Benchmarking companies is the process of measuring performance of a company’s attributes against those of another. Ideally the benchmarking comparison is made against what are considered to be the best in the industry. Sometimes however the comparison is simply made between industry peers.
We often see junior mining companies benchmarking themselves against others. Sometimes corporate presentations provide graphs of enterprise value per gold ounce to demonstrate that a company is always undervalued.
We also see cash cost charts (an example to the right) benchmarking where a company’s production cost will rank among its competitors.
Benchmarking is a great thing. The information derived from it can be very insightful, but there is the caveat that it takes effort to ensure the comparative data is accurate.
Can we see more benchmarking?
Given the benefits of benchmarking, an area that might warrant more effort is related to capital cost estimation.
When a mining project moves into the construction phase, the first two observable metrics are the construction progress and the capital cost expenditures to date and expected. The capital cost trendline is given very close scrutiny since it is a key indicator where a project is heading.
Lenders may have observers at site monitoring both construction progress and cash outlays. Shareholders and analysts are watching for news releases that update the capital spending. Their concerns are well founded due to numerous cases of significant cost over-runs.
Some of these over-runs have been fatal, whereby the company has been unable to secure additional financing to cover the additional costs. There are others instances where a financing white knight has come in to the rescue, and essentially wrestled company ownership away from current shareholders.
Some industry people also feel that capital cost performance during construction can foreshadow a project’s performance once it goes into commercial production. If construction consumes the available working capital, commissioning and early production will have increase risks if they need to fix things.
Capital cost over-runs may be caused by poor execution and/or unforeseen events, or due to inaccurate cost estimation to begin with. Many investors still have apprehension with capital cost estimates from advanced studies. This is where benchmarking may play a role. Mining company shareholders should want (or demand) to see a comparison of their project capital cost with other similar projects.
Project databases
It would be a positive thing if the mining industry (or other concerned parties) could work together to create open source project databases. These databases would incorporate summary information and cost information for global mining projects. The information is already out there, it just needs to be compiled.
One nice thing is that younger workers coming into the mining industry exhibit an interest in collaboration and information sharing. Hence maintaining the databases could be done by interested parties, industry experts, and/or crowd sourcing.
The databases could be public domain accessible to everyone and could be used to benchmark a project against other similar projects. The Global Tailings Portal (tailing.grida.no/about) is working to build a freely accessible database for the thousands of tailings dam globally. Its the same idea.
I realize that many mining projects are unique with site specific features and conditions. However many projects are also very similar to one another. For example West African gold projects in many cases can be replicates of one another with similar capital costs.
Published 43-101 technical reports could then include a chapter on benchmarking, whereby a project is compared with other similar projects. A company could provide rationale why their project will be costlier (or less expensive) than the others.
Conclusion
Benchmarking can be a great tool when done correctly. Benchmarking capital costs might bring more transparency to the project development process. It may help convince nervous investors that the proposed costs are reasonable.
We already see corporate presentations using benchmarking to explain why they are undervalued. Why stop there?
One could expand the reach to include operating costs but internal confidentiality may be an issue. Furthermore operating costs are longer in duration and subject to change with global influences.
Capital cost accuracy is one of the primary concerns in the development of new projects. Possibly that availability of more benchmarking data is part of the solution.
