cim april 24
TRANSCRIPT
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CSC Excellence In Risk Management April 2005
Quantitative Risk Analysis for Mining LifeCycle Management.
CIM Conference Risk WorkshopToronto
April 24, 2005
C. Coulthard, B.A. D. S. Evans Ph.D., P. Geol.
I. Henderson M.Sc., P. Eng.
CSC Project Management Services
20 Fourth Street NE, Calgary. T2E 3R5(403) 233-7994 [email protected]
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Presentation Agenda
(2) Introduction to Risk Management
Risk Management Risk Identification and Quantification
(1) Mining Issues and Problems Mining Activities Life Cycle Key Uncertainties
(3) Risk Analysis and the Risk Management Process Quantitative Risk Management Tools
(4) Specific Application Examples Portfolio Management
Mine Development
(5) Summary
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Life Cycle Activity: Business FocusStrategic Planning Stakeholder Value / Governance
Selection of Business / Areas
Portfolio Management Balance of Portfolio Rationalization of Assets
Prospect Definition Rationalization of Assets
Start Up / Ramp Up Production On Stream
Development Project Execution
Expansion Project Optimization and Planning
Production Volumes, Rates, OPEX, Product Slate and Quality
Abandonment Long Term Liabilities, Closure
Mining Issues and Problems - Mining Life Cycle Activities
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Mining Issues and Problems Key Uncertainties
Life Cycle Activity: Business Focus Key UncertaintiesStrategic Planning Market conditions
Political & Social RiskStakeholder Value / GovernanceSelection of Business / Areas
Portfolio Management Balance of Portfolio Rationalization of Assets
Market conditions Political & Social RiskGeological Potential
Prospect Definition Rationalization of Assets Resource Quality / Quantity Estimate of Potential Value
Start Up / Ramp Up Production On Stream Quality of Execution, Technology and Regulatory Issues
Development Project Execution Capital Cost, ScheduleTechnology
Expansion Project Optimization and Planning
Capital Cost, ScheduleTechnology, Interference
Production Volumes, Rates, OPEX, Product Slate and Quality
Ore grade, Plant operability, Operating team performance, Regulatory Issues
Abandonment Long Term Liabilities, Closure Cumulative Impact of Operating Decisions, Environmental and
Social Issues
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Presentation Agenda
(2) Introduction to Risk Management
Risk Management Risk Identification and Quantification
(1) Mining Issues and Problems Mining Activities Life Cycle Key Uncertainties
(3) Risk Analysis and the Risk Management Process Quantitative Risk Management Tools
(4) Specific Application Examples Portfolio Management
Mine Development
(5) Summary
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Traditional
Project
Risk
Management
Time
Cost Quality
+ =
Optimized
Value
Fit forPurpose
ContinuousImprovement
BreakthroughThinking
Pick any Two
Project Management Mantras
=+
Risk Management is used to maximize the Project value by testing strategies to find the optimum.
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Three Techniques are available that address different levels of Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Optimize project configuration and shareholder value.
Calculate AppropriateContingency Targets
Objective
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Three Techniques are available that address different levels of Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Optimize project configuration and shareholder value.
Calculate AppropriateContingency Targets
Large Group Consensus Based Broad Expert Group with
judgment based assessment.
Small group Consensus based
or individual interviews(Template driven).
Assessment
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Three Techniques are available that address different levels of Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Optimize project configuration and shareholder value.
Calculate AppropriateContingency Targets
Large Group Consensus Based Broad Expert Group with judgment
based assessment.
Small group Consensus based or
individual interviews (Templatedriven).
Considers all strategic options,execution plans and external
risks.
Considers the project execution plan and assumptions.
Considers the fixed execution plan, assumptions and someexternal risks.
Scope
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CSC Excellence In Risk Management April 2005
Three Techniques are available that address different levels of Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Optimize project configuration and shareholder value.
Calculate AppropriateContingency Targets
Large Group Consensus Based Broad Expert Group with judgment
based assessment.
Small group Consensus based or
individual interviews (Templatedriven).
Considers all strategic options,execution plans and external risks.
Considers the project execution plan and assumptions.
No Modeling Custom Integrated modeling highlighting cross impacts from project areas.
Tool-Driven Modeling focusing on one aspect of project (Cost,Schedule or Economics).
Considers the fixed execution plan, assumptions and someexternal risks.
Modeling
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Three Techniques are available that address different levels of Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Optimize project configuration and shareholder value.
Calculate AppropriateContingency Targets
Large Group Consensus Based Broad Expert Group with judgment
based assessment.
