Like an episode of Air Crash Investigation on National...

Like an episode of Air Crash Investigation on National Geographic Channel we are now “Going Back Into The Heart Of The Disaster”. Before we start let’s set some rules. 1) We will assume for now that everything reported by RED is true and accurate, 2) we will use all information, including data from internal and external sources that may have influenced the outcome and 3) we will use only logic and not emotion to derive probable scenarios for the events leading up to the company’s current situation.

We need to work backwards in time from the most recent announcements of RED’s to the time that the mine (and more particularly the tailings dam) was designed. What do we know as reported by RED?:

1) The time for “land acquisition, permitting and construction (for a new tailings dam), allowing for the wet season, exceeds 12 months” 13/06/13

2) “The short term solution utilises .. geotextile bags”, and the “medium term solution is to thicken and filter the tailings” 13/06/13

3) “The focus is now directed towards the construction of a new tailings dam”. And “a study investigating the possibility of thickening and filtering tailings to make a dry tailings product able to be stacked”, 27/05/13

4) “consultants have also reviewed the opportunity to utilise, on a temporary basis, the secondary tailings dam which is currently being decommissioned in favour of establishing an expanded stockpile facility. Whilst technically feasible, the modified engineering parameters now proposed would lead to limited capacity only. Accordingly, the focus is now directed towards the construction of a brand new tailings dam. The location was selected several months ago” 13/05/13

5) “An immediate consequence of the higher materials movement is the limited permanent capacity for ore on the ROM pad stockpile. Actions have been taken to double the capacity in the short term by placing waste to form a base in a part of the secondary and decommissioned tailings dam adjacent to the plant.” 30/04/13

6) “Milling operations were suspended, as a precaution on 24 April 2013 following early detection of subsidence on a minor portion of the external wall of the tailings dam” “Ore placement on the recently extended ROM pad continues” 30/04/13

7) RED “run the mill at a sustained throughput approaching the nominal (?) design of 3,000 tonnes per day” between April 8-13 as reported on 15/04/13.

8) “The company has also engaged the services of GR Engineering… to conduct a metallurgical audit and assist with process improvements” And “Galeo Equipment and Mining Company (the new additional mining contractor has completed its first mobilisation of equipment to site” 13/03/13

9) “My job as Managing Director is to identify those issues which could impinge on production whether those issues are a few months out or years out so that the operations team can deliver the appropriate amount of ore to the mill on a consistent basis.” “The current funding (the $25 million loan recently drawn down from Credit Suisse) will be used to address the improvements required at Siana and quickly turn it into a cash positive operation, but it will also go some way to contributing to our medium to longer term plans for the Company.” 18/02/13

10) “Credit Suisse conducted extensive due diligence, including reviews by well-known and respected mineral consultants, Behre Dolbear” 29/01/13

The excerpts from the RED announcements above are our ‘cockpit voice recorder’ that records that last messages before the tailings dam disaster. There’s not much else except for a lot of annoying ‘white noise’ and self-justifications in the announcements in the last 6 months or so and what has been reported leaves more questions than provides answers. Now let’s look at the tailings dam design information if we can find it! But before we do, the statements reported by RED above need to be considered:

1) If the new tailings dam to be constructed will take more than 12 months, how much capacity was in the old tailings dam before it failed?

2) If geotextile tubes are the short term solution, why were they not mentioned in earlier reports and installed immediately since they seem to be a readily available product?

3) If the location of the new tailings dam was selected several months ago (as reported on 13/05/13) does that mean it was chosen before or after the new MD arrived? Must be close to the exact date with ‘several’ meaning 3 or more?

4) How big was the ‘secondary’ tailings dam that was decommissioned in favour of a larger ROM pad in relation to the tailings dam that failed?

5) What influence did GR Engineering have in the decisions made to decommission the ‘secondary’ tailings dam and create a bigger ROM pad and what experience do they have in the Philippines? (Remember they were the consulting group that completed the Phillips River Feasibility Study that was never developed)

6) What was the back-up to the tailings dam that failed and what was the long-term plan 6 and 12 months ago?

