Developers and investors now face a new range of factors that conspire to undermine their projects’ success, according to SRK Consulting Director Roger Dixon, and this calls for even higher standards of engineering, planning and execution.

“Volatility in commodity prices, exchange rates, a lack of infrastructure capacity and inflation all contribute to making feasibility studies more difficult and project implementation more risky,” said Dixon. “As consulting engineers, we have to be able to demonstrate to our peers that the conclusions in our studies are reasonable, and that other experts would have arrived at the same result.”

High levels of uncertainty make it difficult for project backers, and raise questions about the way that the feasibility studies are being conducted, said Dixon. This heightens the risks and tarnishes the reputations of all concerned, with the prospect of litigation now a real possibility.

Last year, for example, a “capex blowout” doubled the estimated project cost of the Galore Creek project in Canada, and led shareholders to file a class action against the company. Cost projections had inflated from $2.2 billion to $5 billion.

Dixon explained that a lack of technical capacity is a key factor in project overruns. “The feasibility studies may not meet the required standard, leading to an underestimation of capital expenditure requirements,” Dixon said. “And then, when it comes time to implement the plan, the technical capacity often isn’t there to ensure the project is rolled out well and in good time. Engineers in all of the different disciplines are in an extremely difficult position in the business environment we now operate in, and the shortage of skills just exacerbates this situation.”

As part of its response, SRK Consulting recently gathered its experts from around the globe in Lulea, Sweden, prior to MASSMIN 2008 (5th Annual Conference on Mass Mining), to set more detailed standards for all levels (concept, prefeasibility and feasibility) of its engineering studies. The group comprised 36 engineers from SRK’s offices around the world. “One of the benefits was that we had all of the engineers and scientists present—from legal tenure, reserves and processing to tailings, market analysis and risk assessment. We also included those fields that often get left out, like hydrogeology and hydrology. They could quickly see the interdependent relationships between the different disciplines,” Dixon said.

One of the objectives was to decide on a common terminology for the studies, as there exist many variations to describe engineering studies from “scoping study” to “full feasibility” to “bankable feasibility study.” “Where do these people get all of these other terms?” said Dixon. “We have decided that we are going to stick with the ones defined in the regulatory codes.”

The South African code for reporting mineral reserves and resources (SAMREC), has been revised recently with definitions for prefeasibility and feasibility studies only. It references the Canadian Institute of Mining (CIM) standards, which also have definitions for prefeasibility and feasibility studies. The Australians, who use the JORC standards, however, have remained silent on the definition of engineering studies. There are so few differences between SAMREC and CIM that they enjoy reciprocity. “When SRK files a report in Toronto, we say that there are no material differences because we have followed the SAMREC code,” Dixon said.

Levels of Accuracy
The group also debated levels of accuracy for the studies. The overriding view was that levels of accuracy should not be defined as this could lead to litigation problems further down the line should cost overruns be queried. It would seem prudent to infer a level of accuracy through the text of the standards for each section of the study.

“In the situation we are in now, not just the financial problems, but the volatility in steel and oil prices, it’s quite dangerous to quote a percentage,” said Dixon. “The discussion focused on whether we should actually state a level of accuracy or define standards for the various areas and from those standards the client would be able to judge the level of accuracy that we have achieved.”

If a lawyer in a U.S. court of law, Dixon explained hypothetically, says to an engineer, “You said this ranges from +10% to - 15%,” and then asks, “Can you please tell me how you arrived at those figures?” a lot of engineers would have great difficulty explaining their rationale. “The best approach would be to give a high or low level of confidence and refer to the standard that we are developing within SRK and the reader can judge for themselves the technical nature of the work and the levels of accuracy for the study,” said Dixon.

The group also considered all of the different aspects of a study. There was a strong feeling among participants that an integrated approach where all disciplines participate in a study as a team was vital to the successful completion of a study. There are strong interdependencies among the disciplines which are better solved with a team approach. The level of discussion generated on the topics confirmed the need for a generalized standard within the greater SRK group. It was also apparent that as in most engineering situations a degree of judgment is required on the standards to be applied and that projects should be considered on their own merit taking into account such things as size and complexity.

Risk Assessment
Mining companies do need to be more honest with themselves when it comes to risk analysis. “Risk assessment was another item that we discussed in Lulea,” Dixon said. “We are moving toward bringing that into all of our engineering studies. Risk should be managed through all of the different levels of studies and into project implementation through production.

“After all, risks are established at the prefeasibility level,” Dixon said. “Mitigating measures and management plans are put in place. They are reviewed on a regular basis. If the measures are not met or the risk is not being reduced, the risk must be quantified. It’s a constant process. That’s a principle that we want to introduce into our engineering studies.” Today’s business climate will force engineering companies that perform feasibility studies to be more stringent in the way that they approach the study. The banks will drill down into the data much more than they ever did before.

“As professionals, we need to make it absolutely clear to clients what we are investigating and the standards we apply in each of these investigations,” Dixon said. The effect of this should be to remove uncertainty in the relationship between client, consultant and other stakeholders.

“Our aim at the Lulea workshop was to ensure that all of the ‘modifying factors’ in a project are considered in a systematic and standardized way,” Dixon said. “We are now taking the input from all SRK’s experts in the various disciplines and turning them into detailed standards for each of the three levels of study. We’ll review it again to check that everyone agrees. By about the middle of next year, we’ll be able to gather everyone again to fine tune and finalize a comprehensive package.”