Small group Consensus based or
individual interviews (Templatedriven).
Considers all strategic options,execution plans and external risks.
Considers the project execution plan and assumptions.
No Modeling Custom Integrated modelinghighlighting cross impacts from
project areas.
Tool-Driven Modeling focusingon one aspect of project (Cost,Schedule or Economics).
Considers the fixed execution plan, assumptions and someexternal risks.
No Correlation Conditioning Variables to captureunderlying risks & correlation,
determined by project team.
Tool-Driven based on distribution, determined by risk
analyst
Correlation
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CSC Excellence In Risk Management April 2005
Three Techniques are available that address different levels of Risk Management
Qualitative Range Estimating Quantitative Analysis
Identify key project risks Optimize project configuration and shareholder value.
Calculate AppropriateContingency Targets
Large Group Consensus Based Broad Expert Group with judgment
based assessment.
Small group Consensus based or
individual interviews (Templatedriven).
Considers all strategic options,execution plans and external risks.
Considers the project execution plan and assumptions.
No Modeling Custom Integrated modelinghighlighting cross impacts from
project areas.
Tool-Driven Modeling focusingon one aspect of project (Cost,Schedule or Economics).
Considers the fixed execution plan, assumptions and someexternal risks.
No Correlation Conditioning Variables to captureunderlying risks & correlation,
determined by project team.
Tool-Driven based ondistribution, determined by risk
analyst
Project Team, Constructors, and EPCM Contractors.
Project Team, Owners,Stakeholders, Constructors &
EPCM Contractors.
Project Team, Constructors, and EPCM Contractors
Audience
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Outcome Uncertainty(Cost, Schedule or Economic)
Risk Variable Correlations
Integrated Modeling(Cost & Schedule)
Full Cycle Analysis(Production / Revenue / Finance / Returns)
Underlying Risk Drivers(Corporate / Economic / Regulatory / Political Environment)
Strategic and Tactical Alternatives Review
External / Event Driven Risk Impacts
Outside the Box Risks(Project Assumptions)
Properly conducted risk analysis builds on the early tools used forqualitative analysis (KT, SWOT) and range estimation to include all the
risk and opportunity impacts on a project or decision.Qualitative
AnalysisRange
EstimationQuantitative
Analysis C om pr e h
e n s i v e Ri s k E n
v e l o p e f or
d e c i s i onm
ak i n
g
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Five Levels of Risk Management Maturity*
Level 1: Ad Hoc
Level 2: Initial
Level 3: Repeatable
Level 4: Managed
Level 5:Comprehensive
* Modified from PMI Risk Management Group, 2002
Success depends on the competencies and heroics of individuals
Risk awareness, but no precedents, structures or drive in place for consistent application.
(Qualitative, KT Analysis SWOT )
Risk Management has been implemented into routine business processes.
(Risk Register, Range Estimating, Real Options)
Risk Management Standard and defined processes used across the organization
(Quantitative Risk Analysis)
Risk Management is used to base both individual decisions and strategic planning on quantified values
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Frames the decision problem and documents a consistent set of assumptions, limitations and constraints ...
Allows all strategies to be tested in an uncertain environment and compared in a quantified manner
Identifies all sources of uncertainty and assesses the probability of occurrence and impact on the results ...
Provides an effective communication tool so that the assumptions and uncertainties are clearly communicated to stakeholders
Uses conditioning variables to model the underlying uncertainties toensure the project/activity performs in a logical manner...
Assists in mitigation planning, implementation tactics, and identifies opportunities to enhance project/activity value.
Quantitative Risk Analysis is a rigorous and comprehensive
process that:
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A rigorous process is applied consistently to evaluate all projects
1Frame
TheProblem
2DevelopAnalysis
Basis3
EvaluateTheRisks
4Interpret
TheResults
RiskManagement
Recycle to Focus on Most Important Risks
DevelopAlternativeStrategies.
Identify allImportantSources ofUncertainty.
Model howunderlyinguncertaintiesinteract toinfluenceoutcomeson the Project.
Identify theExperts in eachof the uncertainvariables.
Assess theimpact and theprobability ofoccurrence foreach uncertainvariable.
Calculate theuncertainty inthe key resultmeasures.
Quantify therisk & returnfor each scenario.
Analyze anddocument the
results.
Identifypreemptiveactions.
Developcontingencyplans.
Recommendedactions.
5
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Cold Eyes ReviewTeam Involvement
Project Team
Involvement
Operations Team
Involvement
Risk ContractorInvolvement
Risk Management Process
An effective Risk Management plan must re-evaluate the risks on the project and their impacts throughout the project life cycle. Each phase of the risk analysis involves a different focus and a different mix of disciplines.
