April 2016

Do all metallurgical plants work well? Plant metallurgists can ensure they do

  • By Peter Cameron, consulting metallurgist, Brisbane

All projects comprise many different teams with competing priorities – it is essential that these teams be brought together in order for success to be achieved

Many papers, books and presentations reinforce the ‘how to’ of doing metallurgical plant (metplant) projects right:

  • Dunlop (2013) details all the steps, interactions and hurdles involved in doing a mining project right the first time
  • Whincup (2008) provides plant metallurgists with guidelines for each stage of a mine development project
  • Guarnera (1997) considers the uncertainties of mining projects and outlines methods of minimising the associated 25 risks prior to submitting
    the ‘bankable’ feasibility study to avoid potential embarrassment over the long term.

Most companies insist their project teams follow the discipline of StageGate® to provide comfort that the right projects are selected and are being done right. Yet still we see metplant projects that underperform after commissioning. Various colleagues have presented analyses of how these problems
manifest themselves:

  • Hanrahan (2012) outlined the challenges resulting from pressure to reduce costs and schedule imposed by ‘market forces, market expectations and corporate promises’.
  • McCarthy (2014) analysed the ‘Performance of Feasibility Studies’ then assessed the difference between successful and unsuccessful projects to conclude most of the root causes of where things go wrong are attributable to human factors from ‘wise men’ remote from the project team.
  • Love (2009) presents a theory of ‘sponsor bias’ where project sponsors inflate the economics in a bid to secure financing. Love also comments on some projects where the team, although focused on success, recognised the possibility of failure which then became the basis for a detailed, iterative and exhaustive process of risk identification and mitigation.
  • Marsden (2001) provides guidelines to assist plant metallurgists walk the ‘political metallurgical tightrope’ of project development.

Few authors have focused on how to manage events and stakeholders to avoid building metplants that underperform.

The problem

Since plant metallurgists know how to lead a multi-discipline team to do the project right, why do some metplants not work well? It is proposed the answer generally lies between the ‘bankable’ feasibility study and reaching financial close.

A mine development project involves the work of several multi-discipline teams. In the centre, the core team has expertise in geology, mineralogy, geometallurgy, mining, mineral processing and engineering. Then there is a middle team focusing on environment and sustainability. An outer team is responsible for permits, legal aspects and raising finance. These teams are ultimately responsible to the CEO and board of directors.

The plant metallurgist’s team, which combines the core and middle teams, ensures that the feasibility study confirms the mining project is well engineered, technically possible, sustainable and makes good business sense.

The outer team, which is focused on or influenced by broader commercial and economic aspects of ‘business’, has the task of maximising the potential returns within a reasonable risk envelope and can consciously or inadvertently manipulate the process to reduce the schedule, capital or operating cost estimates (or all three) in order to achieve financial closure.

In many cases the impact of such reductions in costs or schedule on the risks associated with the long-term uncertainties of the mining project are generally not thoroughly evaluated with the consequence that the project can be heading for failure.

Lessons learned

The primary lesson is ‘do it right the first time’. This sentiment can be heard in the corridors of many places: carpenters and tailors say ‘measure twice, cut once’. Such philosophy is common to all industries around the globe, so why is it difficult for this lesson to be learned?

Hanrahan (2012) refers to the triangle of triple constraint to balance:

scope of work + cost + schedule = quality

This same philosophy is often expressed in less sophisticated terms as:

‘Fast, cheap or good; you can only pick two.’

Consider an assignment to deliver a wheel and the remote ‘wise men’ insist we reduce schedule and costs by cutting corners. The outcome will not be good:

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In the 19th century, John Ruskin – an even wiser man – frustrated by the actions of some of his colleagues, proposed the ‘Common Laws of Purchasing:

  • It is unwise to pay too much, but it is worse to pay too little.
  • When you pay too much, you lose a little money – that is all.
  • When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do.
  • The common law of business balance prohibits paying a little and getting a lot; it cannot be done.
  • If you deal with the lowest bidder, it is wise to add something for the risk you run and if you do that you will have enough to pay for something better.’

