Managing Risk and Cost in Mining
Infrastructure Development
Sarah Thomas, Partner
Pinsent Masons LLP
Mining on Top
24 June...
Setting the Scene: (1) Key Drivers
• Dismal shareholder returns, uncertainty of future demand and
commodity pricing
• All ...
Setting the Scene: (2)
Infrastructure Deficit: West Africa case study
3
Setting the Scene: (3) Physical , Regulatory and
Reputational Risks of Water
• Lack of available water
– Challenging physi...
Construction Stage: Current Market – EPCM
Model – trend towards more variability?
5
Traditional model
Client EPCM
Construc...
Split Contract Model
6
Split Model
ClientEPCM*
EPC
EPC
EPC
Construction
contract
Construction
contract
Construction
contra...
Controlling costs in construction
• Main issue - delays and cost overruns –
• Unpredictability of local mine site/communic...
What can be done to help manage delays
and cost overruns cont.?
• For construction packages - use of bills of quantities/r...
Design Responsibility and Defects
Management (1)
• Mining’s complex terrain and climate challenging; every mine site is
un...
Design Responsibility and Defects
Management (2)
• Possible solutions:
– Ensure retention of experienced, competent person...
Concluding Remarks
• Mining build by its nature is complex, challenging and costly
• Historically a limited marketplace an...
• “Project management can be defined as a way of
developing structure in a complex project, where the
independent variable...
Any Questions?
13
Sarah Thomas, Partner
Pinsent Masons LLP
T: +44 (0)20 7490 6273
E: sarah.thomas@pinsentmasons.com
Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authoris...
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Managing Risk and Cost in Mining Infrastructure Development - Sarah Thomas, Pinsent Mason

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Managing Risk and Cost in Mining Infrastructure Development

Speaker: Sarah Thomas, Partner, Pinsent Mason
Director, Vale

Mining On Top: Africa - London Summit
24-26 June 2014 | London

Published in: Business, Technology
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Managing Risk and Cost in Mining Infrastructure Development - Sarah Thomas, Pinsent Mason

  1. 1. Managing Risk and Cost in Mining Infrastructure Development Sarah Thomas, Partner Pinsent Masons LLP Mining on Top 24 June 2014
  2. 2. Setting the Scene: (1) Key Drivers • Dismal shareholder returns, uncertainty of future demand and commodity pricing • All leading to less funding & less projects – changes in marketplace? • High capital costs of mining infrastructure - South African example - infrastructure costs = 80% of mine development costs; cost inflation (not matched by productivity gains) plus geological inflation (declining grades = increasing tonnage mined) • High bulk commodities – e.g. iron ore, coal, manganese - significant transportation costs • Wider costs of infrastructure development (ports, road, rail, water and power availability) • Focus on ‘back to basics’ – cost control, productivity gains & protecting margins 2
  3. 3. Setting the Scene: (2) Infrastructure Deficit: West Africa case study 3
  4. 4. Setting the Scene: (3) Physical , Regulatory and Reputational Risks of Water • Lack of available water – Challenging physical conditions and competition for use • Forced shutdown – Revenue losses • Power outages • Low quality water – Leading to losses in mineral recovery or reduction in quality of product • Environmental impact/Resource Nationalism • Australian regime sets example for other countries • e.g. Ghana • strict legislative requirements • environmental sustainability • licensing requirements 4 Source: http://www.infrastructurene.ws/3s-composition/uploads/2012/05/acid- mine-water.jpg
  5. 5. Construction Stage: Current Market – EPCM Model – trend towards more variability? 5 Traditional model Client EPCM Construction contract Construction contract Construction contract Equipment Supply Equipment Supply Equipment Supply Purchase order and T’s & C’s
  6. 6. Split Contract Model 6 Split Model ClientEPCM* EPC EPC EPC Construction contract Construction contract Construction contract Equipment Supply Equipment Supply Equipment Supply * “E” & “P” can be split from CM with CM undertaken by Client in house or by another consultant (for cost savings)
  7. 7. Controlling costs in construction • Main issue - delays and cost overruns – • Unpredictability of local mine site/communications/labour force/ground and environmental conditions/consenting regime • Controlling manpower costs – Starting point – manpower intensive and key contracts (e.g. EPCMs) reimbursable plus Fee – Doing the works ‘in house’ vs using third parties • Balance cost vs capabilities vs terms imposed by host Government/sponsor – Cost of expatriate personnel. Ability to impose detailed cost controls in EPCM contracts limited – disallowed costs regime often relatively loose and fee relates to man hours expended so no incentive not to inflate manpower costs – Link fee to a target cost mechanism – Include rate for drawing so EPCMs incentivised to be efficient – Control inappropriate use of expat personnel/overloading: e.g. pre-agree allocation of resources - organogram with manpower schedule – with any changes to be approved by Client – All difficult to negotiate but changing market? 7
  8. 8. What can be done to help manage delays and cost overruns cont.? • For construction packages - use of bills of quantities/remeasurement or fixed price/EPC for discrete packages • Detailed programme with milestones and consequences • Regular reporting (linked to KPI measures) • Liquidated Damages • Incentive for finishing early • Regular reporting to Head Office • Early Warning system (similar to NEC) • KPI Regime linked to % of Fee including re: programming, forecasting and management setting deadlines 8
  9. 9. Design Responsibility and Defects Management (1) • Mining’s complex terrain and climate challenging; every mine site is unique • Third party engineers may have only designed discrete parts early on – limited recourse • Expiry of design responsibility or limited to re-performance • Other Issues: – Shortage of other skilled consultants/contractors to do the work in country – When things go wrong costs and delay mount up very quickly (e.g. flying team experts to site paying premium to fast-track re- design and replacement parts) – Lack of integration between development and operations teams? 9
  10. 10. Design Responsibility and Defects Management (2) • Possible solutions: – Ensure retention of experienced, competent personnel with Key Project Personnel clauses – Express design requirements in the contract & as detailed as possible – Make any design breach/non compliance a “defect”, not just breaches of duty of care/laws – Require EPCM to redo a defective design without cost and uncapped (ensure a Disallowed Cost) – Design review at all stages – Client to approve design before proceeding to next stage – Longer warranty periods – e.g. 2 years post mechanical completion or longer – Pro-active management and greater integration between construction and operation teams; regular reporting to head office • However, note that EPCM liability for rework difficult to obtain - therefore must mitigate risk before design proceeds to implementation 10
  11. 11. Concluding Remarks • Mining build by its nature is complex, challenging and costly • Historically a limited marketplace and “seller’s” market • Potential changes due to reduced project spend (consolidation of EPCM’s and new entrants) – JV’s with construction operators (influence of Chinese Investors) – Bringing more expertise back in house – Improved reporting and data collection (and interpretation) – Utilise framework relationships with supply chain – Mixed contract models – greater collaboration? – Greater use of incentivisation models • Key is pro-active management good stakeholder relationships and quality of personnel 11
  12. 12. • “Project management can be defined as a way of developing structure in a complex project, where the independent variables of time, cost, resources and human behavior come together.” -– Rory Burke
  13. 13. Any Questions? 13
  14. 14. Sarah Thomas, Partner Pinsent Masons LLP T: +44 (0)20 7490 6273 E: sarah.thomas@pinsentmasons.com
  15. 15. Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority, and by the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use 'Pinsent Masons' to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to 'Pinsent Masons' is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2014 For a full list of our locations around the globe please visit our websites: www.pinsentmasons.com www.Out-Law.com 15

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