StrategicPlanning
ProjectDefinition
ProjectFinancing
Mid-Construction
ProjectStart Up
Year 1Full
Operations
ProjectExecution
Corporate
PlanningInvolvement
StrategicTactical
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Presentation Agenda
(2) Introduction to Risk Management Risk Management Risk Identification and Quantification
(1) Mining Issues and Problems Mining Activities Life Cycle Key Uncertainties
(3) Risk Analysis and the Risk Management Process Quantitative Risk Management Tools
(4) Specific Application Examples Portfolio Management
Mine Development
(5) Summary
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ProbabilityDistributions
Tornado DiagramsStep Diagrams
Interview Issues Model and Test Options
Scheduled, Formal ReviewsUpdated Model Results(Probabilities, Tornados, Steps)Management Risk Reporting
Base Design& Operating Plans
Contingency Plans
RiskMonitoring
System
Project Targets Immediate RiskControl Measures
Risk Analysis
Risk Analysis is the centerpiece of a Risk Management Process
There are four key outputs from a comprehensive Risk Analysis
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The probability distribution illustrates the full range of project uncertainty and is used to set the project targets at appropriate confidence levels.
*Expected
Value
10/90 Range
CAPEX, Schedule, OPEX, etc.
90%
50%
10%
Note:1. Each point on the curve is a result from
a single Monte Carlo trial. The expected value represents the average value of all
the trials.
2. The slope of the 10/90 range represents the uncertainty, the flatter the curve, the more uncertainty.
3. The curve below the expected value
indicates upside opportunity, the portion above shows the downside risk.
P r o b a b i l i t y
Project Targets
P80 (?) Confidence Level
UpsideOpportunity
DownsideRisk
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*
Project Production (or NPV, ROCE, ROR)
90%
50%
10%
P r o b a b i l i t y
UpsideOpportunity
DownsideRisk
Probability distributions illustrate opportunity and risk trade- offs, and can be used to select the best project option.
Option B
ExpectedValue
Option A
Project Targets
Option B has slightly more riskwith a much greater upside
opportunity.
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-60 -40 -20 0 20 40 60Start Date
EV = 20-Dec-07
Days
The tornado diagram identifies and ranks the key project risks and is a tool that helps the project team to focus on the
most important drivers.
Road Preparation Duration 3 6Labour Productivity Delays -1.25 1.75Plant Pad Preparation Duration 3 6Labour Unrest Delays 0 2.3Execution Organization Performance Best Worst
Regulatory Duration 11.3 16.5Competing Project Environment Low HeatedStart-up & Commissioning Duration (Early Steam) 1.5 2.4Terms of Reference - Duration 3 4Regulatory Environment Relaxed StringentTerms of Reference - Application Date 1-Aug-02 1-Oct-02
Labour Availability Delays 0 1.4OTSG Manufacture & Delivery Duration 12 16Weather Delays 0 0.5Long Lead Equipment Delays -1 2
Immediate Risk Control Measures
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C S C Ex c el l en c eI n Ri s k M an a g em en t
1 5 -A u g- 0 7
1 - S e p- 0 7
1 5 - S e p- 0 7
1 - O c t - 0 7
1 5 - O c t - 0 7
1 - N o v- 0 7
1 5 - N o v- 0 7
0 1 -D e c - 0 7
1 5 -D e c - 0 7
0 1 - J an- 0 8
AFE Approval + 6
Engineering to 60% +1 3
Preliminary Vendor Data +7
Module Steel Fabrication 0
Module PipeFabrication Duration 0
Rack/ ProcessModule Assembly
- 3
Last Process Area ModuleOn-site to Construction
Complete
0
Evaporator Units 0
Vapour Compressors 0
Site Prep Duration +1
Piling - 8
Commissioning Duration +1 4
Start-up Duration - 3
Construction Duration + 3 1
Materials Delivery + 5
Weather Delay + 5
Labour Issues+1 2
L g L d +
S t ar t D
a t e
B a s e = 0 3 - S e p- 0 7
T h e S t e pD i a gr a m d e m o n s t r a t e s w h e r e t h e gr o w
b a s e e s t i m a t e t o t h e E x p e c t e d V a l u e o c c ur s , a n d id
f a c t or s i m p a c t i n g t h e c o s t .
I m m
e d i a t e R i s k C o n t r o l M
e a s ur e s
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A complete risk register considers all sources of information available for the project uncertainties.
