Knowing what a preliminary economic assessment is will help new market participants better understand news from mineral resource issuers and mining projects.
A preliminary economic assessment, sometimes abbreviated as PEA, is defined as a study that includes an economic analysis of the potential viability of a project’s mineral resources. Preliminary economic assessments are completed before prefeasibility and feasibility studies, and are an important step in determining whether a company should develop a mineral resource project.
Read on for a more in-depth look at the information preliminary economic assessments include and why they are a crucial part of the mineral resource exploration and mining process.
What is a preliminary economic assessment?
Before a mineral resource project becomes a mine, several technical studies must be completed on a deposit to ensure its economic viability. As mentioned, putting a PEA together is one of the first steps in the process, with prefeasibility and feasibility studies following.
All of these studies analyze and assess the same geological, engineering and economic factors; however, they include significantly different levels of detail and precision. For example, unlike a prefeasibility or feasibility study, PEAs may contain results of metallurgical testing that are based on an inferred mineral resource. That means the mineral resource estimate that they include may be based on limited information and sampling of the mineralization.
PEAs must either be presented in the form of a technical report, or supported by a technical report. In some cases, the technical report must be independent. PEAs are sometimes called scoping studies.
What’s in a preliminary economic assessment?
As noted, the purpose of a PEA is to evaluate a mineral project’s economic viability.
Generally, PEAs will include base-case information on the capital costs associated with bringing a project into production, an estimate of how the mine will operate once it is built, how much metal and money it will produce and at what operating cost. The PEA helps mining companies understand risks and uncertainties associated with a project. The study can be part of exploration with both open-pit mining and underground mining, and should include a mine plan.
More specifically, a PEA tends to have information on pre-production capital costs, life-of-mine sustaining capital, mine life and cash flow, as well as details on processing and production methods and rates.
PEAs also include information on project economics at various metal prices.
For example, the PEA for the Séguéla gold project in Côte d’Ivoire, then owned by Roxgold and now held by Fortuna Silver Mines (TSX:FVI,NYSE:FSM), outlines how the project will perform before and after tax in two different gold price scenarios:
Chart via Business Wire.
What comes after a preliminary economic assessment?
After producing a positive PEA, a company can then move on to prefeasibility and feasibility studies. As explained, these studies look at the same geological, engineering and economic factors, but at a higher level of detail and precision.
These studies can help determine factors such as operating costs and potential tonnes to be mined for commodities such as precious metals and base metals. They can also offer insight into the average grade of the resources that will eventually be mined or how many ounces or tonnes per day could come from the asset and at what metal prices.
Additionally, prefeasibility studies take into account other key future events that could impact a project, such as community issues, geographic obstacles and permit challenges. They should include multiple options for tackling different issues.
Once a prefeasability study has been reviewed and approved, companies then move onto the feasibility study, which includes fewer assumptions and harder facts.
Feasibility studies contain similar content, but are much more accurate than prefeasibility studies in their assumptions and require more resources to conduct. These studies are intended to evaluate if a mineral reserve can be mined effectively and if it will be profitable.
Detailed mining feasibility studies are also used as the basis for a project’s capital estimates, operating costs and overall economic viability.
To learn more about how issuers determine potential viability for their assets, click here for details on prefeasibility and feasibility studies and here for more on the full lifecycle of mining.
This is an updated version of an article first published by the Investing News Network in 2019.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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