Why Feasibility Studies FAIL

Peter McCarthy
AMC Consultants AusIMM Melbourne Branch, 2013 1
 Content

 What is a Feasibility Study?

 What is failure?
 Data on failures
 Failure rate hasn’t improved
 Why they fail
 How to address the problem

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Types of Studies

After Bullock 2011

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Purported Accuracy of Capital Estimates

After Bullock 2011

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 Failure

• The capital cost is higher than expected

• The operating cost is higher than expected
• The recovered grade is lower than expected
• Sales revenue is lower than expected
• It takes longer to build and ramp up than expected
• Initial performance cannot be sustained, though It
may take several years for the failure to become
evident.

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Documented Capital Overruns and Underruns

After Bullock 2011

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Startup and Subsequent Performance

In the 1970s, a study for the World Bank showed

that in the first year of operation after
commissioning, 60% of the mines and 70% of the
treatment plants surveyed achieved a production
rate of less than 70% of design capacity.

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Startup and Subsequent Performance

In the 1980s, a study of 35 Australian gold mines

found that 68% failed to deliver the planned head
grade (Burmeister, 1988)

A similar review of nearly 50 North American

projects showed that only 10% achieved their
commercial aims with 38% failing within about one
year (Harquail, 1991).

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Startup and Subsequent Performance

A study of the start-up performance of nine

Australian underground base metal mines found
that only 50% achieved design throughput by Year
3 and 25% never achieved it at all.
120%
Mill Throughput (% of Design)

100%

80%

60%

40% Base Metal Mine Start-ups

20%
McCarthy and Ward 1999
0%
1 2 3 4 5 6 7 8 9
Year Since Start Up

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Startup and Subsequent Performance

A US study comparing the final feasibility

study production rate with the average
sustained production rate from sixty steeply-
dipping tabular deposits found that 35% of
the mines did not achieve their planned
production rate.

Tatman 2001

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Ore Reserves

A 2003 study of 41 underground mines showed that

60% of ore reserve estimates fell outside the
expected range, with some very seriously in error

Tatman 2003

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Some of the Failures from 2004 Study (the unlucky 25%)

Geology
• Bottle Creek
• Disraeli
• Horn Island
• Rothsay
• Second Fortune
• Timbarra A fifteen year study of 56
• White Range mines for which feasibility
Geotechnical studies were announced in
• Golden Cross 1988-89.
• Big Bell
• Mount Todd
Metallurgical
• Mineral Hill

McCarthy 2004

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Some Good Outcomes (the lucky 20%) from the 2004 study

Mt Leyshon

Boddington

Granites

Plutonic
Actual
Martha
Plan
Wiluna

Hill 50

Macraes

Kundana

0 100 200 300 400 500

Koz Per annum

McCarthy 2004

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Where are things going wrong?

Three key areas of concern:

Area of Problem Frequency

Geology, resource and reserve estimation 17%

Geotechnical analysis 9%
Mine design and scheduling 32%
Mining equipment selection 4%
Metallurgical test work, sampling and scale-up 15%
Process plant equipment design and selection 12%
Cost estimation 7%
Hydrology 4%

McCarthy 2003

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Where are things going wrong? Some detail

Mine design & scheduling

Over optimistic ramp-up schedules
 Learning-curve not considered
 Over optimistic production schedules

Geology, resources & reserves estimation

 Inadequate attention to local variability
 Statistics & modelling override common sense.

Metallurgical test-work, sampling and scale up

 Metallurgical domains within the orebody not
understood.
 Testing is done on unrepresentative composites
 Failure to identify process contaminants
 Inability to handle ore types as per mining schedule
 Process water chemistry differs with lab.
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 Example – poor planning in platinum

• Long, bumpy bus ride in and out for operations staff every day
• Global geostats study but little drilling in initial production areas
• Water powered drills >> high maintenance >> flooding on levels >>
delays and equipment damage
• Jumbo development >> oversize waste rock doesn’t fit through
conveyor grizzlies
• Manual rockbolt installation >> rockfalls and fatalities
• Inadequate training
• Unrealistic ramp up schedules
• Timing mismatch between development of mine and metallurgical
complex
• Technically challenging metallurgical process in a backward social
setting
• One photocopier for +2000 employees!
• Free alcohol for consultants and senior staff in site camp!

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What is the problem?
Beyond mining studies…Other factors

T Things often change between

study and implementation

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Post Construction Management

Construction planning

• The Sumatran stuff up

Operations

• The Kambalda slasher

• The Cobar robber
• The Austrian encroacher

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 Feasibility studies
Where are things going wrong? Root causes

Inadequate Resources
• time (and artificial deadlines)
• budget
• availability of skilled personnel for studies and for construction
management

Human factors
• consulting firms are dependent on clients
• the innate drive to make it work, when it doesn’t (corporate
momentum)
• pressure to make it work, when it doesn’t (stretch targets)
• Structure and timing of bonuses to executives, consultants and
bankers
• Confirmation bias

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 Who gets it wrong?

