explained, “some of our machines are simply too large to exhibit at a trade show.”

Knowing that bigger machines exist was hard to believe because some of the trucks, shovels and tires that filled the exhibit halls we so big that many visitors had to take photos to confirm what the manufactures are capable of building. And, what they were seeing.

But what would amaze the visitors even more was knowing the actual amount of time it took the exhibitors to assemble their products for display, then dismantle, and cart them away.

The exact dates of the show were September 26-28, but the overall move-in and move-out dates ran from August 1 to October 23, a total of 84 days. That’s almost there months of getting the equipment to Las Vegas (much of it coming in pieces from around the world), assembling it, and making sure that everything else associated with the display was in place.

To do this, pre-assembly of equipment took seven weeks and post-assembly three weeks, and in some cases, required upwards of 250 service technicians to complete the tasks. In addition to people, 150 forklifts, varying in size from 12,000 lbs. to 36,000 lbs. were required along with 20 cranes ranging from 30 tons to 265 tons were used to move equipment into place.

To answer the electrical requirements at the display booths, 3,800 outlets were hooked up, enough electricity to power 200 houses. As for the finishing touches before the delegates arrived, the 840,000 sq. ft. of dis-

play space was dressed up with more than 70,000 linear feet of carpeting, which is 700,000 square feet of aisle carpeting.

As you see, MINExpo 2016 was a huge undertaking, but as exhibitors and delegates agreed, it was all worth it and plans are already in the works for a repeat performance in 2020.

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PICKING

parts THE

EXAMINING THE LIFETIME COSTS OF FABRICATED PARTS FOR VIBRATING SCREENS Special Report

O

ne of the ways operation managers naturally presume to increase profits in a mining or aggregates operation is to cut costs. Parts are often an area that production managers eye as a way to save money, but it’s important to look beyond the price and understand the part that a component is playing in the performance of a vibrating screen and long term productivity.

Operation managers need to be sure they are choosing the most reliable parts for their equipment. They need to consider the knowledge, experience and resources required to manufacture the part, the potential hazards of using a fabricated version and the value of having the support of the original equipment manufacturer (OEM). Here’s a look at the difference between the two and how those differences can impact production.

OEM Expertise Consider the difference between fabricated and OEM components.

Fabrication shops have come a long way and are often able to produce quality components, but some equipment, such as vibrating screens, need such a precise tolerance that a fabricated part might not work correctly no matter how closely it resembles the OEM version. Only a machine’s manufacturer has the precise equipment drawings, measurements, plus/minus tolerances, material 26 |

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composition and know-how on what needs to be heat tempered.

This means only the manufacturer can produce a component that fits those fine tuned parameters. Even a reputable fabrication shop with capabilities similar to that of the OEM has to rely on reverse engineering and guesswork to fashion a replacement. The part may look identical, but if it’s even a little off it could cause problems.

A vibrating screen isn’t so much a machine as a complete system where every component works together to accomplish a specific goal. If an operation screens 1,200 tonnes per hour, for example, a manufacturer designs parts with different strength and rigidity than they would for a 200-t/h application.

This customization ensures the entire system runs to the proper g-force and is strong enough to resist the forces of the material running over the screen. The weight of the parts, the required running speed plus amplitude are all taken into consideration when balancing the screen.

If an operation chooses to fabricate a side plate and the weight is wrong, for example, it could impact the machine’s balance. This could lead to improper motion in the vibrating screen causing poor stratification of material, lower bearing Above: Manufacturers design and build vibrating screens as a total system. The weight of the parts, required running speed and amplitude are all taken into consideration when balancing the machine.

WWW.CANADIANMININGJOURNAL.COM

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MAINTENANCE life, or premature breakage of body components due to improper operation.

Call for Backup Custom fabrication shops can’t offer the support benefits of the original equipment manufacturer. OEMs usually have the infrastructure to ensure fast, efficient problem solving. If there is a problem with a part, the OEM will take full responsibility, quickly assess the situation and send a replacement almost immediately.

