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 [email protected]
+1 613 598 6689
Jose Lazo Senior Technical Advisor
Technical Advisory Services [email protected]
+1 613 598 3012
Export Development Canada 150 Slater Street
Ottawa, ON Canada K1A 1K3 www.edc.ca