Iron is the world’s most commonly used metal. Steel, of which iron ore is the key ingredient, represents almost 95% of all metal used per year. Iron-rich rocks are common worldwide, but the commercial mining operations are dominated by countries like China, Australia, Brazil, Russia, India etc. The major constraint to economically develop an iron ore deposits is not necessarily the grade or size of the deposits, because it is not particularly hard to geologically prove enough tonnage of the iron bearing rocks exist. The main constraint is the position of the iron ore relative to market, the cost of rail infrastructure to get it to market and the energy cost required to do so.

Mining iron ore is a high volume low margin business, as the value of iron is significantly lower than base metals, even at today’s all time high iron ore prices. It is highly capital intensive, and requires significant investment in infrastructure such as access – rail or slurry pipeline and ports which can accommodate super capsize vessels. Often these resources are in wilderness necessitating building townships and facilities to ferry workmen. For these reasons, iron ore production is concentrated in the hands a few major players.

Chile remains an important iron ore producer in Latin America, after Brazil. Nearly all of Chile’s production comes from the Region III Atacama Region and the region IV Coquimbo Region. The country produces slightly over 10 Million tones of iron ore annually. Chile is renowned for its copper mining industry. The IOCG (Iron ore copper gold) veins bear the magnetite or martite mineral etc. Iron ore in Chile mainly occurs along the Atacama fault. Compania Minera del Pacifico(CMP) is the main producer of iron ore in Chile with other players entering the market now. Production cost of iron ore concentrate in Chile is high compared to many places. This could be one of the reasons why Chilean iron ore industry has not grown, even as the demand has outpaced the supply. Geographically, too, Chile is not in the major bulk sea routes.

Iron ore prices

Since 2004, the spot market for iron ore has established firmly and the 30 year annual benchmark pricing has given way to quarterly pricing keeping in tune with spot prices. In general there is a cyclic nature since 2007. While steel also follows a cyclic nature of demand, it is possible that iron ore, the key ingredient, will also follow a similar pattern. As and when there has been a change in market new entrants have entered the business.

Expectedly, long term demand and price prediction during the project development phase remains a challenge and is a hindrance in preparing a feasibility study. Often, one sees a rush for investments and then as the capacities come on stream, prices fall. The last decade has been spent in predicting China’s steel consumption with doubts in growth post the Beijing Olympics and the Global Financial Crisis. Only now the studies are clear that China may touch a steel intensity of 800 Kg meaning a billion tones of steel in China by 2020. In order to have a correct prediction of prices it would be essential to know the exact iron ore mining capacity addition in progress or in pipeline, exact demand or steel making capacity addition in progress and in pipeline globally. While accurate predictions in capacity addition and demand are being made, the fact remains that the supplies are controlled by Big-3 who would also like prices to remain high.

Feasibility study

Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of the existing business or proposed venture, opportunities and threats as presented by the environment, the resources required to carry through, and ultimately the prospects for success. In its simplest term, the two criteria to judge feasibility are cost required and value to be attained.

Feasibility studies are the heart of any mine evaluation process. A feasibility study of a mining project represents an engineering and economic appraisal to arrive at commercial viability of that project. As such, it is the result of a relatively formal procedure for assessing the various relationships that exist among the myriad of factors that directly or indirectly affect the project in question. In essence, the objective of a feasibility study is to clarify the basic factors that govern the chances for project success. Once all the factors relative to the project have been defined and studied, an attempt is made to quantify as many variables as possible in order to arrive at a potential value or worth of the property.

Conducting a Feasibility Study of an iron ore resource in Chile

Planning a feasibility study before actually going for it is essential. It depends on the owner or investor on how much detail is required or how much he is ready to spend on the feasibility study. It often happens that the study is conducted in phases, as more and more confidence is gained. It makes sense to bring the best possible minds to bear in the early stages. This means gaining access to the expertise of senior, experienced individuals and creditable organizations, who can take the wide range of information and estimates that are available and, given their wisdom gained on other projects, understand the “big picture” and make appropriate choices. This is not a time to be “penny wise and pound foolish” by not investing sufficiently in good advice.