Most parts shops don’t have the resources for a quick, precise turnaround if the part doesn’t work right, and there is no guarantee the replacement fabricated part will be correct.

In addition, working with an OEM means having a support team that understands an operation, its production and equipment.

They know what parts will wear quickly and what parts need to be on hand to limit downtime. They often offer OEM supplier agreements that ensure they will have critical parts in stock for immediate delivery, limiting or eliminating extended downtimes.

OEMs’ focus on vibrating screens also brings an in-depth product knowledge that’s rare elsewhere. Some manufacturer’s certified technicians test each machine as a system before each leaves the factory, and they run the same tests once the vibrating screen has been commissioned to ensure results are identical. They use this information to make sure every component is running at OEM standards, and the machine plus components are backed by a strong warranty program. Not only do some manufacturers offer warranties on new equipment purchases, some guarantee parts for up to a year if an operation uses OEM certified technicians and parts and performs regular maintenance. Any fabricated parts introduced to a machine during a warranty period will void the entire machine warranty.

1

Fabricated Parts’ Hidden Price Tag While at first a fabricated component seems to make sense because it can often cost less than an OEM part, those savings are often short term. Minor imperfections in the part or lower tolerances for the stress placed on the machine can cause the component to fail prematurely, resulting in additional replacement costs on top of unscheduled maintenance. Even while the part is functioning, it often adversely affects the production of the machine, diminishing the throughput and limiting profit potential.

But the potential damage from an imperfect part doesn’t stop there. Those imperfections could start a chain reaction that leads to the damage of a series of other parts. For example, if the shaft shoulders are 1. Imperfections in fabricated shaft components can lead to 2 excessive heat, resulting in bearing failure and premature wear of other components. 2. Fabricated tension rails, if not built to original equipment manufacturer tolerances, may not correctly tension screen media. This could lead to broken screens and thousands of dollars in new screen media and downtime before the operator realizes the problem.

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not machined within the OEM tolerances, an operation could see problems within hours of operation. This slight difference in size can cause the shaft assembly stack up to be too tight or too loose, leading to excessive heat and or wear of the shaft components.

This can cause bearing failure or premature breakage of shaft components or body components.

This chain reaction of issues could result in maintenance costs far greater than the price of the fabricated component, but the cost is compounded by the fact that rarely is the heart of the problem diagnosed on the first pass. Most operators miss the true cause of the problem and begin fixing the symptoms – a cracked panel, a cross member or sections of screen media. Then the damage is destined to repeat and those parts must be replaced again. These symptoms might become obvious within 48 hours; while the root cause might take a month before it’s realized. By the time technicians find the issue, the cost of the initial part fix could be greatly multiplied and could be much higher than what the OEM counterpart would have cost.

Take tension rails, for example. A customer might wonder why his screen media is breaking after just a week of use, where before it lasted a month or more. An OEM representative visits the site and finds the operation has been buying tension rails from a local fabrication shop to save money. The tension rails looked right but were not tensioning the screen media properly across the screen deck, causing the sections to break. What saved the operation a few bucks up front on new tension rails cost them thousands of dollars in screen media and downtime for change-outs. In addition, if the faulty part caused the vibrating screen to operate incorrectly, there’s a good chance that the stratification didn’t occur correctly and that materials may have to be rescreened or discarded.

If operators do notice a problem soon after installing a fabricated part, they can prevent further damage by shutting the machine down quickly. However, this still results in costly downtime, as mechanics order parts and make repairs. Any time the vibrating screen can’t run will bite into profits, particularly for operations in the midst of production season or a mining operation, where a few hours of lost time can result in tens of thousands of dollars of profit losses. This cost alone would quickly offset any savings from choosing fabricated parts.

