Commentary: Cost overruns on capital development: An ever-growing concern

There has been a dramatic increase in the number of mine development projects where capital costs are spiraling upwards from their study numbers than at any time I can recall in my 30+ years experience in the development side of the industry...

There has been a dramatic increase in the number of mine development projects where capital costs are spiraling upwards from their study numbers than at any time I can recall in my 30+ years experience in the development side of the industry worldwide. It’s led me to try to better identify and understand the serious and pervasive causes of the problem.

It is not without a great deal of consideration that I commit these thoughts to paper. The easy way for me is to ignore the trend and simply move on. Retirement from permanent practice is not that far away and it would be far less exasperating to simply let the industry handle the situation.

However, I am not that kind of a person and am still keen to share my opinion freely with anyone in the business who wants to listen.

It is not always an opinion that people want to hear, but it is intended to be constructive and well-meaning. Also, our company, Merit Consultants International, has a long term vested interest in seeing to it that projects that are supposed to be financially viable at feasibility do move forward. We are also deeply concerned that, in our opinion, the bar is being raised so high on capital cost expectations that financiers and developers are becoming too hesitant to move forward.

So, what's going wrong with capital costs?

To a large degree, almost everyone involved in the mining industry is at fault for allowing costs to spiral from concept to completion.

Many factors contribute: the allure of high priced commodities; the deep well of available developments; the desire to rush into operations too fast; financiers demanding well-meaning layer upon layer of cost and schedule risk protection; the apparent increasing costs of equipment and materials; labour issues; and the lack of effective, knowledgeable and experienced management.

Where do we start in our self-examination?

In a recent interesting but naive and self-serving response to our cautionary note as an industry observer, one mine developer said they were quite “happy with how things were going” despite dramatically escalating capital costs and an elongating schedule. This, despite an almost two-fold increase in their capital costs at the 30% completion mark, a dramatically sinking share price, and an ever-extending timeline bound to bring on another round of cost increases. And all this in a location where only 12 years ago the same size facility was built at one third of the costs for a project that was more complex.

How do we get things right when this kind of attitude prevails?

Moreover, where does the ultimate responsibility lay? Well, with the development team, of course.

There are three major reasons why things get out of control: a blind devotion to ignoring essential planning, a lack of developmental experience, and a race to get ahead of others as a recognized major.

There are other reasons, not least of which are things like equipment cost escalation, exchange rates and in-country government actions.

It has been well acknowledged by industry that there is a sad lacking of development resources available. That means a lack of experienced people in the engineering industry in particular. That is also true of the development companies themselves as well as in construction but, in our opinion, to a far lesser extent.

Owners look to the engineering groups for many skills: design and project leadership; control over their deliverables; cost and scheduling control using the sophisticated project management systems they have been developing over the last 20 years; and knowledge that should reflect the last 40 years of their experience.

It should not be news that this last skill now seems to be essentially missing. Those with the experience have put their time in and prefer to be fishing. The mentoring and oversight is starting to disappear, and rapidly. There is less and less shirt sleeve rolling and getting down to the details, and little or no cost trend forecasting at the design level.

That means no more design correlation, constructability sessions and checking.

Technical arrogance has also gotten in the way of dutiful participation. Project owners that are more attuned to shareholders and stock market attention than just getting on and doing it right, are essentially ignored by the project technical personnel.

Owners seem quite content with that approach until the proverbial s**t hits the fan and suddenly the project is out of control. Costs just overrun with little or no forecasting. And the schedule? Well, it will be what it will be – won’t it?

So where do we go from here?

Developers need to decrease their heavy focus on the financing, geology, socio-economics, politics, legalities, land ownership and environmental sides of the project. Leave all that to trustworthy professionals.

Go back to focusing on what the target is: successfully getting the project into operation. That means on time, on budget, and with a smooth transition into operations.

Put the MBAs to one side and get responsible people in charge at the top that have some practical experience.

Is this a naïve solution? Yes, to some degree, but in the past this approach translated into success.

We need to take the distractions away from the development team and let them focus on managing the development of the project all the way from design through construction. Implement controls that are simple and dynamic. Understand on a daily basis where the project is primarily in terms of obstacles to be overcome. Good news is always easy to take, but the worse news must be managed, so insist and insist again on transparency, ability and simplicity.

Follow the plan and take anyone to task that is reluctant to do so. Remember safety, cost, schedule and the environment — these are our four key building blocks.

As one of my best mentors in the industry used to say, “Where are we with costs? What are the critical activities? And where the hell are the deliverables?”

Even the best plans can go awry. But, unlike what appears to have happened on Baja Mining’s Boleo copper-silver project in Mexico, there has to be more personal accounting, responsibility and understanding of what is happening.

With Boleo, where was the forecasting? Where was the experience and where was the management?

We will likely never publicly know. When things get tough and answers are needed, people just leave. That happens all the time. Those exiting have no accountability and no stake in their projects.

So, let’s give the stakeholders a real stake that is worth fighting for. Not just a job, but a meaty, added enticement, since they can always walk around the corner for another job.

And not stock options — they have a history of losing value — but bonuses based on project performance and their contribution to it. Again, it’s back to basics.

For the development company executives that have had little or no vested interest in their company, owners could hold their options and release them based on project development performance and have execs contribute a part of their annual compensation to buying company stock.

In other words, create the vested interest. It is far too easy for folks to just leave when the going gets tough and pick up another job elsewhere. But they just carry their inabilities on through to the next project.

We have reached a point where potential financial backers have no idea if the price is right; where development companies cannot rely on their expensive feasibility studies; where the A-teams seem to have disappeared; where mediocrity has become the norm; where inexperience is an acceptable part of doing business; and where the learning curve never stays on an upward trend.

So, for Galore Creek, Donlin Creek, Conga, El Cobre, Mount Milligan, Tasiast, Boleo and all the other projects out there that have spiraling capital costs and eroded schedules, developers take care.

Remember that the devil is in the details and the details are in the management.

The author, Jay Collins, is a professional engineer and president of Vancouver-based Merit Consultants International.

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