Why Feasibility Studies FAIL
Peter McCarthy
AMC Consultants AusIMM Melbourne Branch, 2013 1
AusIMM Melbourne Branch, 2013 2
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
AusIMM Melbourne Branch, 2013 3
Types of Studies
After Bullock 2011
AusIMM Melbourne Branch, 2013 4
After Bullock 2011
Purported Accuracy of Capital Estimates
AusIMM Melbourne Branch, 2013 5
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.
AusIMM Melbourne Branch, 2013 6
Documented Capital Overruns and Underruns
After Bullock 2011
AusIMM Melbourne Branch, 2013 7
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.
Startup and Subsequent Performance
AusIMM Melbourne Branch, 2013 8
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).
Startup and Subsequent Performance
AusIMM Melbourne Branch, 2013 9
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.
Startup and Subsequent Performance
0%
20%
40%
60%
80%
100%
120%
1 2 3 4 5 6 7 8 9
Year Since Start Up
Mil
l T
hro
ug
hp
ut
(% o
f D
esig
n)
Base Metal Mine Start-ups
McCarthy and Ward 1999
AusIMM Melbourne Branch, 2013 10
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.
Startup and Subsequent Performance
Tatman 2001
AusIMM Melbourne Branch, 2013 11
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
Ore Reserves
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
• White Range
Geotechnical
• Golden Cross
• Big Bell
• Mount Todd
Metallurgical
• Mineral Hill
A fifteen year study of 56
mines for which feasibility
studies were announced in
1988-89.
McCarthy 2004
AusIMM Melbourne Branch, 2013 13
0 100 200 300 400 500
Kundana
Macraes
Hill 50
Wiluna
Martha
Plutonic
Granites
Boddington
Mt Leyshon
Koz Per annum
Actual
Plan
Some Good Outcomes (the lucky 20%) from the 2004 study
McCarthy 2004
AusIMM Melbourne Branch, 2013 14
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%
Three key areas of concern:
Where are things going wrong?
McCarthy 2003
AusIMM Melbourne Branch, 2013 15
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.
Where are things going wrong? Some detail
AusIMM Melbourne Branch, 2013 16
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
AusIMM Melbourne Branch, 2013 20
No apparent difference between:
• Junior or major company
• Large of small projects
• Location
• In-house or “blue chip” consultants
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
Gypton, E&MJ, 2002
AusIMM Melbourne Branch, 2013 21
Production Rate Realistic?
AusIMM Melbourne Branch, 2013 22
Head Grade and Mining Rate
Kambalda Nickel Mines
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0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
He
ad G
rad
e (
% C
u)
Pro
du
ctio
n R
ate
(tp
a)
Year
Head Grade and Mining Rate
CSA Mine, Cobar
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• Owners employees
• financial fees
• interest charges
• Insurances
• legal and consulting fees
Don’t Forget Owners’ Costs can be Huge
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Contingency Allowances
After Bullock 2011
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-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
- 100.0 200.0 300.0 400.0 500.0
Total Work (Mt.km)
To
tal C
ost
(M$
)Site A
Site B
Benchmark everything possible
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
- 1,000 2,000 3,000 4,000 5,000 6,000
Total Capacity (t)
To
tal C
ost
(M$
)
Site A
Site B Trucking Fleet Fuel Cost ($/t ore)
0.00
0.29
0.78
0.28
0.10
0.53
1.00
0.00
0.25
0.50
0.75
1.00
1.25
C B D A E F G L M J H K I
Mine
Fu
el
Co
st
($/t
ore
)
Decline Shaft Combination
AusIMM Melbourne Branch, 2013 27
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!!
Key areas for change
“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)
AusIMM Melbourne Branch, 2013 28
• 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
Key areas for change
* A cold and heartless furry green recluse (Dr Suess)
AusIMM Melbourne Branch, 2013 29
“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
AusIMM Melbourne Branch, 2013 30
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.