Quantitative Risk Analysis to Select a High Opportunity Exploration Jurisdiction

1. Quantitative Risk Analysis to Select a High Opportunity Exploration Jurisdiction D. S. Evans, Ph.D., P. Geol. C. Coulthard, B. Sc., P. Jones, B.A. CSC Project Management Services Calgary, Alberta

2. Identifies all sources of uncertainty & assesses the probability of occurrence & impact on the measurement criteria ... Frames the decision problem, and documents a consistent set of assumptions, limitations and constraints ... allows all logical strategies to be tested in an uncertain environment and compared in a quantified manner… provides an effective communication tool so that the assumptions and uncertainties are clearly communicated to stakeholders… uses “soft” conditioning variables to model the underlying uncertainties to ensure the project/activity performs in a logical manner... assists in mitigation planning, implementation tactics, and, identifies opportunities to enhance project/activity value(s). Risk Analysis is a rigorous & comprehensive process that:

3. Frame Develop Evaluate Interpret Decide The Analysis The The Between Problem Basis Risks Results Alternatives Develop Model how Identify the Calculate the Identify Alternative underlying Experts in each uncertainty in preemptive Strategies. uncertainties of the uncertain the key result actions. interact to variables. measures. Identify all Develop influence Assess the Important outcomes Quantify the contingency Sources of impact and the risk & return on the Project. plans. probability of for each scenario. Uncertainty. occurrence for Recommended each uncertain Analyze and actions. variable. document the results. The Risk & Decision Analysis Process proceeds in a systematic sequence of five steps Recycle to focus on most important risks 5 1 2 3 4

4. Mining Smelting & Extraction Refining Increasing Reserves In Country: onsite Competitive Precious Need Metals In Country: offsite Competitive Industrial Out Of Country Advantage Minerals Strategy Table for Country Risk Analysis Decisions Strategy Country Commodities Processing Markets Canada Polymetallic Open Pit Heap Leach In Country Indonesia Underground Standard Regional Flotation & Concentration Russia InSitu Leach Solvex International Selected Strategy Options

5. Increasing reserves strategy Canada, Indonesia & Russia comparison Polymetallic deposit Open pit Truck & shovel operation Crushing & grinding Standard Flotation & Concentration Out of Country Smelting & Refining International Markets Preaquisition, acquisition, AFE, construction, rampup, production & closure phases Au, Ag, Cu & Zn grades, recoveries, credits & prices fixed Discount Rate 12% Full cycle economics All schedules, grades, costs, production, benefits, royalties and taxes fixed Poor, Expected & Superior Conditioning Variable Nominal Performance ratings fixed, separate probabilities assessed for Canada, Indonesia & Russia Project Definition & Assumptions

6. Influence Diagram/Risk Model Country Risk Analysis Environmental Performance Exploration/ AFE Duration Mech. Duration Acquisition Duration Socio-Cultural Environment Pre- Acquisition Acquisition AFE First Production Labour Availability Discount Rate Political Climate Local Benefits Labour Productivity Extraordinary Costs CAPEX Project NPV Infrastructure Costs Acquisition/ Exploration Costs Bulks Labour Costs Material & Equipment Costs OPEX Labour Productivity Energy & Utility Costs Extraordinary Expenses Legend Revenue Smelting & Refining Costs Impact Variable Variable Costs Fixed Costs Chemical Costs Environmental Performance Conditioning Variable Commodity Price Expropriate Closure Taxes & Royalties Fiscal Terms