Immediate Risk Control Measures
ProjectDocumentation
QualitativeAnalysis
QuantitativeAnalysis
Risk Register
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0%
10%
20%
30%
40%
50%
60%
70%
80%90%
100%
1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07
UnconstrainedFix Filing Date (-120 days)
Early Application (-40 days)
No JV Delays (-60 days)No Staffing Delays (-30 days)
The analysis can be used to evaluate impacts of schedule
risks, and test mitigation steps to show the potential for schedule advancement. Incremental mitigation can be
applied to reach an acceptable target date.
BaseEV = 1-Nov-04
MitigatedEV = 21-Feb-04
Contingency Plans
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P r o b a b i l i t y
Project NPV ($MM)
10%
30%
50%
70%
90%
2000-800 -400 0 400 800 1200 1600
DefinitionEV = 528 $MM Project AFE
EV = 697 $MM
Mid-ConstructionEV = 669 $MM
Start UpEV = 695 $MM
PlanningEV = 460 $MM
Use of risk analysis throughout the project life helps the
project team to focus on the most important risks for each stage of development, resulting in a better defined project
(i.e. less risk).
Risk Monitoring System
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Presentation Agenda
(2) Introduction to Risk Management Risk Management Risk Identification and Quantification
(1) Mining Issues and Problems Mining Activities Life Cycle Key Uncertainties
(3) Risk Analysis and the Risk Management Process Quantitative Risk Management Tools
(4) Specific Application Examples Portfolio Management
Mine Development(5) Summary
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Mining Issues and Problems Key Uncertainties
Life Cycle Activity: Business Focus Key UncertaintiesStrategic Planning Market conditions
Political & Social RiskStakeholder Value / GovernanceSelection of Business / Areas
Portfolio Management Balance of Portfolio Rationalization of Assets
Market conditions Political & Social Risk
Geological Potential Prospect Definition Rationalization of Assets Resource Quality / Quantity
Estimate of Potential Value
Start Up / Ramp Up Production On Stream Quality of Execution, Technology and Regulatory Issues
Development Project Execution Capital Cost, ScheduleTechnology
Expansion Project Optimization and Planning
Capital Cost, ScheduleTechnology, Interference
Production Volumes, Rates, OPEX, Product Slate and Quality
Ore grade, Plant operability, Operating team performance, Regulatory Issues
Abandonment Long Term Liabilities, Closure Cumulative Impact of Operating Decisions, Environmental and
Social Issues
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Mining Issues and Problems
Activity: Business Focus Key UncertaintiesStrategic Planning Market conditions
Political & Social RiskStakeholder Value / GovernanceSelection of Business / Areas
Portfolio Management Balance of Portfolio Rationalization of Assets
Market conditions Political & Social RiskGeological Potential
Prospect Definition Rationalization of Assets Resource Quality / Quantity Estimate of Potential Value
Early in the Project life cycle the analysis should be focused at a high level to level to
ensure that the right strategic decision is taken.
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Strategy Table for Country Risk Analysis
Decisions
Strategy Country Commodities Mining
Extraction
Processing Markets
Increasing Reserves
Canada Polymetallic Open Pit Heap Leach In Country
Competitive Need
Indonesia Precious Metals
Underground Standard Flotation &
Concentration
Regional
Competitive
Advantage
Russia Industrial
Minerals
InSitu Leach Solvex
Smelting
& Refining
In Country:onsite
In Country:offsite
Out Of
Country
International
Selected Strategy Options
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Portfolio Management to select best mining project
Pre-Acquisition Acquisition
ProjectExecution
CAPEX
OPEX
Revenue
ProjectNPV
DiscountRate
AcquisitionDuration
Exploration/ AFE Duration
Mech.Duration
ExtraordinaryCosts
Acquisition/ Exploration
Costs
LocalBenefits
LabourProductivity
LabourCosts
Energy &Utility Costs
ChemicalCosts
FixedCosts
Variable
Costs
BulksMaterial& EquipmentCosts
CommodityPrice
FiscalTerms
Taxes &Royalties
Expropriate
FirstProduction
Smelting &Refining Costs
Closure
EnvironmentalPerformance
Infrastructure
Costs
PoliticalClimate
Socio-CulturalEnvironment
EnvironmentalPerformance
ClosureCost
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0%
10%
20%
30%40%
50%
60%
70%80%
90%
100%
-1500 -1000 -500 0 500 1000 1500
P r o b a b i l i t y
$MM NPV @ 12%
NPV Country Case Comparison
CanadaEV = $147 MM
IndonesiaEV = $48 MM
Portfolio Management
RussiaEV = -$415 MM
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-1000
-500
0
500
1000
2000 2005 2010 2015
Canada PayoutEV = 2011
Indonesia PayoutEV = 2014
Russia PayoutEV = Never
$ M M
Cumulative Cash Flow
Year
Portfolio Management
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-100 0 100 200 300 400
EV = $147 MM
$MM NPV @ 12%
The Tornado Diagram highlights the key drivers for the option and identifies areas to focus mitigation efforts to ensure success
NPV Canadian Case
Political ClimateDaily ProductionSocio-Cultural EnvironmentTaxes & RoyaltiesAu GradeCu Price
Environmental PerformanceAu PriceLabour CostsZn Recovery RateZn Grade
Chemical CostsRamp-up DurationLocal Benefits
Acquisition / Exploration Costs
Portfolio Management
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Mining Issues and Problems
Activity: Business Focus Key Uncertainties
Start Up / Ramp Up Production On Stream Quality of Execution, Technology and Regulatory Issues
Development Project Execution Capital Cost, ScheduleTechnology
Expansion Project Optimization and Planning
Capital Cost, ScheduleTechnology, Interference
During the Project Development phase the analysis should have more focus on the tactical level to ensure that the project is executed well.
