Skin in the game

The worst problem in mining is the industry’s expertise in destroying capital. Investors hold their breath during commissioning as they await the inevitable bad news pertaining to capital overruns, recovery shortfalls, or grade issues. I’ve become increasingly cynical over the years with a baseline assumption that all projects will underperform. The question is not if, but by how much these investments will disappoint.

Sure, there are the odd examples of success. In general, however, projects that have been built in the past ten years have disappointed.

Take a look at each of the following charts; underperformance in grade, underperformance in throughput, underperformance in production. The results are remarkably consistent. Why is this the case?

It’s a problem of incentives, no feedback loops, and a lack of skin-in-the-game. These “independent” 43-101 technical reports are often anything but. Feasibility study managers or coordinators organize and pay-the-bills of the various consultants that support the reports. Each component is an isolated silo. 

A modeler can produce an estimate with a robust global estimate but a riskier high-grade distribution. The mine planner, ignoring the concept of model risk, will maximize the NPV by accelerating mining to get this higher-risk ore into the mill quicker. On paper the additional capital required to mine in this fashion is justified. In reality, the high-grade may get mixed with other material rendering the strategy useless. Individually, each of these experts are maximizing the project’s value within their domain. Collectively, each of these experts are driving the project to economic failure.

This scenario is repeated again and again. Study managers are incentivized by producing a project with the highest IRR possible. Independent consultants want to please the manager. We know where this leads to.

For this system to evolve it needs feedback. Unfortunately, the time period between feasibility study, construction, design, and evaluation can take 5+ years (in a good case). The individuals that are leading these reports and teams aren’t sticking around to learn from these mistakes. Even if they did, a seasoned leader might get 3-5 of these examples in their career. There just aren’t any detailed case studies to learn from these mistakes. This seems like a big shortfall for our industry. 

Leave a Reply

Your email address will not be published. Required fields are marked *