7. static or declining science & continuing research, driven accelerating research with engineering research, new by financial performance financial & non-financial applications, implementations objectives performance objectives Legislation, prescriptive, criteria-based criteria & risk-based full acceptance of risk-based Regulations & standards based on poor science, standards supported by good standards with high degree of Guidelines politically driven notions science and public input public input Stakeholder low degree of public average/static degree of increased levels of public Content participation public participation participation Greenhouse Gases Ecology & declining biodiversity & stable biodiversity & increasing biodiversity & Conservation renewable resource capacity renewable resource capacity renewable resource capacity Sustainable low interest, support & stable interest, support & high level of support, interest & Development integration of the principles of integration of the principles of integration of the principles of environmental management environmental management environmental management Environmental Performance Conditioning Variable Attribute Poor, Low=0 Expected=5 Superior, High=10 Technology increasing levels of GHGs stable levels of GHGs declining levels of GHGs 2.5 5.5 7.5 Canada 10% 75% 15% Russia 75% 23% 2% Indonesia 23% 52% 25%

8. more open to development,, prepared open society, full acceptance of change, closed society, resentment of to accept change, good learning seeking challenges, learning & opportunity past development, reluctant to change, poor learning low tolerance of religious essential and basic tolerance to high tolerance for religious freedoms, freedoms, expression religious freedoms, expressions expressions Resource negative experiences with past some positive experiences with past good experiences with past mining, mining or resource development, mining, better experience with social accrued benefits from social contract & Development poor social contract & contract & environmental measures environmental measures History environmental measures little or no support/respect for essential and basic support/respect high support and respect for national national and local institutions for national and local institutions and local institutions Leaders & little or no support afforded to essential and basic support afforded high level of support and acknowledgment leaders and the professions to leaders and the professions of leaders and the professions Professions Corporate little or no acknowledgment acknowledgment & some acceptance high level of acceptance of corporate of corporate image, credibility of corporate image, credibility & credibility, image & profile Image & & profile profile Credibility Tolerance little or no societal tolerance or basic tolerance & acceptance of acceptance of foreign investment foreign investment of Foreign Investment Socio-Cultural Environment Conditioning Variable Attributes Poor, Low=0 Expected=5 Superior, High=10 History Religion Institutions high acceptance of foreign investment 6.0 4.5 7.5 Canada 25% 50% 25% Russia 67% 27% 6% Indonesia 27% 45% 28%

9. Representation low or poor level of basic and essential high level of representation and by Population representation, suppressed representation, democratic enhanced democratic freedoms & democratic freedoms freedoms & processes processes Resource ownership highly uncertain, newer, best mining practices modern mining code linked with Legislation & older mining code, uncertain driven legislation & economic, environmental and societal Regulation permitting process permitting process, ownership policy and best practices, highly regulations defined favorable ownership regulations Business tax & royalty driven regulation, some tax and royalty tax/royalty role fully balanced with Environment shareholder ransom, restrictions incentives, shareholder incentives, full shareholder & global on profit repatriation acknowledgment, flexibility for business case acknowledgment profit repatriation little commitment to improving, basic commitment to improving high level of commitment to improving democratizing public policy & democratizing public policy & democratizing public policy design design & execution design & execution and execution poor relations with neighboring better & improving relations high level of interaction and relations countries and international with neighboring countries and with neighbors & international community international community community fragmented electoral processes, essential electoral processes, long periods of stable responsible entrenched positions, improving political maturity government with consistently maturing regulatory disorder and regulatory order political & regulatory order 5.5 7.5 70% 10% 34% 2% 44% 19% Political Climate Conditioning Variable Attributes Low, Poor=0 Expected=5 Superior, High=10 Public Policy Foreign Policy Stability 3.0 Canada 20% Russia 64% Indonesia 37%

10. Probability Assessments For a direct schedule variable: operating days P10 Exp. P90 270 300 330 For a direct cost variable: material & equipment costs (US$mm) P10 Exp P90 65 85 95 For a direct schedule variable: Exploration/AFE duration (mo) Conditioned by Socio-culture Environment: P10 ExpP90 Superior 9 15 36 Expected 18 36 54 Poor 24 40 60 For a direct cost variable Royalties (% on revenue) Conditioned by Political Climate: P10Exp P90 Superior 4.0 4.8 5.5 Expected 5.5 6.5 7.5 Poor 6.5 8.5 9.5