Stick with OEM Choose carefully when looking at replacement parts. While fabricated components are usually cheaper and may appear to work correctly, any variance could cause damage and downtime down the line. Continue to work with the original equipment manufacturer to guarantee a supply of reliable parts and the backing of a company with the resources to solve problems quickly. The right choice means more uptime, more profits and the assurance CMJ that a part will only make a machine run better.

Information for this Special Report provided by Duncan High, division manager of processing equipment technology, Haver & Boecker Canada.

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CSR & MINING

Sustainability, risk culture and the mining executive

By Michael Torrance

R

isk, both known and unknown, actual and potential, keeps many CEOs, corporate directors and general counsel up at night. Sustainability issues from environmental, health and safety, human rights or indigenous rights can present critical risks affecting the future of a mining project. Responding to these issues, a key question for the CEO must be: What can I do to create resilience in my company and effectively manage risk at the strategic level?

The answer to this question necessitates an appreciation and understanding of corporate risk culture, where it is within your organization and where it needs to go. Senior management is the place where an appropriate risk culture suited to the company’s goals, objectives and risk appetite can originate and be cultivated.

It is also the best potential driver of a strong risk culture, embedded throughout the organization, that aligns actual conduct and behaviour with governance expectations.

Non-financial risks may give rise to strategic failures, operational failures, financial failures, market disruptions, environmental disasters and regulatory violations that seriously affect reputation and financial performance. New and emerging risks such as sustainability, climate change, human rights, cyber security and the internet of things require a proactive rather than reactive approach. From a strategic perspective, senior management can promote a culture of risk that anticipates and addresses such risks before they materialize. This necessitates a culture of risk intelligence, beyond mere compliance.

True intelligence in risk management necessitates a dynamic and flexible approach to risk management with the ability to identify at an early stage risks that may not have been foreseen in the development of the current risk management system. To achieve this intelligent, forward looking, approach to risk management, there must be a culture of risk management and full utilization of the talent, reach and technology of the organization to anticipate and mitigate risks proactively rather than reactively.

At its root, this necessitates a strategic role for senior management to inculcate a culture of risk management and drive an understanding of the company’s risk appetite and approach to risk management.

Effective risk management necessitates consistency between corporate risk culture and employee behaviour which embodies corporate conduct. Where corporate conduct deviates from risk culture, it creates conduct risk that can manifest in fines, penalties, loss of reputation and the fees associated with remediation 28 |

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or litigation. Alignment of actual conduct (of individual personnel or agents of the company and the company itself) with risk management expectations, is necessary to mitigate conduct risk.

This alignment must be driven by an embedded risk culture, relentlessly re-enforced at the highest levels of the company. In the field of sustainability this is most critical. That the way the company, its personnel and agents actually act line up with the risk culture and objectives of the company Put simply, risk culture is “how we do things around here”.

Culture embeds the risk appetite and approach of the company throughout the organization. A strong culture allows for a clear sense of purpose with every employee, wherever located or in whichever business line, knowing what the organization stands for and being capable of withstanding internal and external pressures.

Far from simply management theory, risk culture can be part of legal and regulatory risk compliance and enforcement.

Regulators want to see companies and their leadership going beyond simply a “tick the box” approach to compliance. These regulators may examine and consider the existence of a “culture of compliance” within an organization, along with other considerations like resourcing of the compliance function, effective risk assessment, auditing and competence of compliance personnel, in assessing legal compliance or in enforcement action.

Leading sustainability standards, which can be a requirement for financing, also adopt management approaches that are implemented through a strong risk culture. Ongoing monitoring by financiers of a sustainability action plan may involve understanding of how risk culture is affecting the risks associated with the project.

Senior management is ideally situated to drive a strong risk culture through the company – with the end result of improved risk management results. This requires knowledge of risk management strategy and embedding and reinforcing that strategy through relentless communication, role modelling, tone setting and alignment of incentives and disincentives with risk objectives.

Coupled with an effective strategy for intelligent risk management, companies can anticipate rather than simply react to risk.