The key to Ruskin’s philosophy is in the last line: mitigate the risk by providing some extra funds. It is doubtful Ruskin ever contemplated having to deal with the risks associated with all the uncertainties of a mining project.

Risks in a mining project are generally identified and qualitatively categorised for likelihood and impact (red, yellow, green).

However, modern technology and available computing power allows the risks to be quantified by developing appropriate mathematical models and overlaying these on the projected cash flows for the project. Ruskin would certainly be impressed and our remote wise men should be equally impressed.

Geologists will remind us how unpredictable nature can be between drill holes. If you visualise what can change between the drill hole spacing used to underpin the feasibility study, it is often surprising that so many projects are more or less right.

Quantifying project risks associated with the uncertainties of mining

Risk analysis and mitigation is frequently a qualitative exercise conducted by a team of specialist multi-discipline engineers knowledgeable in the particular project. Risks are identified and assessed against standard procedures. Some probability considerations may be overlaid to allow an estimate of the likely impact of the ‘sum’ of all the risks on the project which may be carried forward when determining the contingency to be added to the capital expenditure estimate.

The complexity of mining projects, together with the extent and nature of uncertainties, is such that when combined with pressures to reduce costs and schedule it is reasonable to subject the conventional qualitative risk analysis to a more rigorous review.

Such rigour should include a detailed quantitative assessment of the risks associated with each of the key uncertainties and overlaying these on the cash flow for the life of the project:

  • geological: ore tonnage (volume and density), ore grade, physical properties, variability, waste tonnage, impact of geostatistics
  • mining: production units payload variation, ore dilution, ore losses, mining recovery, cut-off grade
  • metallurgical: mineralogy, liberation size, comminution and concentration parameters, metal recovery, concentrate grades, penalty elements
  • equipment: scale-up, mechanical availability, instrumentation and control
  • environmental and health and safety: safe guards built in and operable
  • human factors: culture and attitudes of workforce.

Halatchev (2007) proposed a method to quantify the impact of the risks associated with uncertainty on life-of-mine cash flows. A series of mathematical models developed to estimate the dollar value of risks in the geological and mining areas were used to demonstrate how these can be used to optimise the net present value of an open pit gold project by overlaying them on the life-of-mine cash flow.

This method can be extended to reasonably quantify the risks associated with the technical uncertainties of mineral processing, metal prices, environmental hazards, etc. However, it is doubtful a robust mathematical model could be developed to cover the complexities of ‘human factors’. Protection from this field requires collaboration, cooperation and
team work.

Technically all factors could be modeled by a multi-disciplinary team to predict the portion of risk in discounted cash flows.

The outer team

Against a volatile mineral price backdrop the outer team is under pressure from the business and finance community to maximise returns to investors. Many of the team members have little practical understanding of the uncertainties of mining nor do they have the time to devote to learning more of the subject.

Thus the plant metallurgist or project leader has the task of maintaining a balanced approach in the lead up to financial close to ensure a successful outcome for all stakeholders of the project. This can be difficult as the outer team members may perceive the plant metallurgist to be biased and conflicted and thus unable to provide
a balanced view.

It may not be possible to have agreement about everything, but at least an understanding should be reached between the viewpoints of the core and outer teams.

For both teams to be aligned and agree that the outcome will be ‘good’ requires mutual respect and a willingness to achieve a common understanding:

  • core teams comprise highly skilled technical people with a track record in delivering good outcomes which deliver expected financial returns (subject to vagaries of metal prices)
  • outer teams are non-technical people with fiscal responsibilities who generally do not understand the details and risks of metplant projects.

From the outset the plant metallurgist should lead the core team in negotiations with the outer team to ensure there is a common understanding of:

  • the difference between a good outcome and ‘fast and cheap’
  • the risks of cutting corners which may result in a metplant not working as well as expected and the project not delivering the expected financial returns.

The outer team and metplant team become one team

The ideal scenario is for the outer team to join the metplant team as early as possible to form ‘one team’ which will increase the likelihood that all aspects of the risks associated with the project will be understood and the risks will be properly quantified (Figure 1). Thus the ‘one team’ can make informed decisions.

