why feasibility studies fail (melbourne_2013_02_presentation)

Why Feasibility Studies FAIL

Peter McCarthy

AMC Consultants AusIMM Melbourne Branch, 2013 1

AusIMM Melbourne Branch, 2013 2

Content

What is a Feasibility Study?

What is failure?

Data on failures

Failure rate hasn’t improved

Why they fail

How to address the problem


Types of Studies

After Bullock 2011


After Bullock 2011

Purported Accuracy of Capital Estimates


Failure

• The capital cost is higher than expected

• The operating cost is higher than expected

• The recovered grade is lower than expected

• Sales revenue is lower than expected

• It takes longer to build and ramp up than expected

• Initial performance cannot be sustained, though It

may take several years for the failure to become

evident.


Documented Capital Overruns and Underruns

After Bullock 2011


In the 1970s, a study for the World Bank showed

that in the first year of operation after

commissioning, 60% of the mines and 70% of the

treatment plants surveyed achieved a production

rate of less than 70% of design capacity.

Startup and Subsequent Performance


In the 1980s, a study of 35 Australian gold mines

found that 68% failed to deliver the planned head

grade (Burmeister, 1988)

A similar review of nearly 50 North American

projects showed that only 10% achieved their

commercial aims with 38% failing within about one

year (Harquail, 1991).



A study of the start-up performance of nine

Australian underground base metal mines found

that only 50% achieved design throughput by Year

3 and 25% never achieved it at all.


0%

20%

40%

60%

80%

100%

120%

1 2 3 4 5 6 7 8 9

Year Since Start Up

Mil

l T

hro

ug

hp

ut

(% o

f D

esig

n)

Base Metal Mine Start-ups

McCarthy and Ward 1999


A US study comparing the final feasibility

study production rate with the average

sustained production rate from sixty steeply-

dipping tabular deposits found that 35% of

the mines did not achieve their planned

production rate.


Tatman 2001


A 2003 study of 41 underground mines showed that

60% of ore reserve estimates fell outside the

expected range, with some very seriously in error

Ore Reserves

Tatman 2003


Some of the Failures from 2004 Study (the unlucky 25%)

Geology

• Bottle Creek

• Disraeli

• Horn Island

• Rothsay

• Second Fortune

• Timbarra

• White Range

Geotechnical

• Golden Cross

• Big Bell

• Mount Todd

Metallurgical

• Mineral Hill

A fifteen year study of 56

mines for which feasibility

studies were announced in

1988-89.

McCarthy 2004


0 100 200 300 400 500

Kundana

Macraes

Hill 50

Wiluna

Martha

Plutonic

Granites

Boddington

Mt Leyshon

Koz Per annum

Actual

Plan

Some Good Outcomes (the lucky 20%) from the 2004 study

McCarthy 2004


Area of Problem Frequency

Geology, resource and reserve estimation 17%

Geotechnical analysis 9%

Mine design and scheduling 32%

Mining equipment selection 4%

Metallurgical test work, sampling and scale-up 15%

Process plant equipment design and selection 12%

Cost estimation 7%

Hydrology 4%

Three key areas of concern:

Where are things going wrong?

McCarthy 2003


Mine design & scheduling

Over optimistic ramp-up schedules

Learning-curve not considered

Over optimistic production schedules

Geology, resources & reserves estimation

Inadequate attention to local variability

Statistics & modelling override common sense.

Metallurgical test-work, sampling and scale up

Metallurgical domains within the orebody not

understood.

Testing is done on unrepresentative composites

Failure to identify process contaminants

Inability to handle ore types as per mining schedule

Process water chemistry differs with lab.

Where are things going wrong? Some detail


Example – poor planning in platinum

• Long, bumpy bus ride in and out for operations staff every day

• Global geostats study but little drilling in initial production areas

• Water powered drills >> high maintenance >> flooding on levels >>

delays and equipment damage

• Jumbo development >> oversize waste rock doesn’t fit through

conveyor grizzlies

• Manual rockbolt installation >> rockfalls and fatalities

• Inadequate training

• Unrealistic ramp up schedules

• Timing mismatch between development of mine and metallurgical

complex

• Technically challenging metallurgical process in a backward social

setting

• One photocopier for +2000 employees!

• Free alcohol for consultants and senior staff in site camp!


What is the problem?

Beyond mining studies…Other factors

T Things often change between

study and implementation


Post Construction Management

Construction planning

• The Sumatran stuff up

Operations

• The Kambalda slasher

• The Cobar robber

• The Austrian encroacher


Feasibility studies

Where are things going wrong? Root causes

Inadequate Resources

• time (and artificial deadlines)

• budget

• availability of skilled personnel for studies and for construction

management

Human factors

• consulting firms are dependent on clients

• the innate drive to make it work, when it doesn’t (corporate

momentum)

• pressure to make it work, when it doesn’t (stretch targets)

• Structure and timing of bonuses to executives, consultants and

bankers

• Confirmation bias


No apparent difference between:

• Junior or major company

• Large of small projects

• Location

• In-house or “blue chip” consultants

Who gets it wrong?

