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.
Reading it further, it was apparent that their study consultant, Ausenco, was being paid in company stock in lieu of cash. The arrangement included an initial financing of $750k with a further $375k to follow once the pre-feasibility study was 75% complete. Upon completion of the study another share payment was due.
I have never been in a situation where I was consulting with company shares as my compensation. Neither have I ever managed a study where outside consultants were being paid in shares. However I can see the possibility of interesting dynamics at play.
Regarding the first item “impartiality”, in the past there have been questions raised about the impartiality of engineering firms. I first recall reading this claim many years ago in a public response to a mining EIA application. Unfortunately I cannot find the exact source now.
It would be interesting to know how many consulting firms would be willing to accept compensation solely in shares. Stock prices move up and down and the outcome of the study itself can have an impact on share performance.
In general to get financing and investor interest, development projects must demonstrate a high NPV, high IRR, and short payback period. This requirement tends to apply more to the small and mid tiered companies than to the major companies. The majors normally have different access to financing.
There are several scenarios where NPV analysis decision making may conflict with the objectives of sustainable mining. Here are a few examples.
4. Low grade ore stockpiling can help to increase early revenue and profit, thereby improving the project NPV and payback. Stockpiling of low grade and prioritization of high grade means that lower grade ore will be processed in the later stages of the project life. Who hasn’t been happy to develop a mine schedule with the grade profile shown on the right?
7. Accelerated depreciation, tax and royalty holidays are types of economic factors that will improve NPV and early payback. They are one tool governments use to promote economic activity. These tax holidays will greatly enhance the NPV when combined with high grading and waste stripping deferral.
NPV is one of the standard metrics used to make project decisions. The deferral of upfront costs in lieu of future costs is favorable for cashflow and investor returns. Similarly, increasing early revenue at the expense of future revenue does the same. Both approaches will help satisfy the financing concerns. However they may not be advantageous for creating long term sustainable projects.
I was at the 2019 Progressive Mine Forum in Toronto and a presentation was given on underground compressed air storage. The company was Hydrostor (
Converting an abandoned mine into a power storage facility will still have its challenges. Cost and economic uncertainty are part of that. In addition, permitting such a facility will still require some environmental study.
In the past there would be binders with detailed calculations and backup for the different parts of the study. Typically there was a binder for the Executive Summary and separate sections (i.e. binders) for Geology, Mining, Processing, Infrastructure, Capital Cost, Operating Cost, Environmental, Project Execution, and Economic Analysis, etc.
The original intent of the 43-101 Technical Report was for it to be a summary document, only about 80-150 pages in length. The intent was to simplify all the technical work for the benefit of non-technical investors. Currently I have noticed that in many cases the 43-101 report is now the entire feasibility study document.
My recommendation is that, where budgets permit, mining companies return to the days of preparing the comprehensive feasibility study document. It’s the right thing to do.
If any mining industry credibility has been lost, re-establishing it should be important. One way to start doing this is to focus on creating the type of reports that best serve the needs of the industry stakeholders.
The technology consists of a floating LNG (liquefied natural gas) turbine power plant combined with high capacity seawater desalinization capabilities. MODEC is offering the FSRWP® (Floating Storage Regasification Water-Desalination & Power-Generation) system.
From a green mining perspective, the FSRWP produces clean power with the highest thermal efficiency and lowest carbon foot-print.
Currently there are three mooring options for the floating system that should fit most any tidewater situation.
The bottom line is that if your mining project is near shore, and has both water supply and power issues, take a look at the FSRWP technology. One might say it is greener technology by using LNG (rather than coal, heavy fuel oil, or diesel) to generate power. At the same time it avoids competition with locals for access to fresh water.
Each year business leaders are queried about what they view as their major risks. The survey results are summarized in the Global Risk Report.
It is also interesting to look at the detailed 10 year table in the report to see how the risk perceptions have changed over the last decade.
The mining industry will see positive impacts from digitalization. Unfortunately more reliance on technology also brings with it significant risks. These risks are related to cyber security.
As your mining company continues to move into the digital world, you must ask:
The bottom line is that there is no stopping the digitalization of the mining industry. It is here whether anybody likes it or not. At the same time, there is likely no stopping the growth of cyber crime.
Mining companies are always on the hunt for new projects to grow their cashflows. They would all like to find the “perfect” project; one with ideal conditions and great attributes.
Now take an honest look at some recent (or past) projects that you have been involved with. How many of the perfect attributes listed above would be represented? It would be surprising to see them all checked off. Unfortunately that means certain flaws (risks) must be accepted when developing a project.
The bottom line is that management understandably have a difficult task in making go/no-go decisions. Financial institutions have similar dilemmas when deciding on whether or not to finance a project.
The study concluded that accessing potential deposits at depths of around 1000 m is economically feasible only if curved wells are used. The most relevant operational parameters are sufficient permeability in the ore zone and an adequate contact surface between the ore and leaching solution. The depth of the deposit is indirectly relevant, but more importantly the well installation cost per volume of deposit is critical. Hence curved wells are optimal.
I am also curious about the ability to finance such projects, given the caution associated with any novel technology. Many financiers prefer projects that rely on proven and conventional operating methods.