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Finally, at financial close when the CEO and board sign off on the project, they must trust and accept the recommendations of their executive managers. To earn this trust the plant metallurgist and executives in the ‘one team’ must clearly answer all the probing questions which a good CEO and board will ask. Decision makers must accept responsibility for their decisions and actions. If the agreed goal is to build a good metplant right the first time and the team comes together early in the process, there will be greater confidence in the project and a high probability that the shareholders will be rewarded with the forecast profits.

Case study

A large vertically integrated aluminium project from bauxite mine through alumina refinery to aluminium smelter was at the stage of finalising the bankable feasibility study when the concept of adding a large rolling mill was approved. This decision coincided with discussions on project finance options for the refinery and smelter. The project financers in the smelter outer team were comfortable with the risks as they had financed several aluminium smelters in the region. However, a rolling mill was completely new to the project financers and their initial comfort level was not high. It transpired that the leader of the finance team was curious and after receiving ‘Rolling Mill 101’ he came back for ‘Rolling Mill 102’ in which the consequence of not minimising the risks were graphically demonstrated in a photo of the first coil produced at another rolling mill (Figure 2).

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Figure 2

The ensuing discussions which included all the project finance team as the project progressed through feasibility were frequent and productive. Whilst it was sometimes difficult for the finance people to agree as ‘one team’ on what was ‘good’, there was no doubt in their understanding of what was ‘not good’.

The new rolling mill reached financial close without too much pain and was subsequently constructed using first class equipment without cutting corners. The first coil confirmed this metplant worked well and was ‘done right the first time’ (Figure 3).

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Figure 3

Conclusions

For a quality metplant project to be on time, within budget and work well the first time all parties must work as one team to:

  • appreciate that all mineral projects are a risked compromise whereby we believe we are able to understand and exploit natural geological systems based on collecting the minimum quantity of cost-effective data
  • understand the complete multi-discipline process from exploration through resource definition, feasibility studies, financial close, construction and commissioning to ensure a safe and profitable long-term operation
  • agree on all goals and targets then confirm they pass ‘reality checks’
  • be aligned on how agreed goals and targets can be met
  • identify and quantify all risks associated with the uncertainties of mining and overlay these on the project cash flows
  • accept there will be problems and unknowns to solve (this is what the contingency is for)
  • ensure all stakeholders, ‘wise men’, management, project team and consultant engineers cooperate and collaborate to define problems and develop solutions to achieve the agreed goal of a profitable long-term project successful project delivery requires a united effort which cannot be achieved through an adversarial stand-off
  • schedule or budget should not have higher priorities than quality.

Acknowledgements

The author gratefully acknowledges the positive interactions with Alan Lowe, Vice President of Corporate Finance at Riyadh Bank, which inspired the concept for this paper; and also the assistance of Jon Coates, Ross Halatchev and Bob Greenelsh who provided significant editorial contributions.

Further information about this article can be obtained via peter@pcandjt.com  

A version of this paper was originally delivered as a keynote presentation at the MetPlant 2015 conference.

References

Dunlop JS, 2013. Mineral Project Management – A perspective from Four Decades in the Industry, in MetPlant Proceedings 2013, (The Australasian Institute of Mining and Metallurgy: Melbourne)

Guarnera B J, 1997. Technical Flaws in Bankable Documents, in Proceedings of Assaying and Reporting Standards Conference 1997, Singapore

Halatchev R A, 2007. Variable Discount Rate Modelling of Open Pit Gold Projects, Apcom 2007, Santiago

Hanrahan S, 2012. Project Studies- setting up for success 2012, AusIMM Bulletin October 2012 p34

Love S, 2009. Sponsor Bias and variance in outcomes of mining projects, AusIMM Bulletin February 2009, p69

Marsden J O, 2001. Politics of Mining, pp49-56 (SME)

McCarthy P, 2014. Performance of Feasibility Studies presented to AusIMM Branch Meeting Adelaide

Whincup P R, 2008. Role of the Metallurgist in Project Development, in MetPlant Proceedings 2008, (The Australasian Institute of Mining and Metallurgy: Melbourne)

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