For the sake of this paper, we illustrate with a 100 Ha iron ore property in Chile which needs to be studied for starting of a mining project. In the planning phase the studies are divided into parts like:

1) Information collection & Regulatory studies

2) Geological studies

3) Metallurgical studies

4) Mining Studies

5) Logistics and Transportation Studies

6) Due diligence of mining rights, surface rights, native heritage

7) Environmental due diligence

8) Economic evaluation

9) Summarised Feasibility report

Information Collection and regulatory studies. Before starting of the work, various information regarding the property are collected and compiled. These information include location and its access, climate, altitude, wind, dust, fog, snow, work environment – people and skills availability, their wages, availability of water, distance from nearest town, land ownership and availability of land for waste rock and tailings’ stacking, nearest rail road, nearest port/sea coast, power, fuel explosives. It is also important to understand the regulations while operating in a new country.

One of the important information is the surface topographic survey. A survey is done of the surface with the PSAD56 or WGS84 coordinate system. In Chile benchmarks are available from the Instituto Geographico Militar, it is required to transfer the reference points on the property. The data is available at a fee.

Geological studies. This is one of the biggest pillars of a mining feasibility study. It is also cost intensive and takes a long time frame. Also this is the costliest part of the investigation. The various stages of the geological investigations are detailed below.

Regional geology. The study starts with studying regional geology maps which are available in several institutions and are often in a scale of 1:100000. This study gives a general idea of the rock type and the possibility of formations of iron ore. Operating mines nearby also give a good idea of the host rock and the minerals being mined.

Aeromagnetic study. At times aeromagnetic studies are available from multi client reports. There are several agencies who have such data. It may not be worthwhile to conduct an aeromagnetic study for 100 Ha alone. However, there are some cautions on such studies and the way they are interpreted

Geophysical studies – Ground magnetic and gravimetry. Chilean iron ore is mostly magnetite and it can be fairly understood by a ground magnetic study. Such studies are initially conducted at 100m interval and with promising results narrowed down to 50m or 25m interval. Ground magnetic studies are often combined with gravimetry. A combination of ground magnetic and gravimetry gives a fairly good idea for the presence of an iron ore body.

Surface geological mapping: Geological mapping could be done in a scale of 1:2000 or even 1:1000 for a good idea of the disposition of the outcrops or veins. Since Chile has some history of working of high grade deposits in the sixties. Most of the good iron ore deposits have some old workings. These workings often give a guidance of the veins to the field geologist.

Drilling. Initial drilling campaign for iron ore is normally started with some pilot Reverse Circulatory drill holes. Based on the results of success of the pilot holes intensive drilling campaign on a close grid can be taken up which includes core (diamond) drilling as well. Drill cores or chips are logged, photographed and chemical assay reported within the requirements of JORC, NI-43 101 or any other reporting standard guidelines.

Resource estimation and modeling. Normally competent Consultants are engaged for resource estimation and modeling. These consultants also oversee the overall drilling program and play an important role in guiding the geology team. It is worthwhile to state that the exchange of information forms an important part of the entire study. Reports are prepared as per JORC or other standards as may be required by the financing agencies.

A good geological report is extremely essential for correct assessment of a property. It often happens that attractive reports are prepared to sell a property. It is important to have a strong in-house geology and mining team which coordinate with consultants of repute and reassess available reports.

Metallurgical study. Iron ore mines in Chile normally have a feed grade of around 25 to 40% Fe. The recovery of concentrate in terms of weight varies from mine to mine. It is important to understand the liberation characteristics of a deposit before proceeding. Certain deposits though may have a high total Fe content, it may not be possible to recover concentrate from them by dry magnetic separation means. Most beneficiation process in Chile use dry magnetic separation techniques due to scarcity of water, though there are some projects which are coming up with plans of using desalinated water.

Representative samples are collected either from the old workings or from the core drills and are subject to study in pilot plants for recovery. Such studies help in identifying a cut off grade for a particular deposit. There are facilities of such studies in Chile, but often such studies are also undertaken out of Chile by sending representative samples.

Depending on the investment the size of the beneficiation plant is decided, keeping in view the resources in the mine. A flow sheet is then developed for the plant. At the Feasibility stage detailed engineering is normally not included in the study. However Basic engineering details are prepared for correct estimations of expenses.

Mining Studies. Once the geological model is ready and the cut off grade known the Mining Engineer can get to work. Initially geotechnical studies are conducted to get the pit slopes and stable bench geometries. Based on the above the ultimate pit is designed. Normally softwares like gemcom whittle are used to get the pit shells and the ultimate pit.

The life of the mine is also decided based on the plant capacity. Mining equipment requirement is decided at this stage. Also some studies evaluate whether it is worth to operate contractually. A separate report of the Mining study is generated. Normally such a report is also required to be submitted to the Government authority in order to obtain approval. This study also serves that purpose.