The average operating company:

• often has limited experience in developing projects

• often has cut back or eliminated corporate engineering staffs

• often does not involve the EPCM contractor from early concept through

start-up even though EPCM contractor has typically been involved in the

construction of more mines than the owners

Gypton, E&MJ, 2002


Production Rate Realistic?


Head Grade and Mining Rate

Kambalda Nickel Mines


0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

He

ad G

rad

e (

% C

u)

Pro

du

ctio

n R

ate

(tp

a)

Year

Head Grade and Mining Rate

CSA Mine, Cobar


• Owners employees

• financial fees

• interest charges

• Insurances

• legal and consulting fees

Don’t Forget Owners’ Costs can be Huge


Contingency Allowances

After Bullock 2011


-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

- 100.0 200.0 300.0 400.0 500.0

Total Work (Mt.km)

To

tal C

ost

(M$

)Site A

Site B

Benchmark everything possible

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

- 1,000 2,000 3,000 4,000 5,000 6,000

Total Capacity (t)

To

tal C

ost

(M$

)

Site A

Site B Trucking Fleet Fuel Cost ($/t ore)

0.00

0.29

0.78

0.28

0.10

0.53

1.00

0.00

0.25

0.50

0.75

1.00

1.25

C B D A E F G L M J H K I

Mine

Fu

el

Co

st

($/t

ore

)

Decline Shaft Combination


Increased scrutiny: Peer review, audit & due diligence

More benchmarking

Specific industry guidelines on feasibility studies?

Allocate more resources to feasibility studies

Buy the new AusIMM Cost Estimation Handbook!!

Key areas for change

“Why has such a tremendous effort been put forth to

greatly improve the quality and standards of the

resource and reserve classifications, but with little or

no effort to improve the detailed definition of that which

determines whether or not a resource will move from a

resource to a reserve classification”? (R Bullock, 2011)


• Scope of work must be “is it feasible?” and not “make

it feasible”. Sometimes the answer is “no”.

• Just because the CEO announces numbers doesn’t

mean they are real (in large and small companies)

• Include a formal process of risk assessment

• Peer review by a specialist team that has no interest

in the project outcome

• Perhaps employ a dedicated grinch*

• Independent audit of data gathering and analysis for

each step in the study process

Key areas for change

* A cold and heartless furry green recluse (Dr Suess)

http://www.google.com.au/url?sa=i&rct=j&q=grinch&source=images&cd=&docid=ccgLsM3bK7SdFM&tbnid=7I31rvPEKRHC9M:&ved=0CAUQjRw&url=http://www.philnel.com/2010/12/20/grinch/&ei=hSgYUeqHFpCWmQXBhIGQAg&bvm=bv.42080656,d.aGc&psig=AFQjCNGon1Y1IkxluDBGFlUO1VluqzQ_cA&ust=1360624086813731


“Not Feasible”

• Is a function of orebody, location and market

conditions

• Does not mean the study team are

nincompoops

• Does not mean the study budget was wasted

• Is better learned from a study than from

experience

Thank You


References

Bullock RL Accuracy of feasibility study evaluations would improve accountability Mining Engineering April 2011

Burmeister B.B., From Resource to Reality: A Critical Review of the Achievements of New Australian Gold Mining Projects

During the Period January 1983 to September 1987, Macquarie University, 1988.

Gypton, C, 2002, How Have We Done? Engineering and Mining Journal, 203, p 40-46

Harquail D., 1991. Investing in Junior Mining Companies. Proceedings of the 6th Mineral Economics Symposium of CIM.

CIM Montreal Canada.

Ward D.J. and McCarthy P.L. 1999 Startup Performance of New Base Metal Projects in Adding Value to the Carpentaria

Mineral Province, Mt Isa, Qld, Australian Journal of Mining, April 1999.

McCarthy 2003 Managing technical risk for mine feasibility studies in Mining Risk Management , The AusIMM ISBN 978-1-

920806-00-2

McCarthy 2004 New Mining Projects – Expectations and Outcomes, Pacrim 2004

Berry and McCarthy Cause and effect – unravelling the significance and consequences of geological inputs into ore

reserves and feasibility studies 6th International Mining Geology Conference Darwin, Australia - August 2006

Tatman C.R. 2001 Production Rate Selection for Steeply Dipping Tabular Deposits Mining Engineering October 2001 pp.

62-64

Tatman C.R. 2003 Ore Reserve Accuracy pers. comm. 7 April 2003.

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