Pre-feasibility Study - Springpole Gold ProjectWith gold prices on the rise, there are plenty of projects that have risen from the ashes like a Phoenix. The Springpole Gold Project is prime example of how a rising commodity prices breathes new life in a left for dead project.
So, with the increase in these projects springing up, how does an investor separate the wheat from the chaff? Well…One simple way to compare is using what is know as the profitability index (PI). Profitability index is calculated as after-tax NPV divided by sum of initial capex and expansion capex (no sustaining Capital to be included).
Investopedia describes Profitability Index (PI) Rule
The profitability index rule is a decision-making exercise that helps evaluate whether to proceed with a project. The index itself is a calculation of the potential profit of the proposed project. The rule is that a profitability index or ratio greater than 1 indicates that the project should proceed. A profitability index or ratio below 1 indicates that the project should be abandoned.
Having a PI over 1 (by definition) is what you are looking for in a project. But as everybody knows that one must look at the maturity level of the project into consideration when deciding between investments. It should be clear to everyone that choosing between two projects with a PI = 1 with one project at the feasibility and one at the PEA level, one should pick the one at the feasibility level (assuming the commodity pricing - base case - is similar).
One way to mitigate maturity issues between projects or even looking at a solo project on its own merits is to apply contingency. With any project, contingency is the always a touchy subject, but the following rates are within the norms of project management:
PEA or Scoping: 30% to 50%
Pre-Feasibility: 20% to 30%
Feasibility: 10% to 15%
Detail Engineering: 5% to 10%
Circling back to the Springpole Gold Project it has a PI = ($995 million/$718 million) = 1.38
As it stands, the index tells us we are in good shape, when it is stress tested against project maturity it remains >1 (albeit slightly). This bodes well for the decision to continue de-risking the project (for now).
COMPANY/PROJECT STAGE CAPEX (US$M) AFTER-TAX AFTER-TAX PI INDEX (X)
IRR (%) NPV (US$M)
Trilogy Metals Arctic PFS $780 33.4% $1,413 1.2x
Solgold Cascabel PEA $2,715 25.9% $4,349 1.2x
Filo Mining Filo del Sol PFS $1,266 23.0% $1,280 1.0x
Capstone Santo Domingo –
2020 Cobalt PEA Opportunity PEA $2,180 23.0% $1,660 0.8x
Audley / Orion / MMC
Mantoverde Feasibility $731 22.8% $878 1.2x
Capstone Santo Domingo –
Base Case Feasibility $1,512 21.8% $1,032 0.7x
Nevada Copper
Pumpkin Hollow - OP PFS $1,145 21.0% $829 0.7x
Yamana / Glencore /
Newmont Agua Rica PFS $2,386 19.7% $1,935 0.8x
Josemaria Josemaria PFS $2,761 18.7% $2,030 0.7x
First Quantum Taca Taca PEA $3,006 17.2% $2,087 0.7x
Minsur Mina Justa Feasibility $745 16.7% $368 0.5x
Teck Zafranal PFS $1,157 15.9% $496 0.4x
Hudbay Rosemont Feasibility $1,921 15.5% $769 0.4x
Northern Dynasty Pebble PEA $4,695 15.4% $2,358 0.5x
Mitsubishi Quellaveco Feasibility $5,150 15.0% $2,7 0.5x
Pan American La Arena II PEA $1,364 14.7% $82 0.6x
Hudbay Ann Mason PEA $1,351 13.7% $7 0.6x
Teck / Sumitomo QB2 Feasibility $4,714 11.7% $1,253 0.3x
Antofagasta Twin Metals PFS $2,775 11.4% $753 0.3x
PolyMet NorthMet Feasibility $1,204 10.3% $271 0.2x
Newmont / Teck Galore Creek PFS $4,691 7.4% $125 0.0x
Source: RBC Capital Markets, Capstone news release (Feb’20)