Projected cost variances for selected over-running capital infrastructure projects
Note: Percentage variances between market-advised cost projections and original estimates for selected capital infrastructure projects
Source: Publicly available material and Ernst & Young analysis
“Mining and metals companies that best manage project execution risk will derive great competitive advantage.” Paul Mitchell, Advisory, Ernst & Young
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.
In 2011, the top five diversified mining companies are set to advance over US$180b of projects1, with some individual projects exceeding US$10b (“mega” projects). This increased demand has placed additional pressure on already constrained owners and contractors.
The near simultaneous commitment to new capital projects immediately after the global financial crisis in 2008/2009 meant that capital project decisions were not factoring in many of the capacity constraints on project execution.
The Reserve Bank of Australia in its 7 June 2011 policy meeting noted that “capacity constraints would result in delays or cancellation of some of the projects in the earlier stages of planning”. The ratings agency , Fitch, expects funding to become more difficult as projects continue to face cost increases and timetable over-runs.
Capital expenditure
Project delivery track-record and expectations are impacting companies’ market value more than ever. Capital expenditure and associated project delivery is a key topic in many of today’s financial and resource publications, yet many owners and contractors alike continue to be challenged by the strategic and /or tactical issues of project execution.
Capital 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 and hence enterprise value.
Capital project execution, which was not deemed a major risk a year ago, ranked as the fifth risk in our Business risks facing mining and metals 2011 –12 report. Addressing risks surrounding the delivery of mining projects is critical with many companies having incurred cost escalations that have forced them to defer, cancel or revise project business cases and execution strategies.
Of the companies that reported project overruns publicly (between October 2010 and March 2011), the average overrun was about 71% of the original project cost estimate. These are not restricted to any one geography or commodity but seem to be fairly evenly distributed. This would be indicative of the overall and mutual challenges facing many of the large projects.
After accounting for outlying data points, analysis results clearly indicate the consequences of underperforming projects and the materiality of this risk to corporations.
In this context of cost and schedule pressure, mining and metals companies delivering a portfolio of capital projects face a growing level of execution complexity and risk.
High performing mining and metals companies are responding to these challenges with a focus on the integrity of stage-gated delivery and early intervention, in addition to deployment of robust project controls and maturity of project, program and portfolio delivery practices.
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1Ernst & Young analysis from company reports and publicly available news releases
