Benchmarking 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 might be undervalued.
We also see cash cost charts (an example to the right) benchmarking where a company’s production cost will rank among its competitors.
I view benchmarking as a great thing. The information can be very insightful, but with the caveat that it takes effort to ensure the comparative data is accurate.
Can we see more benchmarking?
Given the benefits of benchmarking, another area that might warrant such effort is related to capital cost estimates.
When a project moves into the development stage, the first two observable metrics are the construction progress and the capital cost expenditures. The capital cost trend is generally given very close scrutiny since it is a key indicator describing where a project is heading.
Lenders may have observers at site monitoring both construction progress and cash expenditures. Shareholders and analysts are watching for news releases that update the capital spending. Their concern is well founded due to several significant cost over-run instances.
Some of these over-runs have been fatal whereby the company has been unable to secure additional financing for the extra costs. There are others instances where a financing white knight has come in and essentially wrestled company ownership away from current shareholders.
Some industry people also feel that capital cost performance can foreshadow a project’s performance once it goes into commercial production.
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 may want to see a comparison of their project capital cost with other similar projects.
Project databases
It would be a good thing if the mining industry (or other concerned parties) work together to create open source project databases. These 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 would 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 technical reports could 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, so why stop at production costs and share price valuation.
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 more benchmarking is part of the solution.
