Merit and mine cost over-runs run rampant

In my email this past week was a missive from the news-editor of Mining.com.  He passed on a letter sent to him for possible publication.  I repeat the entire letter below.  It has the edge I like.  It has the honesty of an old man about to retire: I respect that.  It has the frustration of change; and we all know the feeling.  So here it is.  It was written by Jay Collins, P. Eng., President,  Merit Consultants International Inc.

Given the relatively recent dramatic increase in the number of mine development projects where capital costs are spiraling upwards from their study numbers at a greater rate than at any time I can recall, my 30 + years experience in the development side of the industry worldwide leads me to try to better understand and identify the serious and pervasive causes that need to be identified and addressed.

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 anyone who has known me in this business must surely know that I have never been one to not have an opinion that is freely shared with anyone who wants to listen. It is not always one that people want to hear, but it is intended to be constructive and well meaning. Also, our company – Merit Consultants International Inc., or just Merit – 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 artificially raised so high on capital cost expectations that financiers and developers are becoming too anxious to move forward.

So, where are things going wrong with capital costs?

To a large degree, every one of us involved in the mining industry is at fault for allowing costs to spiral from concept to completion. Whether it is the allure of high priced commodities, the deep well of available developments, the desire to rush into operations too fast, the financiers who demand well-meaning layer upon layer of cost and schedule risk protection, the apparent increasing costs of equipment and materials, labour issues, the inexperienced and the lack of effective and knowledgeable management – all contribute to a degree. So where do we start with a self-examination?

In a very 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 their dramatically escalating capital costs and 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 constructed at one third of the costs for a project that was more complex. It makes no sense – and that is our problem. How do we get things right when these kinds of attitudes prevail?

So where does the ultimate responsibility lay? Well, with the development team of course. A blind devotion to ignoring essential planning, a lack of developmental experience, and a race to get ahead of others as a recognized major. Three major reasons why things get out of control. There are other reasons, not least of which are things like escalation and in-country government actions, but even a combination of the other reasons are unlikely to account for the majority of cost and schedule negativity we are seeing these days on the basic framework of direct and indirect elements.

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 design and project leadership, for control over their deliverables, for cost and scheduling control using the sophisticated project management systems they have been developing over the last 20 years, and for knowledge that should exhibit the last forty years of their experience. It should not be news that this now seems to be essentially missing. Those with the experience prefer to be fishing. They have put their time in. The mentoring and oversight is starting to disappear – and rapidly so. Less and less shirt sleeve rolling and getting down to the details. Little, or no, cost trend forecasting at the design level. No more design correlation, constructability sessions and checking. Technical arrogance has gotten in the way of dutiful participation. Owners that are more attuned to shareholders and stock market attention than just getting on and doing it right, are essentially ignored by the technocrats – and seem quite content with that, until the proverbial s*** hits the fan and suddenly the project is out of control. Costs just overrun with little or no forecasting; and schedule? Well, it will be what it will be – won’t it?

So where to 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 – and 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 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.

Naive? Yes, to some degree but it meant success in the past. Take the indirects 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. The good news is always easy to take, but the worse news must be managed. Insist and insist again on transparency, ability, simplicity and dutifully maintaining the philosophy of the building blocks developed as the studies were concluded. Follow the plan and take anyone to task that is reluctant to do so. Remember safety, cost, schedule – and environment! These are our 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 appeared to have happened on Baja’s Boleo Project, there has to be more personal accounting, responsibility and understanding of what is happening. Where was the forecasting? Where was the experience and where was the management? We will likely never publicly know. When things get tough, when answers are needed, people just leave. That happens all the time. No accountability and no stake in their projects. So, let’s give the stakeholders a stake – a real stake that is worth fighting for. Not just a job, but a meaty added enticement – they can always walk around the corner for another job. 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 little or no vested interest in their company, hold their options and release them based on project development performance and have them 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. 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; where there 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, Galore Creek, Donlin Creek, Conga, El Cobre, Mount Milligan, Tasiast, Boleo and all the others out there that have spiraling capital costs and eroded schedules take care. Remember that the devil is in the details and the details are in the management.