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Why Mining Projects Go Bad

There is a lot of talk about the number of mining projects that have not met their goals by overrunning the budgets and being behind schedule, also the amount of the overruns and length of the delays. 

There are a lot of reasons projects can go bad; changing political situations, changing economic conditions (material costs increase or commodity sales price decrease), inexperienced project team, poor control of the project, and many others.  Some of these you have no control over (politics and economics).  But some you do.

While many of the articles point to project control and project management, I believe there is another culprit. First off NI 43-101, JORC, and SAMREC are NOT enough!

While these codes (NI 43-101, JORC, and SAMREC) have done a lot to assure adequate resource and reserve reporting they were not designed to be a complete description of a project.  Their purpose is to provide for some safeguard against misleading, wrong, or fake information on mineral properties resources and reserves as in the Bre-X scandal (http://en.wikipedia.org/wiki/Bre-X) . 

For what they were meant for, they do a reasonable job, but should not be considered as a complete and final answer.  Part of this is because they were not designed to cover the actual mining and processing (where the real costs are).   

I am going to use NI 43-101 for my discussion because it is the one I know the most about.

Ni 43-101 generally uses the term “Technical Report” or “Preliminary Economic Assessment”, but does reference the terms pre-feasibility and feasibility but refers to the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) for their definition.   CIM’s definition of feasibility includes:  “… study of the selected development option … at the time of reporting, that extraction is reasonably justified (economically mineable). …”  And that a pre-feasibility is less well defined.

These lead to a fairly wide interpretation of what a “Feasibility Study” should include.  NI 43-101 does provide a list of 27 items that a Technical Report should include and even describes what those should cove.  

Of the 27 items called for under NI 43-101, 8 are specifically related to the resource and reserves, and 4 are related to mining, processing and infrastructure requirements.   The others are introductory, conclusion, or generally descriptive.  Less than 15% actually covers where the time and money spent in taking a project to production actually are.  This leads to point that the amount of effort preparing the input and the estimates and schedules for the project is a minor part of the effort, yet a major reason mining projects go bad.

To truly asses the viability of a project detailed estimates are needed.  Using simple or factored estimates can lead to problems getting the project running.

A rather interesting paper is “The High Costs of Low Estimates” available from Turner & Townsend.  It highlights some of problems with less than detailed estimates and also lists five common mistakes in estimating. 

1. The omission of undefined scope of work from the estimate

2. Over optimistic performance is assumed

3. Possible risk is omitted

4. Inexperienced or biased estimator used for the type of estimate or project

5. Inadequate duration allowed for estimate development

 Similar points could be raised for preparing a project schedule, let alone truly assessing the political and economic risks.  For these reasons relying solely on NI 43-101, JORC, and SAMREC can be a major cause for mining projects to go bad.