7) What was the designed input rate of tailings to the tailings dam that failed?

8) If the extension of the ROM pad caused the decommissioning of the ‘secondary’ tailings dam what were the financial improvements gained as opposed to placing the ore in an area close, but adjacent to, the smaller ROM pad?

9) What influence did cash from a new $25 million loan have on the planning of the mine both short and long term?

10) Did a respected group of mineral consultants like Behre Dolbear provide any pertinent advice when they inspected the mine on behalf of the bank?

Questions, questions… let’s see if we can answer any of them!

The best reference for clues on the tailings dam design is on the cover of the RED 2008 annual report. The drawing must be based on a preliminary design since descriptions of the feasibility in 2008 and 2009 indicate that GHD Engineering was still completing the final tailings dam design. If you overlay this design drawing on the latest Google Earth satellite photo the match is over 99% perfect (go to 9°32'33"N 125°34'45"E in Google Earth and use the 16/10/12 photo). The only difference I can see is a few small buildings. The plant, roads, most of the buildings, the open pit, the waste rock dump, drainage canals AND the tailings dams are an exact geographical match. The problem is that the ‘secondary’ tailings dam reported by RED as having been decommissioned is actually much LARGER than the dam that failed (at least double the size) and clearly has never been used. Strike 1. (Incidentally the photo shows the pit is completely dry, and with no silt as reported by RED in Oct 2012).

The size of the two tailings dams in the design of 2008-2009 must therefore match the amount of material expected to be placed in them. The Open Pit Reserve reported over this period was +/-3.1 million tonnes which also matches the Mine Extraction Plan reported in 2009. Since RED report on several occasions that the tailings derived from underground ore will be put back underground as a paste we can assume the tailings dams have a capacity a little more than the Extraction Plan for the open pit – say 3.2 to 3.5 million tonnes. A measurement of the smaller (failed) tailings dam shows it is about a half the area of the decommissioned dam then the capacity of the dam that failed in April 2013 must be about 1.1 million tonnes. Given RED have reported about 420,000 tonnes of production to date, the old (failed) dam must have had only about 7 months (at 3,000t/day) or 11 months (at 2,000t/day) of life left in it anyway. We can therefore conclude that the ‘secondary’ tailings dam was actually the primary tailings dam and it must have been designed for approximately 25 months of tailings storage at 3,000t/day. Very naughty RED! You have been caught out telling a ‘Porky Pie’! Strike 2!

Now, help me if my logic is wrong… but why would anyone decommission a tailings dam that had over two years of future use (let alone the back-up value) to extend a ROM pad when a new tailings dam is going to take at LEAST 12 months for the “land acquisition, permitting and construction”. Furthermore, the capacity of the old (failed) tailings dam has less life (7-11 months) than the ESTIMATE for constructing a new dam (+12 months). Strike 3!

In the 2009 Annual Report, RED provide a production schedule that indicates that the 3,000t/day production rate was not contemplated until year 4 with production rates in the first three years between 1,700-2,500t/day. What’s the difference between then and now? The POG. At higher gold prices the cut-off grade will be lower and more tonnes will be available over a longer mine life but at a reduced grade. This meant that RED would need more tailings dam capacity some time from about two years from now since the larger open pit and expanded Reserve tonnage would postpone the need to go underground (and be able to return the tailings underground as a paste). This would have been known to RED during the last couple of years since they permitted the mine, so the requirement for a new dam is probably not a new concept. Since they contemplated returning the tailings underground as a cemented paste, they may have considered dry stacking the tailings to alleviate the extra tailings disposal requirement since they are one and the same technically as reported by RED recently.