11. Expected Value * The accumulated probability distribution indicates the range of uncertainty in the results. Each point on the curve is a result from a single Monte Carlo trial. 90% Note: 1. The expected value represents the average value of all the trials. 2. The 10/90 range represents the uncertainty, the flatter the curve, the more uncertainty. 3. The curve below expected value indicates upside opportunity, the portion above shows the downside risk. 50% Probability Downside Risk Upside Opportunity 10% 10/90 Range X axis = Capital Cost and Schedule

12. NPV Country Case Comparison 100 90 80 70 Canada EV = 147 $MM 60 Probability 50 Russia EV = -415 $MM 40 Indonesia EV = 8 $MM 30 20 10 0 -1500 -1000 -500 0 500 1000 1500 $MM NPV @ 12%

13. The Tornado Diagram highlights the key drivers for the option & identifies areas to focus mitigation efforts to ensure success $MM NPV @ 12% -100 0 100 200 300 400 Political Climate Poor Superior Daily Production - tons/day 25000 34000 Socio-Cultural Environment Poor Superior Zn Price - US$/lb 0.39 0.87 Au Grade - oz/ton 0.04 0.07 Cu Price - US$/lb 0.65 1.25 Ag Price - US$/troy oz 4.5 11.36 Environmental Performance Poor Superior Au Price - US$/troy oz 275 405 Ag Grade - oz/ton 0.9 1.8 Zn Recovery Rate 0.62 0.81 Zn Grade - % 1.8 2.3 Chemical Costs - US$MM 50 20 Ramp-up Duration - Months 36 9 Cu Recovery Rate 0.72 0.9 EV = 129 $MM NPV Canadian Case

14. The Step Diagram Identifies the Variances from the Base Plan Canada EV = 147 $MM 200 100 Indonesia EV = 8 $MM 0 $MM NPV @ 12% -100 -200 -300 Russia EV = -415 $MM -400 -500 Environmental Performance Socio-Cultural Environment Daily Production Political Climate Operating Days

15. Cumulative Cashflow 1000 Indonesia Payout EV = 2014 Canada Payout EV = 2011 500 $MM 0 -500 -1000 2000 2005 2010 2015 Year Russia Payout EV = Never

16. A Risk & Decision Analysis should be conducted early in the project planning cycle because... • The process identifies opportunities and issues, and allows early • identification and quantification of mitigated solutions. • The process tests the effectiveness of the project configuration • and assumptions, and identifies areas which need attention. • Early design changes are easier and less expensive to implement. • The process quantifies and compares all project options and • eliminates non-feasible ones. • The analysis identifies the project base data and facilitates open • information across the project team. It sets a baseline so that • changes can be monitored and reconciled. • Potential risk mitigation actions are identified early enough to • identify the R&D that may be needed to mitigate a downside • risk or capture an upside opportunity.

17. In each case, risk analysis has caused the project plans to improve: • Sable Gas Project developed a proactive strategy to mitigate a potential schedule delay from regulatory • uncertainty. They updated the results five times to monitor value over the life of the project. • Syncrude delayed upgrader expansion plans because of improved understanding between experts from the • risk analysis.Adopted a strategic R&D program based on the long term decision map. • Corridor Pipeline and Shell used the risk analysis to set contingency levels used in an incentive formula. • Corridor planned the project using risk analysis to mitigate a serious schedule concern on the integrated • start-up for the project. • Suncor and Syncrude used the process to negotiate realistic incentives with Alliance partners on their • major capital expansions. • Calgary Northwest LRT team avoided embarrassment using a schedule mitigation plan developed • from the risk analysis. • PanCanadian at Weyburn shared the model with SEM and WIO for consistency of analysis by all • stakeholders. Rescheduled Weyburn project to capture benefits of the fiscal terms analysis and negotiations. • Optimized facility sizes to counterfeedstock cost uncertainty.