Published in September 2006 Australian Longwall Magazine

One of the major outcomes of a coal project evaluation during the feasibility and often pre-feasibility stage, and of primary consideration in further investment in the project, is the definition of the reserve base.

As there are invariably uncertainty and risk in several of the “modifying factors” applied to resources in determining their economic recovery and conversion to reserves, the level of uncertainty and risk needs to be identified and quantified by the “competent person” in order to classify the reserve in accordance with JORC code guidelines.

Some of the pertinent areas of risk that arise during project feasibility, together with methods of quantifying and assessing the risk in order to define and classify the project reserve base, are outlined below.

Resource base risk

Understanding the resource base estimation risks and implications is critical prior to the conversion of resources to reserves. A number of risk areas arise in the estimation of the resource base, including:

• Adequacy of the “points of observation” (number and spatial distribution) in defining deposit continuity and variability;
• Reliability of the database (surveying, drilling techniques, sampling and assaying);

• Material density determination and variability;

  *Resource continuity and variability (density, grade/quality);

• Lower than predicted grade/quality;
• Geological interpretation.

A thorough audit of the resource base early in the project feasibility process is necessary in order to discover any mistakes/deficiencies before extensive effort on mine planning and design is undertaken and later found to require redoing due to an error in the database or data interpretation.

Geotechnical risk

There are major benefits in applying appropriate expertise and strategy to maximise geotechnical interpretation of exploration data at an early stage particularly in underground coal projects, even as early as concept level. These advantages relate to:

• Presenting a balanced and unbiased assessment of project potential so that significant resources and costs are not dedicated to projects that may not ultimately be viable, or alternatively, viable projects are not overlooked at the outset;
• Providing capacity for formulation of hazard plans, risk ranking, and risk assessment during the mining environment definition phase so that critical issues and strategies are developed and integrated into the initial mine plan;
• Scoping future exploration and feasibility studies to ensure that critical issues are addressed in appropriate depth and in a timely fashion with respect to landmark requirements in project development, and optimising exploration expenditure by targeting the collection of important geotechnical data.

Particular geotechnical risks for coal mine projects include seam structure (dip and faulting), jointing, cleating, immediate rock mass strength and characteristics (massive or bedded) and horizontal stress.

Most of these risks can be identified and quantified (to a certain extent) early in the project through the use and interpretation of standard geophysical logs (gamma, sonic, caliper) and the acoustic scanner log. The use of 2D and 3D seismic surveys, while seemingly expensive, can prove to be a very cost-effective tool in quantifying structural risk early in the project.

A key process in feasibility planning lies in assessing the optimum mine plan orientation relative to assessed critical geotechnical risks and impacts, including in particular cleating/jointing and horizontal stress (e.g. adverse stress impacts on development headings and longwall maingate retreat).

Acoustic scanner interpretation provides a very powerful geotechnical tool in defining cleat/joint and stress orientation (from breakout) and assists in overburden strata geomechanical characterisation, but only if the interpreted data is adequately characterised, spatially defined and correctly orientated in the context of proposed mine layout.

Mine planning risk

Risk arises in the mine planning process of feasibility analysis through the application of the modifying factors required to develop the mine layout and estimate mine production, operating costs, capital expenditures, and revenue streams. Modifying factors that have a large influence on project economics and are particularly vulnerable to risk are:

• Productivity and production levels;
• Product quality and yield;
• Project design, approvals and construction timing;
• Infrastructure (power, water, rail and port) requirements and availability;
• Local social factors (availability of labour and skills, social and cultural influences);
• Influence of petroleum licences and coal bed methane;
• Environmental sensitivity, particularly with respect to water resources, subsidence (100-year remediation considerations in New South Wales) and endangered ecosystems;
• Operating and capital cost estimates;
• Marketing (product types and sales levels/realisation).

Addressing the risks during the mine planning analysis is an iterative process that involves identifying and assessing the sources of risk (generally through internal risk assessments and audits) to determine their potential impact and likelihood of occurrence. Areas of high identified risk must be adequately addressed as early as possible in the planning process through margin ranking, benchmarking and options analysis.

Risk management and reserves

Management of risk during feasibility can be accomplished through simple sensitivity analysis (impacts of generic percentage swings in assumption parameters) and probabilistic sensitivity analysis (e.g. through Monte Carlo simulation and probability distribution curves).

The result of the above should be a realistic, risk-weighted base case. The overall level of risk identified for the project base case must be adequately portrayed in the cash flow analysis through use of appropriate discounting to determine profitability and value.

A key factor in achieving diligent risk assessment during feasibility lies in the adequate understanding and linkage between various professional disciplines at all stages of the feasibility study relative to one another. The conversion of resources to reserves, while ultimately the responsibility of the “competent person”, should ideally be a team-based effort.

The classification of resources as reserves is...click here to read on.