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Business risks facing mining and metals 2011 - 2012 - 5. Capital project execution - EY - Global

Business risks facing mining and metals 2011 - 2012

5. Capital project execution

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“With expenditure on current projects surpassing the annual gross domestic product (GDP) of some countries, small schedule delays or cost increases, coupled with fluctuating commodity prices, are now materially impacting the financial performance of organizations involved in their execution.”Loretta Hudson, Executive Director, Advisory, EY

Summary: Managing the complexity of major capital projects in today’s mining and metals landscape has never been more challenging or critical. Global demand for commodities continues to drive substantial capital investment within the sector.

Capital project execution, which was not deemed a major risk a year ago, now sits in the middle of our list of top ten risks in 2011 and beyond. As the global economy has continued to recover, a large number of new mining projects, expansions and restarts have been virtually simultaneously announced.

The projects are often calling on the same resources to be developed. Upstream metals and mining projects comprise a significant percentage of company spend and require particular focus on budgets, schedules and execution. These issues alone, if managed poorly, can be the cause of dramatic losses in project value.

As a consequence, tight management and execution of major capital project plans in today’s mining and metals landscape of a scarcity of inputs has become more imperative than ever. Addressing risks surrounding the construction of mining projects is also critical and many miners have seen cost escalations that have forced them to defer, cancel or suffer the costs of project delays &/or overruns.

Some examples of this are the Ambatovy nickel project in Madagascar where costs were estimated to have risen from US$3.3b to US$4.5b, and the Karara iron ore project where costs increased by 20% due to cost escalations and scope.

Steps mining and metals companies can take to respond to this risk:
  • Implementing an effective risk management process where there is a clear line of sight between project, portfolio and strategic risk management such that objectives are supported by appropriate tactics that address all potential project threats.
  • Rigorous portfolio management and greater scrutiny around project selection, prioritization and management is vital.
  • Operationalizing knowledge management through incorporating learnings, technological advancements and benchmarks into all procedures and databases.

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