Commentary: Cost overruns on capital development – a growing concern

The number of mine development projects where capital costs are spiralling upwards from their study numbers has increased more than any time I can recall in my 30-plus years of worldwide experience in the development-side of the industry. This has 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. I could ignore the trend and move on. Retirement from permanent practice is not that far away, and it would be easier to let the industry handle the situation.

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

This 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 financially viable projects at the feasibility stage 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 shoot up from concept to completion.

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

Where do we start in our self-examination?

In an interesting — but naive and self-serving — response to our cautionary note as an industry observer, one mine developer said they were “happy with how things were going,” despite an almost two-fold increase in capital costs at the 30% completion mark, a dramatically sinking share price and an extending timeline bound to bring another round of cost increases. Only 12 years ago, the same-sized facility had been built at one-third of the cost for a project that was more complex.
How do we get things right when this kind of attitude prevails?

Moreover, where does the responsibility lay? Well, it’s 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.

And there are other reasons, including equipment-cost escalation, exchange rates and in-country government actions.

The industry has acknowledged that development resources are lacking. That means a shortage of experienced people in the engineering industry, in particular. This is also true in development companies as well as in construction, but in our opinion, to a far lesser extent.

Owners look to engineering groups for many skills: design and project leadership, control over deliverables, cost and scheduling control using sophisticated project-management systems developed 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 missing. Those who have the experience have put their time in, and prefer to be fishing. The mentoring and oversight is disappearing, 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 who are more attuned to shareholders and stock-market attention than 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 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, geological, socio-economic, political, legal, land-ownership and environmental sides of the project. Leave all that to trustworthy professionals.

Go back to focusing on what the target is: 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, people who have some practical experience.

Is this a naive 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. Let them focus on managing project development from design to construction, implement controls that are simple and dynamic, and understand on a daily basis where the project is primarily in terms of obstacles to overcome.

Good news is always easy to take, but the worst 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 the 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 with 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. This happens all the time. Whoever exits has 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 companies, owners could hold their options and release them based on project-development performance, and have executives 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 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. Development companies cannot rely on their expensive feasibility studies, A-teams seem to have disappeared, mediocrity has become the norm, inexperience is an acceptable part of doing business and 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 growing capital costs and eroded schedules, developers take care.
Remember that the devil is in the details, and the details are in the management.

— Jay Collins is
a professional engineer and president of Vancouver-based Merit Consultants International. Please visit www.meritconsultants.net for more information.