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Materials/ EstimateVariance
TotalProject
CAPEX
$ 160 MM
Indirects
$ 20 MM
Mill
$ 60 MM
Mine
$ 60 MM
$ 40 MMLevel
Excavation
$ 5 MM
ShaftExcavation
$ 5 MM
Water
$ 5 MM
Roads
$ 10 MM
Miscellaneous
BidRate
EngineeringCost
Variance
OrganizationPerformance
CompetingProjects
LabourProductivity
$3 MM
Administration$ 15 MM
EPCM
ExchangeRate
$1.5 MM/yrSustaining
Capital
LocalBenefits
CostVariance
SubsurfaceEquipment
$ 15 MM
$20 MM
Infrastructure
UsedEquipment
LabourRate
ScopeVariance
Development capital cost for a mining project
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0%
10%20%
30%
40%
50%60%
70%
80%
90%100%
50 100 150 200 250 300
P r o b a b i l i t y
CAPEX ($MM)
The Cumulative Probability Distribution shows that $35 MM (16%) contingency is required for a 70% confidence limit. The slope
(uncertainty) in the curve approximates a Class V Estimate.
Expected ValueCAPEX = $175 MM
Development - CAPEX
Base Estimate$160 MM
P90 = $220 MM
P90 = $130 MM
Class V Estimate+25%/-25%
$35 MM
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-15 -10 -5 0 5 10 15 20
Mine Dev. Unit Cost VarianceMine Dev. Quantities VarianceCompeting Projects EnvironmentLevel Excavation Dev. Scope Variance
Infrastructure CostsExecution Organization PerformanceInfrastructure Construction DurationRegulatory Process DurationTailings Cost VarianceRoads Cost VarianceSubsurface Equipment CostsMine Construction DurationEPCM Cost Variance -BaseLeaseholder Negotiations DurationWater Cost Variance -Base
Total Capital Expenditure $MM
$175 MM
The range in in Capital Cost is largely due to uncertainty in Mine UnitCost Variance, Mine Quantities Variance and Level Development Scope
Variance.
Development - CAPEX
P i A d
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Presentation Agenda
(2) Introduction to Risk Management Risk Management Risk Identification and Quantification
(1) Mining Issues and Problems Mining Activities Life Cycle Key Uncertainties
(3) Risk Analysis and the Risk Management Process
Quantitative Risk Management Tools
(4) Specific Application Examples Portfolio Management Mine Development
(5) Summary
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Risk management is fundamental for accountability on corporate governance and on maximizing shareholder value. It begins with strategic definition and continues in a consistent manner throughout the project life cycle. The earlier risk management starts, the earlier you can avoid
or mitigate risks and capture opportunities.
Risk Management ensures that there are no surprises. Documentation of assumptions and all risks. Communication of risk analysis results and the plan for managing those risks (avoid, accept, manage). The focus of effortsis on the underlying project risks.
Range Estimating is not Risk Analysis. Fully accountable risk analysis considers the specific uncertainties of a project, and incorporates these underlying risks into the project value. Processes that provide
single-point outcomes or risk distributions based on the probability of fixed outcomes(decision trees, KT, range estimating) do not meet the definition of risk analysis.
Ignoring risks to a project is not an option ; important decisions will be made anyway, should they not be made with the best information available?
(Project Manager Today, October 2000)
Modern Day Applications of Risk Analysis to Mining Issues and Problems