Allan Trench is Adjunct Professor of Mine Management & Mineral Economics, Western Australian School of Mines and is a Non-Executive Director of Pioneer Nickel, Navigator Resources and Enterprise Metals – He leads the copper analysis team at CRU Group, a global mining and metals consultancy. -----------------------------------------------------------
Getting excited about delays to mining projects
Monday, 17 March 2008 - Mining News-
HARDLY a week goes by without a planned mining project experiencing a capital cost overrun, a significant delay, or both. So this week Allan Trench spends some time listing what causes delays at mining projects.
A favourite course back at University was operations management – it somehow seemed highly amusing and yet also ultimately rewarding to study in intricate detail the waiting time of people in supermarket queues, the optimum methods to organise patient-screening at a hospital clinic and the processing capacity of telephonists operating customer enquiry switchboards.
Complex formulae exist to predict the equilibrium steady state in all these situations (although the checkout operators at my local supermarket likely defy any form of mathematical modelling) – and of course these same formulae are also used to drive capacity decisions for mining and mineral processing facilities.
Yet Strictly Boardroom cannot recall similar rigour applied to the analysis of project delays. Sure, critical path considerations and Gantt charts are standard tools for project management and, for that matter, in project management courses – but with so many mining projects falling adrift of schedule at present, there seems little discussion, other than at anecdotal level, as to quite why.
A lack of skilled projects engineers is one often-cited reason, government red tape is another. So to make the waters perhaps a little less murky, here is a breakout of where project delays can occur from first principles.
Consider this a form of high-level glossary of potential project delays. Then take your pick as to where you consider most delays to projects are actually occurring.
At the highest level, delays come in only two types; those that are discretionary and those that are non-discretionary. Most discussion focuses on the latter – but the former are real too.
Breaking out this classification to the next level reveals an eight-strong list of generic delay-types – so here they are in order.
One could break out the categories of delays further of course under each sub-heading – and eventually derive a myriad of white noise as to where delays stem from. For the purposes of brevity here though, this column stops at the third layer of the delays ‘onion’ so to speak.
Discretionary delays
1. Strategic delays – These represent cases whereby the managers of a project purposely withholds its development driven by a particular view on commodity prices. So if you think antimony is going to be worth vastly more in 10 years time than now, why would you commit to early development now of an antimony resource?
2. Portfolio sequencing delays - Executives in the fortunate position of holding several pre-development assets in one company are faced with a nice problem to have. Your engineering and project teams cannot do everything at once, so choices must be made. Sometimes these choices are big ones in terms of future supply, with Xstrata’s burgeoning copper project development pipeline an obvious example.
3. Discretionary government delays – From the miner’s perspective, governmental delays are usually non-discretionary, but from the government perspective the opposite can also be true. Governments (if not in Australia then certainly elsewhere) are not beyond instigating purposeful delays to resources projects in order to win concessions from project owners on tax, community benefits, downstream processing and infrastructure promises.
Non-discretionary delays
4. Non-discretionary government delays – Red-tape is the first to appear in this section of the delays classification. Indeed, a good place to start thinking about non-discretionary delays is to first classify them according to the factors of production (land, labour and capital): government is by far the biggest offender in the land category – if one includes their role in managing NGOs, environmental and community issues.
5. Equipment delays – Much is made of the now longer lead-times for larger items of capital equipment required to build and operate mining projects. So if waiting for a SAG mill or an autoclave is the reason your project is falling off schedule, that delay gets classified here.
6. People issues – We hear much about the lack of skilled engineers to advance a project’s design. A lack of skilled frontline workers can be another potential cause for delay. So whether the people issue lies to the skilled or unskilled side of the ledger, count people-related delays in here as they impact projects.
7. Finance delays – Project funding usually comprises a mix of equity and debt (that’s two additional sub-causes of delay at the next level down right there for starters). Debt, in particular, relies on the long-term price assumption a debt-provider uses to assess the down-side risk to a project’s economics. So if the financier’s long-term price assumption is incorrect (here you can read the assumption as being too low in the eyes of most project developers), then expect further delays here.
8. Resource-related delays – No surprises for the two main candidates here; quality and quantity. This category also shows that delays from one area can have clear knock-on effects into other areas (adding to the overall project delay). Using the example of a financier’s long-term price assumption as being too low as one source of delay – this inevitably leads to re-jigging the project design to access high-quality ore earlier in the project life. So financial and resource-related delays are interwoven even at a high level.
Armed with this list, we can now play a form of project delays Bingo. Which numbers do you consider more important than others in driving significant project delays? For Strictly Boardroom the medal winners in the delay stakes lie in the feedback loop between resource quality (8) and debt-financing (7), in red tape (4), and in equipment sourcing (5).
But that’s only my opinion – and it was a hard choice to drop people from a podium finish. What’s your view?
