Effective mining and metals capital project execution
The drivers of mining and metals project execution complexity
“With the huge expenditure on current projects, schedule delays or cost increases, coupled with fluctuating commodity prices, are now materially impacting the financial performance of organizations involved in their execution.” Claus Jensen, Advisory, EY
Delivery of predicable project results undoubtedly bestows competitive advantage and market confidence to those companies who successfully instil this discipline.
The following consistent global themes are impacting our clients:
Human capital constraints — The current human capital deficit (between supply and demand) to deliver projects is between 10% and 15% and is sufficient enough to impact project delivery schedules. This is being experienced globally on all major capital projects. With an estimated additional 86,000 workers needed by 2020 in the Australian mining industry alone2, owners and contractors alike are considering innovative ways to attract and retain project staff, to often remote areas, through strategic workforce planning.
Despite this, many are continuing to be challenged by the ability to identify 'project resources' that have the depth of experience to plan and deliver on these 'mega' projects. Consequently, many owners are placing increasing pressure and responsibilities on already constrained contractors, which in turn is creating increased execution challenges.
Accurate cost and schedule control — At a time when transparent and timely project reporting to boards and shareholders is receiving increased scrutiny, the ability of companies to accurately forecast cost and schedule completion is quickly becoming a competitive differentiator. As a result of a resource deficiency in the area of Engineering and Project Controls, many projects have suffered from ill-defined project scopes and execution plans, driving poor cost and schedule estimates.
This has a knock-on effect of cost escalations that have forced some miners to defer, cancel or suffer the costs of project delays and/or overruns. Examples include the Ambatovy nickel project in Madagascar3 where costs were estimated to have risen from US$3.3b to US$5.5b, and the Karara iron ore project where costs increased by 20% due to cost escalations and scope4.
Contractor delivery reliance and performance — Human capital constraints, compounded by the sheer scale and complexity of emerging projects, is placing increased reliance on contractors (EPC, EPCM and subcontractors) to deliver. However, the competencies, processes and systems of many contractors often fall short of those required to successfully deliver 'mega' projects.
Global program delivery consistency — Increased project complexity and/or pressure on supply chains is forcing many organizations to review their project management methodologies. In doing so, many are identifying a significant lack of standardized processes, controls and systems required to decrease contractor reliance and achieve global synergies. Instead, organizations are continuing to rely on a few 'key personnel', many of whom are approaching retirement in the coming years.
Scope growth and claims management — Many of the aforementioned factors are root causes for scope growth and resultant claims management. Notwithstanding this, many scope changes, and indeed claims, arise from poorly designed 'work break down structures' causing engineering and construction interface issues. This is often compounded by contracts with insufficient compensation and legal contingency funding to manage claims.
Access to strategic infrastructure — A company's ability to provide a product to market is not only influenced by project delivery, but also the ability of that project to 'tie into' existing infrastructure such as rail and ports. Logistical options available as a result of previous infrastructure investment by a company influences whether additional investment is required to support the development, with many organizations now realizing the benefits of prior investment into infrastructure in strategic transportation corridors.
Production ramp-up — Many projects do not deliver the expected production rates as a result of failure to consider all aspects required to deliver the product to market due to latent production issues, technology failures, logistics bottlenecks or labor market constraints. Critical production ramp-up considerations should be included in the early design phases of any major capital project.
Project economic forecasting — Failure to achieve economic forecasts as a result of misalignment between the expectations of technical and commercial functions plague many projects, often requiring issuance of revised market updates. Issues such as infrastructure access and existing facility bottlenecks are underestimated, leading to over optimistic project economic forecasts.
Financial and commercial management — The impact on project costs and schedules brought about by currency volatility and hedging risks are often overlooked. This is particularly true for those global mining and metals companies whose revenues are earned in weaker currencies while their operational costs are in stronger currencies. Input costs are also a major factor, e.g., the cost of steel for manufacturing.
Legal and regulatory compliance — Unclear delineation of contractual responsibilities between owner and contractor with respect to obtaining licenses and consents is often a cause of schedule delays. Additional legal and contractual focus is required to ensure full compliance with regulatory requirements (FCPA and SEC) and legislation relating to bribery and corruption, to avoid unwittingly exposing project and corporate executives.
Health, safety, environment (HSE) and stakeholder management — The health and safety performance of a project and its supply chain is receiving increased scrutiny as a result of corporate responsibility requirements. Greater awareness of the environmental impact of mining and metals projects increases the need for proactive and sustained community and government engagement, driving increased staffing requirements in HSE and community affairs departments.
2‘National Institute of Labour Studies’, Minerals Council of Australia
3‘Costs jump again at delayed Ambatovy’, Mining Journal, 17 June 2011
4‘Gindalbie Metals’ Karara costs blow out 20pc’, The Australian, 6 May 2010