Mining Rehabilitation
Investing Against Uncertainty
Jaco van der Merwe & Sarah Dyke
Palisade Risk Conference 2015, Johannesburg
1
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Contents
Introduction
3
Aim of this presentation
4
Disclaimer
6
Mining Rehab Overview
8
Case Study
11
Conclusion
26
2
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Introduction
Who are we?
Actuarial & Insurance
Mining & Environmental
Aim of
This Talk
Aim of This Talk
What is this all about?
1. Application of expert analytical modelling skills to a niche area of business
2. Mining rehab straddles two of our core fields
1. Mining & environmental science
2. Actuarial & insurance modelling
3. From our own experience, the financial modelling of mining rehabilitation
funding risk is not often well done
4. How does @Risk present an attractive solution?
5. Explore the power of @Risk and how it can be used to develop a solution
5
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Disclaimer
Disclaimer
There are always T&Cs!
• This not meant to be a highly technical presentation.
• It is based on a hypothetical business case. The real-world scenarios have
been simplified & sanitised for the purpose of today’s discussion.
• Its intended to be illustrative, practical & thought provoking.
• It is aligned with what we see in the industry, but will not reflect all
companies attitudes and levels of sophistication.
• Of course, as always: we accept no responsibility or liability for any
use of information contain in these slides!
7
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Mining Rehab:
A brief overview
Mining Rehabilitation
A Brief Overview
Open Pit Mine
Strip Mine
Mining Rehabilitation 101:
 Required for all mines
 Requires input from the Government,
Company
 Various technical, scientific, engineering
studies, valuation input and management
required
 Constantly changing
 4 structural aspects to the quantification of
cost estimates for each element of C&R
1)
2)
3)
4)
9
Palisade Risk Conference 2015, Johannesburg
quantity of activity (which may be subject
to variance)
cost rate per unit quantity of the closure
activity
technical allowances and inputs (at least
annually)
Contingency planning
© 2015 Deloitte Touche Tohmatsu Limited
Mining Rehabilitation
A Brief Overview
Process & outputs: The “Risk Ball”
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
• Key points, abc, xyz, abc, xyz
10
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Modelling Solution
Case Study:
DigDug Mine
Case Study: DigDug Mine
Background
Background
• A well run mining company is looking at starting a new mine in the PMG
(Platinum Metals Group)
• The owners and management are astute businessmen and have applied
their minds to all aspects of the project plan and business case
• One item of concern, though:
Legal requirement for Mining Rehabilitation
 MPRDA (Mining Petroleum Resources Development Act)
 Especially since: rich biodiversity, many stakeholders (community &
settlements)
12
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Background
Background
• Cost & risk associated with the rehabilitation is complex and highly
variable. If done wrong, the financial implications can be catastrophic.
• If done right, the operation promises to be highly lucrative
Key problem statements:
• How do we fund for the rehabilitation requirements, such that:
− We reduce risk of funding shortfall to an acceptable level
− We facilitate proper & responsible environmental care and
sustainability
− We avoid the risk of overfunding and the inefficient use of capital
− We remain regulatory compliant at all times?
13
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Background
The plan of action…
• They start by drawing a plan for the life of the mine
Project
Commences
Planned Mine
Closure
Completion
2045
2055
2015
Concurrent
Rehabilitation
Planned Post Closure
Rehabilitation
• Even with planning there is still uncertainty…
Concurrent
Rehabilitation
Completion
Cost?
2055
Will we get
there?
Case Study: DigDug Mine
Background
Bring in the experts…
• They call on the expertise of the Deloitte SME’s
DigDug Rehabilitation Analysis
Cost Profile
Estimated costs per year
Upper Bound
Average
Lower Bound
1 500 000
575 149
17 180
Cost #
Cost Type
1
Concurrent:
2
Planned closure:
Fixed 8 000 000 (80 000 000 over a ten year period)
3
Immediate:
A function of the ongoing activities & extraneous risks
Joe Soap
Manager
Deloitte
15
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling the risk
Replicate the world in a model…
• A number of key assumptions to be made, for example
Inflows
Outflows
Cost Profile: Immediate Closure
120%
100%
80%
60%
40%
Fund
20%
0%
2015
2020
2025
2030
Pre planned closure
16
Palisade Risk Conference 2015, Johannesburg
2035
2040
2045
2050
2055
Post planned closure
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling the risk
Bringing it all together
Concurrent
Liabilities
Post
Closure
Immediate
Closure
Likelihood
Severity
Cash
Fund
Equity
C
o
r
r
e
l
a
t
i
o
n
Bond
Risk(various)
17
Palisade Risk Conference 2015, Johannesburg
RiskCumulD
RiskCormatt
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling the risk
18
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results
Average Asset Return
15.00%
90.00%
14.00%
400
13.00%
80.00%
Buildup of fund overview.