Alignment of behaviour with risk objectives will also allow for the mitigation of conduct, ethical and compliance risk that flows CMJ from a weak risk culture.

MICHAEL TORRANCE is a lawyer with Norton Rose Fulbright, Toronto.

WWW.CANADIANMININGJOURNAL.COM

2016-11-10 2:10 PM

UNEARTHING TRENDS

Making good capital allocation decisions in a volatile market

By Michael Samis

A

llocating capital is a tough job. With market volatility, allocating capital in mining is an especially tough job.

Investors want projects to earn a good return on invested capital with as little risk as possible. So when the market outlook is constantly changing, how do you improve the effectiveness and efficiency of capital allocation in a risky environment? Until we can jump in a time machine and look at the future face-to-face, we need other solutions.

Think about the ways a forecast can vary

Gold price

(real, March 31, 2016; US$/oz)

The industry accepts that it can’t predict future commodity prices, but everyone still wants their forecasts to be as accurate as possible. Corporate planning exercises only deal with uncertainty in commodity price forecasts through annual or somewhat more frequent forecast updates and the use of limited corporate forecast scenarios or price decks. Unfortunately, this treatment of forecast uncertainty implies that the current forecast won’t change over the life of the project.

Consider the graph below in which the gold spot price and consensus forecasts are tracked over the past 16 years. The black line shows the spot price in real terms. The blue dots are quarterly long range forecast prices; the left-most blue dot is the long range consensus forecast price for Jan. 1, 2000. The vertical space between the two is the forecast error, and it’s evident that forecast errors can be huge. A reasonable question for executives wanting to improve capital allocation is whether it’s better to put additional resources into making better forecasts, or into describing the variability in forecasts and its impact on capital allocation.

Time (date)

•

Consensus forecast at past forecast date (narrow solid lines) Long-term forecast at past forecast date Historic spot price

For companies preferring the second approach when dealing with forecast deviation, an integrated valuation and risk modeling (IVRM) framework can help create dynamic cash flow models 30 |

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which recognize forecast uncertainty and our ability to manage it.

Dynamic cash flow models constructed within the IVRM framework can improve the quality of capital allocation decisions in two important ways: 1 Improve the analytical description of the capital allocation problem

Static cash flow models provide an incomplete description of a capital allocation problem which may limit our understanding and choice of solutions. IVRM improves our understanding of the decision by explicitly modeling long term forecast uncertainty and how we can manage it. With IVRM, variability in long term price forecasts are no longer treated as errors but instead become part of the problem description along with potential management solutions.

2 Reduce cash flow estimation errors and communicate risk exposure

Cash flow estimation errors come into play when you ignore forecast uncertainty due to the “flaw of averages”. The IVRM framework reduces estimation errors because the cash flow effects of forecast uncertainty are quantified. Explicitly modeling forecast uncertainty also provides additional tools to measure and communicate risk exposure that are more powerful than simple sensitivity analysis used with conventional cash flow analysis.

As far as results go, the benefits are easy to identify. In one example, an investment firm used IVRM methods to renegotiate a sliding scale royalty while the mine owner used a conventional static analysis. The mine owner was happy with the new terms but their analysis didn’t reflect the value of the royalty increased with the changes. Unfortunately, their static analysis had ignored the possibility of higher royalty rates if metal prices increased. The investment company found an IVRM approach a distinct advantage in their negotiation as it allowed them to assess the revised royalty terms in both high and low price metal environments.

Amidst all this uncertainty investors are demanding that mining companies improve the effectiveness of their capital allocation decisions. To deliver that, companies need to consider their investment in a range of economic conditions and how their investments will perform in these situations. With IVRM, mining professionals can improve the efficiency of their efforts by accounting for the risk created by forecast uncertainty.

CMJ MICHAEL SAMIS EY associate partner, Transaction Advisory Services.

WWW.CANADIANMININGJOURNAL.COM

2016-11-10 12:02 PM

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2016-11-10 11:20 AM