Logistics and transportation. While evaluating a property it is important to verify the access of the resource to existing roads, rail and the port. The iron ore deposits in Chile are located at a distance of 40Km to 250Km from the coast which is dotted with ports. Depending on the final volume to be shipped the optimal transport mode may be selected. Many a time, an initial phase may be conceived with less investment making use of available infrastructure and, later, the main phase is constructed.

Legal due diligence. Legal due diligence normally involves areas of mining rights and land rights. Mining rights can be viewed on a website of the Sernageomin, a government organization. Property details are available with names of existing owners. Rights are of two types. one meant for exploration and the other for mining. The Exploration right is valid for 2 years and extendable for 50% of the property by another 2 years. The Mining rights are life long, until the patents are paid. In case one property owner defaults in paying patents then the applicant next in line gets priority. This is a complicated area and needs to be studied carefully before investing. A new application could take two to four years to get constituted as a mining property.

Other than Mining rights, surface rights are also required in order to operate a mine. Surface rights could belong to an individual or to the government. There is proper process of obtaining a surface right from the Government department known as Biennes Nacionales.

Environmental Studies. Environmental clearances are a must to start a mining project. There are two types of clearances in Chile one is EIA and the other is DIA. While EIA is applicable where the project has some affect on human habitation. DIA is applicable for areas where there is no human habitation or agriculture. In case of iron ore which normally occurs along the Atacama fault in Region II and IV, DIA is applicable. This is because this region is very less populated, excepting the towns, and is mostly a desert. A DIA application approval takes 3 to 6 months to get cleared. A DIA application contains normal environmental impact concerns along with the project details. Once an application is filed the application and the status is available on the internet to public.

Economic evaluation: Preparing a cost model. Another important pillar in a feasibility study is correct estimate of the project cost, both capital and operational. As the studies progress from concept or scoping to PFS and DFS, the costs are brought to within 10% accuracy. In order to have a correct estimate experience of similar projects is essential. Often budgetary quotes are invited to understand the prices of equipments. Impact of taxes, royalty and other duties is important. Though there is no fixed format for a cost model, the shape of a cost model could vary with the level of information available. The cost model at a pre-feasibility stage could have lesser details than the one at a feasibility stage. Cost models are normally developed in excel and have multiple linked sheets.

There are several parameters which affect the operation cost in mining and make it variable. Some of the important factors are:

i) Fuel cost

ii) Power cost

iii) Variation in indices leading to variation in cost of explosives, salaries, consumables etc

iv) Variation in currency, as many equipments and consumables could be imported.

Summary report. A project feasibility study will necessarily have a summary report with extracts from all the areas and reports discussed so far. Developing a proper Feasibility study is time taking and expensive. Attempt has been made below to understand the level of expenditure for such a study in Chile.

Although there is no prescribed format for reporting the results of a project feasibility study, the final report must fulfill the following essential functions (Taylor, 1977):

1. Provide a comprehensive framework of established and detailed facts concerning the mineral project.

2. Present an appropriate scheme of exploitation complete with plans, designs, equipment lists, etc. in sufficient detail for accurate cost estimation and associated economic results.

3. Indicate the most likely profitability on investment in the project, assuming the project is equipped and operated as specified in the report.

4. Provide an assessment of pertinent legal factors, financing alternatives, fiscal regimes, environmental regulations, and risk and sensitivity analyses on important technical, economic, political, and financial variables affecting the project.

5. Present all information in a manner intelligible to the owner and suitable for presentation to prospective partners or to sources of finance. The document must be “bankable.”

One of the important aspects of a feasibility study is a strong geological report. Geological investigations are one of the most important pillars of a feasibility study. It is essential to follow the standards in reporting a geological resource. A Geological report can be conservative, or optimistic, depending on the geologist. Often geological reports prepared for the purpose of selling a property are optimistic. The standards followed globally are JORC, NI 43-101, Samrec, UNFC etc, depending on the region and the requirement of the financing agencies.

Mining shall continue to be of importance with the growing needs of development of infrastructure, power etc. As the core industries of power, steel keeps growing, Mining and new mine acquisitions shall continue. With advancement in technologies more and more mines shall continue to become economical. Therefore mine feasibility studies shall continue to be of importance. With the increasing need for mine feasibility analysis, more importance shall be laid on standardizing terms and method used to reach conclusions about mining projects. The most important pillars of a mine feasibility study as detailed in this paper are the price prediction model, geological study and the costing of the operations and capital expenses.

This article is contributed by our guest blogger, Ranajit. Read more of his articles on novamining.

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