500
Millions
16.00%
Millions
100.00%
Liquidity
300
250
200
12.00%
70.00%
8.00%
7.00%
40.00%
6.00%
5.00%
30.00%
4.00%
20.00%
Amount
9.00%
50.00%
300
Amount Rands
60.00%
Average return on assets
10.00%
200
-
0.00%
-200
2015
(100)
Year
Equtiy
0
-150
1.00%
Bond
50
-100
2.00%
0.00%
100
-50
100
3.00%
10.00%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2015
2020
2025
2030
2035
2040
2045
2050
Surplus 1
Surplus 2
Liability
2020
2025
2030
2055
Time
Cash
Area of concern
Fund Contribution 1
2035
Year
Median
2040
99.5%
75%
2045
25%
2050
0.5%
Fund Contribution 2
Average Asset Return
16.00%
14.00%
12.00%
10.00%
Return
Asset Allocation
150
11.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2015
2019
2023
2027
2031
2035
2039
2043
2047
2051
2055
Year
Upper 98th
19
Palisade Risk Conference 2015, Johannesburg
Upper 75th
Lower 25th
Lower 2th
Mean
Meadian
© 2015 Deloitte Touche Tohmatsu Limited
2055
Case Study: DigDug Mine
Modelling Results
Average Asset Return
100.00%
11.00%
90.00%
10.00%
80.00%
9.00%
6.00%
50.00%
5.00%
40.00%
4.00%
30.00%
3.00%
20.00%
2.00%
10.00%
1.00%
0.00%
0.00%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
Asset Allocation
7.00%
60.00%
Bond
20
Equtiy
Cash
Palisade Risk Conference 2015, Johannesburg
Year
Mean
Upper 98th
Average return on assets
8.00%
70.00%
Lower 2th
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results
Buildup of fund overview.
Millions
500
400
Amount Rands
300
200
100
-
(100)
2015
2020
Surplus 1
21
2025
Surplus 2
2030
Liability
Palisade Risk Conference 2015, Johannesburg
2035
Time
2040
2045
Fund Contribution 1
2050
2055
Fund Contribution 2
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Millions
Modelling Results
Liquidity
300
250
200
Amount
150
100
50
0
-50
-100
-150
-200
2015
2020
2025
2030
Area of concern
22
2035
Year
Median
Palisade Risk Conference 2015, Johannesburg
2040
99.5%
75%
2045
25%
2050
2055
0.5%
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results
23
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results
Average Asset Return
16.00%
14.00%
12.00%
Return
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2015
2019
2023
2027
2031
2035
2039
2043
2047
2051
2055
Year
Upper 98th
24
Upper 75th
Palisade Risk Conference 2015, Johannesburg
Lower 25th
Lower 2th
Mean
Meadian
© 2015 Deloitte Touche Tohmatsu Limited
Case Study: DigDug Mine
Modelling Results
Results
Taking it a step further
Efficient Frontier
Efficient
points
Average Surplus
Efficient
points
Risk appetite
threshold
Minimum
required return
0
100
200
300
400
500
600
700
800
900
Std Dev (Increasing risk by asset allocation)
25
Palisade Risk Conference 2015, Johannesburg
1000
Millions
© 2015 Deloitte Touche Tohmatsu Limited
Conclusion
Conclusion: DigDug Mine
Modelling Results
So, what was the right answer?
- It all depends!
- Also considered funding vehicle decision (Trust, Account, Insurance, etc…)
-> Address w.r.t. key problem statements:
How do we fund for the rehabilitation requirements, such that:
• We reduce risk of funding shortfall to an acceptable level
• We facilitate proper & responsible environmental care and
sustainability
• We avoid the risk of overfunding and the inefficient use of capital
• We remain regulatory compliant at all times?s
27
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Conclusion
The Benefits of @Risk
How did @Risk help?
28
 Familiarity:
remain in familiar analytical environment; Microsoft Excel
 Speed:
runs fast, quick to build, set-up & populate
 Cost:
more affordable than most other modelling solutions
 Complexity:
easier to deal with more complex scenarios (correlations,
compound distributions)
 Flexibility:
able to alter results easily by changing the parameters or
updating the structures… can even do this in real time
 Visualisation:
able to visualise Monte Carlo simulation elegantly
 Ultimately:
got client to think about risks, instead of worrying about
modelling
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited
Questions
Team members
Director
Industry Specialist
Jaco van der Merwe
Sarah Dyke
Director FASSA FFA
Actuarial & Insurance Solutions
Environmental Industry Advisor
Venmyn Advisory & Valuation
[email protected]
[email protected]
Mobile
Direct
+27 82 682 3270
+11 209 8163
Mobile
Direct
+27 76 424 8221
+27 11 517 4165
Analyst
Kgositsile Moeng
Junior Actuarial Analyst
Actuarial & Insurance Solutions
29
Palisade Risk Conference 2015, Johannesburg
Any Questions?
© 2015 Deloitte Touche Tohmatsu Limited
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (DTTL), its network of member firms and their
related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not
provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.
Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. With
a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to
clients, delivering the insights they need to address their most complex business challenges. The more than 210 000 professionals of Deloitte are committed
to becoming the standard of excellence.
This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms or their related entities (collectively,
the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for
any loss whatsoever sustained by any person who relies on this communication.
© 2015 Deloitte & Touche. All rights reserved. Member of Deloitte Touche Tohmatsu Limited
30
Palisade Risk Conference 2015, Johannesburg
© 2015 Deloitte Touche Tohmatsu Limited