Finally, what happened to cause the smaller tailings dam to fail? IMO it is extremely unlikely that the design by GHD Engineering is at fault. One look at their project list tells you they have many successful designs under their belt. I suspect we shouldn’t be blaming the tools but the operators (and possibly what additional pressures they were under by management). The most up-to-date satellite photo taken at the site on 5/05/13 (not available on Google Earth yet but a degraded version can be found on the GeoEye satellite providers sites) shows that RED have trashed the northern third of the decommissioned tailings dam and constructed a pond on the north-western portion of the remainder. It also shows the partly constructed bund wall described by RED to mitigate the tailings dam wall failure. All these earthworks could not have been completed in nine days since the dam wall failure, so it is apparent the decommissioning of the ‘secondary’ tailings dam was done considerably earlier. Ahhh!

Now we can go deep into the heart of the disaster and explain what happened:

Four years from Disaster: RED completes the feasibility study on the basis of a modest open pit and additional underground mine for a ten year mine life. The tailings dams design has been completed by the experienced engineering firm GHD Engineering. The POG rises during the period while RED permits the mine.

Two years from Disaster: The mine site suffers the worse weather conditions on record which delays the construction of the mine and the eventual first production. There is (reasonably) some disappointment amongst the RED shareholders.

Ten months from Disaster: Further delays are caused by the large amount silt in the base of the pit and water issues in the same. The silt is fully removed over the next 5 months and the pit completely drained. The SP drops ahead of the indices. Board and management are under pressure from irate shareholders.

Three months from Disaster: A new MD is appointed and the company is re-financed with a $25million loan. A ‘new’ tailings dam location is selected on the basis that the land will be quickly acquired and the design and construct will be completed (presumably) within 6 months. The larger of the two tailings dams in the feasibility study is decommissioned to make way for a larger ROM pad. (Oh this mining business is so easy!) With only 10 months of tailings capacity in the smaller dam the company is now locked into a development strategy, $30+ million of debt and with no room for failure. The Board of RED obviously agrees with this strategy.

Two months from Disaster: Consultant engineers are appointed that were involved in a previous venture related to one of the Board members and numerous small capital projects are set in motion at the site with the availability of the new funds. Additional financial commitments are taken on with the contracting of a new earthmoving fleet. The treasury dwindles. The expanded ROM pad is completed and the northern half of the decommissioned dam is now unserviceable. There’s no turning back now and the current strategy is blind to failure.

Two weeks from Disaster: The throughput rate of the mill is cranked up to the maximum contemplated by the design and well before the feasibility plan envisaged. Pressure is brought to bear on the operators to push as much tailings into the smaller tailings dam.

Seconds from Disaster: The tailings dam wall subsides and there is no possibility to redirect the tails output to the decommissioned dam. Nothing can be done in the short term. The immediate task is to mitigate any further failure and this work is completed successfully for a preliminary cost in excess of $3 million of shareholders’ funds.

Three weeks after Disaster: “Whilst technically feasible to use” the larger (supposedly secondary) tailings dam, the company digs its heels in and tries to justify its decision not to use it. The use of a short-term geotextile tube solution is not contemplated until a later date. Senior management take vacations while all hell breaks loose at the site.

Four weeks after Disaster: The Company’s “focus” is the construction of a new tailings dam but they are oblivious to the time the project will take to complete. Again the company reinforces its decision to have decommissioned the ‘secondary’ tailings dam.

Eight weeks after Disaster: The majority of the workforce is terminated totalling many hundred and any chance to recover the situation is lost. Debts mount-up. The Company admits the “brand new” tailings dam will take at least 12 months to complete (probably 18+ months in reality). Finally the Company suggests a short-term and medium-term solution to restart the mine that was available to them from the very start but has since gone silent on the proposal. The final nail in this “air crash” coffin is the receipt of a Cease and Desist Order from the Philippines Mines Department. &*$%!

The final comment? They were blind to risk and dug their heels in when they should have been open to any ideas to fix the situation. Many of the justifications in RED’s reports were probably directed at the Board and not the shareholders and are relatively lame. What do you expect when the Board only holds 0.035% of the stock and has never had a mine operate for more than a few years amongst them? Shame! Makes me want to ……