Managing Risk and Cost in Mining Infrastructure Development
Speaker: Sarah Thomas, Partner, Pinsent Mason
Director, Vale
Mining On Top: Africa - London Summit
24-26 June 2014 | London
Managing Risk and Cost in Mining Infrastructure Development - Sarah Thomas, Pinsent Mason
1. Managing Risk and Cost in Mining
Infrastructure Development
Sarah Thomas, Partner
Pinsent Masons LLP
Mining on Top
24 June 2014
2. Setting the Scene: (1) Key Drivers
• Dismal shareholder returns, uncertainty of future demand and
commodity pricing
• All leading to less funding & less projects – changes in marketplace?
• High capital costs of mining infrastructure - South African example -
infrastructure costs = 80% of mine development costs; cost inflation
(not matched by productivity gains) plus geological inflation (declining
grades = increasing tonnage mined)
• High bulk commodities – e.g. iron ore, coal, manganese - significant
transportation costs
• Wider costs of infrastructure development (ports, road, rail, water and
power availability)
• Focus on ‘back to basics’ – cost control, productivity gains &
protecting margins
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4. Setting the Scene: (3) Physical , Regulatory and
Reputational Risks of Water
• Lack of available water
– Challenging physical conditions and
competition for use
• Forced shutdown
– Revenue losses
• Power outages
• Low quality water
– Leading to losses in mineral recovery or
reduction in quality of product
• Environmental impact/Resource Nationalism
• Australian regime sets example for other countries
• e.g. Ghana
• strict legislative requirements
• environmental sustainability
• licensing requirements
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Source: http://www.infrastructurene.ws/3s-composition/uploads/2012/05/acid-
mine-water.jpg
5. Construction Stage: Current Market – EPCM
Model – trend towards more variability?
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Traditional model
Client EPCM
Construction
contract
Construction
contract
Construction
contract
Equipment
Supply
Equipment
Supply
Equipment
Supply
Purchase order
and T’s & C’s
6. Split Contract Model
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Split Model
ClientEPCM*
EPC
EPC
EPC
Construction
contract
Construction
contract
Construction
contract
Equipment
Supply
Equipment
Supply
Equipment
Supply
* “E” & “P” can be split from CM with CM undertaken by Client in house or by another consultant (for
cost savings)
7. Controlling costs in construction
• Main issue - delays and cost overruns –
• Unpredictability of local mine site/communications/labour force/ground and environmental
conditions/consenting regime
• Controlling manpower costs
– Starting point – manpower intensive and key contracts (e.g. EPCMs) reimbursable
plus Fee
– Doing the works ‘in house’ vs using third parties
• Balance cost vs capabilities vs terms imposed by host Government/sponsor
– Cost of expatriate personnel. Ability to impose detailed cost controls in EPCM
contracts limited – disallowed costs regime often relatively loose and fee relates to
man hours expended so no incentive not to inflate manpower costs
– Link fee to a target cost mechanism
– Include rate for drawing so EPCMs incentivised to be efficient
– Control inappropriate use of expat personnel/overloading: e.g. pre-agree allocation of
resources - organogram with manpower schedule – with any changes to be approved
by Client
– All difficult to negotiate but changing market?
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8. What can be done to help manage delays
and cost overruns cont.?
• For construction packages - use of bills of quantities/remeasurement
or fixed price/EPC for discrete packages
• Detailed programme with milestones and consequences
• Regular reporting (linked to KPI measures)
• Liquidated Damages
• Incentive for finishing early
• Regular reporting to Head Office
• Early Warning system (similar to NEC)
• KPI Regime linked to % of Fee including re: programming,
forecasting and management setting deadlines
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9. Design Responsibility and Defects
Management (1)
• Mining’s complex terrain and climate challenging; every mine site is
unique
• Third party engineers may have only designed discrete parts early
on – limited recourse
• Expiry of design responsibility or limited to re-performance
• Other Issues:
– Shortage of other skilled consultants/contractors to do the work
in country
– When things go wrong costs and delay mount up very quickly
(e.g. flying team experts to site paying premium to fast-track re-
design and replacement parts)
– Lack of integration between development and operations teams?
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10. Design Responsibility and Defects
Management (2)
• Possible solutions:
– Ensure retention of experienced, competent personnel with Key Project
Personnel clauses
– Express design requirements in the contract & as detailed as possible
– Make any design breach/non compliance a “defect”, not just breaches of duty
of care/laws
– Require EPCM to redo a defective design without cost and uncapped (ensure
a Disallowed Cost)
– Design review at all stages – Client to approve design before proceeding to
next stage
– Longer warranty periods – e.g. 2 years post mechanical completion or longer
– Pro-active management and greater integration between construction and
operation teams; regular reporting to head office
• However, note that EPCM liability for rework difficult to obtain - therefore must
mitigate risk before design proceeds to implementation
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11. Concluding Remarks
• Mining build by its nature is complex, challenging and costly
• Historically a limited marketplace and “seller’s” market
• Potential changes due to reduced project spend (consolidation of
EPCM’s and new entrants)
– JV’s with construction operators (influence of Chinese Investors)
– Bringing more expertise back in house
– Improved reporting and data collection (and interpretation)
– Utilise framework relationships with supply chain
– Mixed contract models – greater collaboration?
– Greater use of incentivisation models
• Key is pro-active management good stakeholder relationships
and quality of personnel
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12. • “Project management can be defined as a way of
developing structure in a complex project, where the
independent variables of time, cost, resources and
human behavior come together.”
-– Rory Burke