Financial evaluation of the UG2 and Merensky Reef on Twickenham, North Eastern Bushveld Complex, South Africa

Abstract

The Twickenham Platinum Mine (TPM) Project is located in the north eastern limb of the Bushveld Complex, north west of Steelpoort in the Limpopo Province. The property hosts platinum group metals (PGM) mineralisation in the Merensky Reef (MR) and Upper Group 2 Chromitite (UG2). The two reefs are separated by 400 m of mafic and ultramafic rocks of the Rustenburg Layered Suite. The question that must be answered with this study relates to the economic viability of the MR compared to that of the UG2 at the TPM Project, as it stands in 2011. The assumption is that no mining has commenced on this project and that there is an equal opportunity to commence mining on one of the reefs. The study describes the ore body characteristic for each reef, focussing on the lithologies, structure, and resources available. The discounted cash flow (DCF) method was used to determine the economic value of each reef. The net present value (NPV) and internal rate of return (IRR) were calculated and used to compare the ore bodies. The input parameters to the DCF are the main limiting factors to this method, as the results are heavily dependent on the assumptions made. The input parameters used were based on actual published values and generally accepted and motivated assumptions. A sensitivity and risk analysis was completed to identify value ranges and potential risks to the projects. The outcome of the analysis has been compared to other projects as a benchmark to ensure the project assumptions were realistic. The world markets supply and demand for PGM is intricately related to exchange rates, metal prices, inflation, and investment risk. These have an influence on the strategic planning for a company as well as investment decisions through various project evaluation methods. South Africa has a long history of mining and metals extraction. Extensive mining legislation has been developed to ensure the country’s mineral wealth is protected and the health and safety of employees are high priority. Specific challenges related

L!

to mining on the Eastern Limb are discussed in order to justify the high risk assigned to the project for this evaluation. The DCF was calculated and the outcome indicated that neither the MR nor the UG2 is economically viable using these parameters in the 2011 economy. The MR evaluation produced a negative NPV (R -1,664,541,443.47) and an IRR of 9 %, which is well below the required discount rate of 12 %. The initial project capital will be repaid after 19 years of the 33 year life of mine. The sensitivity analysis showed that by reducing the initial capital by 30 %, the project produces a positive NPV. The other factor that produced a positive NPV was by reducing the operating cost by 50 %. This project will have to be re-evaluated after all parameters have been tested and some re-engineering has been done to optimise the extraction of the MR ore body. The UG2 evaluation produced a negative NPV (R -109,614,208.27) and an IRR of 12 %, equal to the required discount rate. The initial project capital will be repaid after 16 years of the 32 year life of mine. The sensitivity analysis showed encouraging results, as minor changes to the input parameters produced a positive NPV. The two parameters that were most significant were the recoveries and the capital requirements. By increasing the recovery percentage by 2 %, the project NPV becomes positive and a reduction of the initial capital by 10 %, also resulted in the NPV becoming positive. This indicates that with some refinement to the input parameters, the UG2 could be extracted as an economically viable project. The only concern is the sensitivity to changes in grade, which will have to be very well defined and controlled when mining commences. The risk assessment related closely to the challenges identified for a mining operation on the Eastern Limb, with the relationship with the local community and the build-up phase of the project emerging as the highest risks. The limited infrastructure development and high levels of poverty that exists in the area has a direct influence on the support structures and services available for the build-up phase of a mine. The build-up phase requires substantial development and services that will have to be sourced at high risk and cost from substantial distances, to ensure that steady state is reached. The socio-economic development of the local community is critical for the success of the mine. Upliftment of the local community in terms of education and training, job opportunities and health care will provide the foundation for a good relationship