The average operating company:

• often has limited experience in developing projects

• often has cut back or eliminated corporate engineering staffs
• often does not involve the EPCM contractor from early concept through
start-up even though EPCM contractor has typically been involved in the
construction of more mines than the owners

No apparent difference between:

• Junior or major company

• Large of small projects
• Location
• In-house or “blue chip” consultants

Gypton, E&MJ, 2002

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Production Rate Realistic?

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Head Grade and Mining Rate

Kambalda Nickel Mines

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Head Grade and Mining Rate

1,200,000 8.00
7.00
1,000,000
Production Rate (tpa)

6.00

Head Grade (% Cu)

800,000
5.00
600,000 4.00
3.00
400,000
2.00
200,000
1.00
0 0.00
1990

1994
1995
1996
1997
1999
2000
2001
2002
2003
2004
2005
2006
2007
1991
1992
1993

Year

CSA Mine, Cobar

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Don’t Forget Owners’ Costs can be Huge

• Owners employees
• financial fees
• interest charges
• Insurances
• legal and consulting fees

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Contingency Allowances

After Bullock 2011

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 Benchmark everything possible

50.0 Trucking Fleet Fuel Cost ($/t ore)

Site B
45.0
1.25
40.0 Decline Shaft Combination
Total Cost (M$)

1.00
35.0 1.00
Site A

Fuel Cost ($/t ore)

30.0 0.78
0.75
25.0 0.53
20.0 0.50
0.29 0.28
15.0
0.25
0.10
10.0 0.00
5.0 0.00
C B D A E F G L M J H K I
- Mine

- 1,000 2,000 3,000 4,000 5,000 6,000

Total Capacity (t)
50.0
45.0 Site B
40.0
Total Cost (M$) 35.0
Site A
30.0
25.0
20.0
15.0
10.0
5.0
-
- 100.0 200.0 300.0 400.0 500.0
Total Work (Mt.km)

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Key areas for change

 Increased scrutiny: Peer review, audit & due diligence

 More benchmarking
 Specific industry guidelines on feasibility studies?
 Allocate more resources to feasibility studies
 Buy the new AusIMM Cost Estimation Handbook!!

“Why has such a tremendous effort been put forth to

greatly improve the quality and standards of the
resource and reserve classifications, but with little or
no effort to improve the detailed definition of that which
determines whether or not a resource will move from a
resource to a reserve classification”? (R Bullock, 2011)

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 Key areas for change

• Scope of work must be “is it feasible?” and not “make

it feasible”. Sometimes the answer is “no”.
• Just because the CEO announces numbers doesn’t
mean they are real (in large and small companies)
• Include a formal process of risk assessment
• Peer review by a specialist team that has no interest
in the project outcome
• Perhaps employ a dedicated grinch*
• Independent audit of data gathering and analysis for
each step in the study process

* A cold and heartless furry green recluse (Dr Suess)

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“Not Feasible”

• Is a function of orebody, location and market

conditions
• Does not mean the study team are
nincompoops
• Does not mean the study budget was wasted
• Is better learned from a study than from
experience

Thank You
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 References

Bullock RL Accuracy of feasibility study evaluations would improve accountability Mining Engineering April 2011

Burmeister B.B., From Resource to Reality: A Critical Review of the Achievements of New Australian Gold Mining Projects
During the Period January 1983 to September 1987, Macquarie University, 1988.

Gypton, C, 2002, How Have We Done? Engineering and Mining Journal, 203, p 40-46

Harquail D., 1991. Investing in Junior Mining Companies. Proceedings of the 6th Mineral Economics Symposium of CIM.
CIM Montreal Canada.

Ward D.J. and McCarthy P.L. 1999 Startup Performance of New Base Metal Projects in Adding Value to the Carpentaria
Mineral Province, Mt Isa, Qld, Australian Journal of Mining, April 1999.

McCarthy 2003 Managing technical risk for mine feasibility studies in Mining Risk Management , The AusIMM ISBN 978-1-
920806-00-2

McCarthy 2004 New Mining Projects – Expectations and Outcomes, Pacrim 2004

Berry and McCarthy Cause and effect – unravelling the significance and consequences of geological inputs into ore
reserves and feasibility studies 6th International Mining Geology Conference Darwin, Australia - August 2006

Tatman C.R. 2001 Production Rate Selection for Steeply Dipping Tabular Deposits Mining Engineering October 2001 pp.
62-64

Tatman C.R. 2003 Ore Reserve Accuracy pers. comm. 7 April 2003.

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