High-price cycles are a common occurrence in the mining industry, but the most recent one in 2014 was notably prolonged and had a considerable impact on engineering design processes. The 2014 super cycle brought about significant changes in engineering expectations and the quality of feasibility studies. In response to the high prices of metals and favourable market conditions at the time, mining companies rushed to complete engineering designs and cost estimates to build their mines.
To invest in a mining project, it is necessary to conduct prefeasibility and feasibility studies to determine the capital cost and establish a financial model with a certain level of precision. These studies have requirements such as accuracy of capital and operating cost estimates that must be met. For instance, the feasibility study should have an accuracy of 10 to 15 per cent (Class 4 as defined by Association for the Advancement of Cost Engineering) which can be attained with a certain amount of engineering efforts. If a project relies on lightweight feasibility studies, which involve less engineering and result in inaccurate cost estimates, it can lead to cost overruns and ultimately project failure due to inadequate investment.
While a high price for metal may make a project appear economically feasible, it is important to conduct, for example, proper metallurgical testwork to confirm the expected metal recovery and other design parameters. This information is critical to the success of the project and ensures that it will deliver the expected returns. During the super-cycle period in 2014, some companies were willing to forgo testwork or engineering efforts to speed up the project’s schedule. This approach might have saved time in the short term, but in the long term, it led to costly mistakes and project delays. This “cost-cutting” approach resulted in a dearth of data for determining the capital cost and financial outcomes, which resulted in optimistic or light feasibility studies that underestimated the capital expenditure to build the project. As a result, the projects experienced cost and schedule overruns and were unable to be completed within the budget and timeline outlined in the feasibility study.
According to a 2015 Deloitte report, during the super-cycle period, mining projects in South America had the highest overrun rate at 64 per cent, while South Africa had the lowest at 30 per cent. North America and Australia experienced overruns of 51 per cent and 40 per cent, respectively. These findings have led to a loss of credibility in mining projects, causing a confidence crisis.
The shortage of projects in the market, due to low metal prices after the super cycle, created a highly competitive market that exacerbated the situation, leading to lower-quality prefeasibility and feasibility studies as companies attempted to reduce engineering costs to win the available limited projects in the market. These conditions led to reports of an even lower quality and has become the “new normal.”
While the requirements for NI 43-101 reports are maintained regarding confirming geological resources and reserves, it is important to note that the same level of quality may not be reflected when it comes to mining and processing, since the same lightweight prefeasibility and feasibility studies are still performed. The 43-101 reports are a summary of these studies, thus the quality of them are reflected in the 43-101 outcomes.
The recent super cycle has significantly impacted the quality of mining studies, and it appears that we have not yet returned to the necessary quality standards (“normal”) used in the past. You can easily compare a feasibility study report issued pre-super cycle with more recent ones to observe the differences in quality and content.
As a result, if you intend to undertake and progress a project (from prefeasibility to feasibility study or from feasibility study to detailed engineering), a significant amount of engineering work will need to be completed. For instance, a crucial aspect such as piping and instrumentation diagrams must be well-developed for a feasibility study. Unfortunately, some feasibility studies still only indicate marked up process flow diagrams, requiring you to start from the beginning.
To restore confidence in mining projects, it is essential to return to normal and produce engineering works that meet the well-established quality and accuracy standards for feasibility studies. Low-quality feasibility study reports can result in more work during construction and can leave investors in a difficult financial situation, ultimately leading to a loss of confidence again in mining projects.
Manochehr Oliazadeh is chief process engineer, mining, mineral processing and metals (MMM), at Worley Canada.
