Tin Lwin Jose Lazo Technical Advisory Services Export Development Canada

May 25, 2016

Capital Cost Overrun and Operational Performance in Mining Industry

Management and Economics Society, CIM Toronto

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› Project Cost Overruns › Operational Performance

› Production performance › Operating cost performance › Performance index

OVERVIEW

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CAPITAL COST OVERRUNS

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› Capital cost overruns (CO) have been endemic and significant. › EDC has a significant lending portfolio in mining and metals. › As a lender, EDC faced the issue which drove the desire to identify

and mitigate potential CO’s. › 2012 study identified sources of CO using internal data from 12

projects. › 2015 study characterized attributes of 78 projects with CO using

internal and external data. › Findings from the studies used to address CO risk.

BACKGROUND

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2012 STUDY – SOURCES OF COST OVERRUNS

Note: 2012 and 2015 studies use different data sets

Owner'sLabour

OtherIndirects

Material DirectLabour

Equipment EPCMLabour

External Escalation Schedule ScopeChanges

FX0

1

2

3

4

5

6

7

8

Frequency (Count of Occurences)

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› Owner’s and indirect costs tend to be significantly underestimated. › Costs under EPCM scope on average tend to be more or less within

expected accuracy level for a feasibility study (i.e. within 15%). › Evidence of correlation between capex overruns and commodity prices, but

not at the rate of increase in commodity prices. › Significant cost overruns are a more recent phenomena. › Capex estimates are carried out to feasibility level (AACE1 Class 3), but

stated accuracy levels are higher than AACE’s expected accuracy of -20% to +40%.

TAKE AWAYS - 2012 STUDY

1 AACE International, an industry association for advancement of cost engineering

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Purpose: › Analyze capital cost overruns in mining projects and relationship to

various variables. › To compliment the 2012 study on sources of cost overruns. › Discover other factors to consider in sizing cost overrun facility.

Scope: › Study limited to 78 projects: Capex > $ 50 M Started within last 20 years

2015 STUDY

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CAPEX COST OVERRUNS (CO)

-50%

0%

50%

100%

150%

200%

250%

300%

1990 1995 2000 2005 2010 2015 2020

Cos

t Ove

rrru

ns

Bubble Size represents Project Size (Capex) Red buble represents Average Project

CO: 37%

Budgeted Capex: $1.2 B

Actual Capex: $1.6 B

Financing: Debt: 57% Equity: 43%

Source: TAS analysis

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COST OVERRUN OVER THE YEARS

Post 2010 average CO growth rate is showing signs of slowing down after reaching above 40%.

Average CO = 37%

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COST OVERRUN & PROJECT SIZE

Average CO = 37%

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COST OVERRUN & COMMODITY TYPE

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BROWNFIELD vs. GREENFIELD PROJECTS

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DEBT VS. EQUITY FUNDING

51% 38%

49%

62%

42%

27%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

20%

40%

60%

80%

100%

120%

Debt < 50% (22) Debt > 50% (40)

Average Equity Average Debt Average CO

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COST OVERRUNS AROUND THE WORLD

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DISTRIBUTION OF PROJECT COST BY REGION

Africa 9% Asia

3%

Australia 25%

Europe 1%

North America 15%

South America 47%

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TAKE AWAYS – 2015 STUDY

Average cost overrun 37% Significant increases in cost overruns are recent trend Variables with significant impact: Project Size Project Location Project Sponsor Headquarters Type of commodity Leverage (Debt to Equity Structure)

Variables with negligible impact Sponsor Size (Major, Mid Size, Junior) Product Type (Concentrate, Cathode, Doré) Mining Method (Open Pit, Underground)

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1. Verify that capex estimates are carried out to AACE Class 3 or better. 2. Confirm whether budgeted contingencies are commensurate with level of

engineering completed. 3. Undertake comprehensive review of estimates by independent engineer. 4. Recognize that capex estimates are carried out to feasibility level (AACE

Class 3), but stated accuracy levels are higher than AACE’s expected accuracy of -20% to +40%.

5. Consider factors from 2015 study. 6. Assess points 1 to 5 to gauge potential cost overrun risk in a specific

project. 7. Deploy structural features to address potential cost overrun risk - completion

guarantee, committed cost overrun funding, conditions to funding, cost-to-complete test.

CONCLUSION – ADOPTED APPROACH

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OPERATIONAL PERFORMANCE

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› Projected production and opex performance is a key due diligence area.

› Earlier study on the subject showed that companies’ forecasts generally tend to over-estimate production and under-estimate operating costs.

› Since the dataset was small, expanded the study. › Consider whether findings from the expanded study could/should be

applied in due diligence.

BACKGROUND

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DATASET

36 TSX listed gold and copper producers Junior, intermediate and senior producers Production and operating cost figures 6 year period (2010 – 2015) 338 data points Data source: company’s press releases and annual reports

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PRODUCTION PERFORMANCE

Production Performance = Actual Production / Company Production Guidance

89%

99% 97%

104%

97%

101%

80%

85%

90%

95%

100%

105%

110%

2010 2011 2012 2013 2014 2015

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PRODUCTION PERFORMANCE SCATTER PLOT

0%

50%

100%

150%

200%

250%

2009 2010 2011 2012 2013 2014 2015 2016

Mean 99% Min 40% Max 211% Std dev 20%

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PRODUCTION PERFORMANCE BY PRODUCER TYPE

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OPERATING COST PERFORMANCE

Opex Performance = Actual Opex / Company Opex Guidance

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OPERATING COST SCATTER PLOT

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KEY SITE OPEX DRIVERS

Labour Cost per employee - relatively stable Workforce count – potential fluctuation

Power

Onsite generation – potential fluctuation Long term Power Purchase Agreements – relatively stable

Consumables

Potential fluctuation

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IS AVERAGE OPEX PERFORMANCE GETTING BETTER?

R2 (coefficient of determination) between average Opex Performance and WTI: 0.99

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PERFORMANCE INDEX – COMBINING PRODUCTION & OPEX PERFORMANCE

Performance Index = Production Performance / Opex Performance

Criteria <= 0.95 Underachiever 0.96-1.0 Satisfactory >1.0 Overachiever Average 0.99 Min 0.69 Max 1.36 Std dev 0.15

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Questions and Comments ?

Tin Lwin Managing Principal

Technical Advisory Services tlwin@edc.ca

+1 613 598 6689

Jose Lazo Senior Technical Advisor

Technical Advisory Services jlazo@edc.ca

+1 613 598 3012

Export Development Canada 150 Slater Street

Ottawa, ON Canada K1A 1K3 www.edc.ca