Why building a mine on budget is so rare – by Alisha Hiyate (Mining Markets – March 14, 2014)

http://www.miningmarkets.ca/

There is a well-established history of capital cost overruns in the mining industry stretching back at least 50 years, mining analyst Christopher Haubrich told the Prospectors and Developers Association of Canada (PDAC) conference in Toronto in early March.

In fact, since 1965, capital cost overruns in the sector have averaged between 20% and 60%. Even so, there has been little investigation into the cause of the problem, said Haubrich.

“Retrospectively looking at capital cost overruns has obviously not helped at all,” Haubrick noted. “We still have a problem, we have for at least 50 years as I’ve mentioned, and all reports suggest that we will continue having a problem.”

Haubrich, however, came to the PDAC armed with some new insight into the cause of capital cost overruns, a topic he researched while interning at Colorado-based Resource Capital Funds (RCF) on a fellowship arranged through the Colorado School of Mines for eight months last year. Haubrich noted that the research he presented belonged to RCF, but that the conclusions were his own.

In a statistical analysis of 50 mines built between 2005 and 2013 that were representative of the industry, Haubrich said that only two of the many factors that are often given for capex overruns — including poor execution or engineering, poor weather, inflation and currency fluctuations — had a statistically significant association with capital cost overruns.

The first factor, commodity market heat, is a measure of the general direction and speed of commodity price changes at the time of construction.

“The hotter the commodity environment that a mine was built into, the higher the average capital cost overrun, industry-wide,” Haubrich summarized.

This relationship, he noted, is fairly intuitive.

“As commodity prices rise and the markets heat up, more projects are planned, more projects go into queue, which ultimately drives up the competition for the inputs to build a mine,” Haubrich explained.

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