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“At the end of the day, all resources projects are high risk,” says METS Engineering principal consulting engineer Damien Connelly.

“We are in a risk business — we should never lose sight of that.”

Before they choose to invest, banks call on independent consultants like METS Engineering to go over a mineral development project with a fine-toothed comb.

That’s because the banks that lend the money to these projects don’t necessarily have the technical due diligence expertise themselves. They understand all the financial aspects, but not the geology, mining, processing, and even to some extent, the market.

“That’s where we get involved for independent technical due diligence as part of the accountability process,” Mr Connelly told delegates at the Paydirt 2019 Battery Minerals conference.

“Having a good understanding of the risk, and mitigating that risk, is absolutely critical.”

Here’s some of the red flags guys like Mr Connelly look for during the project due diligence process.

1. Project history

“There are projects out there that are recycled. They failed before, then they turn up again – that’s not a good look.”

“If a project has a number of false starts and technical difficulties it becomes very difficult to convince people that it’s going to be successful this time.”

2. Processing plant test work

“If you look at any financial model capital cost doesn’t kill it — the thing that drives it is [metal] recovery, operating costs, and metal prices.”

“We have seen a number of [lithium] projects struggle to get the recovery to start with.

“I’ve even had the banks say to me ‘this is bad! It’s not working!’

“I say listen — they have done bench scale test work, they’ve done locked cycle test work and they’ve done piloting. And it all says [the process] works.

“Having all that test work there to support the project is absolutely critical. Because in lithium, floatation is tough. You should never underestimate it.

“Sure, it’s not working in the plant right now but that’s more to do with grind size, or reagent optimisation – it’s a learning curve.

“If you look at a simple oxide gold ore you don’t need to pilot that because it’s easy.

“With graphite and lithium piloting is mandatory. If you haven’t done that it increases the risk.”

3. Financial modelling

“Financial models — you can manipulate them and turn a pig’s ear into a brilliant project.

“When companies do their own financial models, they tend to polish it and polish it – but look at some of the basic assumptions and you quickly find [holes].

“We see projects where the financial model looks brilliant. The reality is that the project wont achieve it.”

4. Starting with the high-grade stuff

“Look at the ore schedule in relation to the processing plant.

“Early project [production] is absolutely critical, because if you get low grade, difficult to treat material it just screws with cashflow and destroys the financial model. It puts you behind the eight-ball [straight away].

“Some companies will try to go for high grade to start with and that’s not a bad idea because it generates lots of cash.”

5. Unrealistic timelines to production

“I think the industry is struggling with project execution plans.”

“Realistic timelines. That is something we can do better.”

“It takes a long time to get a project up and running. But by fast tracking progress you cut corners [and this] just increases the risk.”