The capex crystal ball: Beating the odds in mining project delivery.
Published in: McKinsey Insights, 11/27/2024,Business Source Complete
Cost overruns and scheduling delays have caused mining projects to underperform. Winners
are intervening early with a focus on preconstruction excellence.
(7 pages)
The past few decades have not been easy for project deployment in metals and mining.
Historically, the approach to project execution has been characterized by poor front-end
project definition, misaligned incentives, constrained resources, and deeply ingrained legacy
practices. Further complicating matters, the outbreak of COVID-19 created a whirlwind of
volatility in most industrial markets, with volatility in few markets rivaling the level of
operational disruption in mining.
About the authors
This article is a collaborative effort by Eduardo Mencarini, Matthieu Dussud, Piotr Pikul, and
Steffen Fuchs, with Sergio Ariztía, representing views from McKinsey's Metals & Mining and
Operations Practices.
Since then, mining projects have systematically underperformed in a significant way. Our
estimates show that cost and scheduling challenges affect 83 percent of recent major mining
and metals projects, with capital expenditure overruns of more than 40 percent and schedule
delays of 20 to 30 percent. Looking at megaprojects valued at $1 billion or more, the result is
even worse: on average, cost overruns run at least 79 percent higher than initial budget
estimates, while delays average out to 52 percent higher than initial time frames.
These figures become important when considering the amount of capital needed to help the
industry navigate the energy transition. According to McKinsey analysis, growth capital
expenditures for new supplies of metals and minerals, driven by traditional demand and
powered by the energy transition, could require $1 trillion over the next ten years. For copper
to close the supply gap, as much as $200 billion in capital expenditures could be needed by
2035. Therefore, it's critical for owners and operators as well as mining C-suite and board
members to improve their abilities to predict potential cost and schedule overruns.
In this article, we explore recent developments in cost and schedule performance in mining
projects as well as what can be learned from them. In doing so, we illustrate the importance
of good initial assessments versus cost management and how to overcome several shared
challenges. Finally, we show lessons learned from industry players that get project delivery
right.
An overview of cost and schedule performance in mining capital
expenditures
According to a recent McKinsey article, materials such as copper and nickel—which play key
roles in energy transition technologies, including electrification and battery electric vehicles—
are expected to see significant demand growth beyond their current applications. In fact, for
these two metals alone, capital expenditures of $250 billion to $350 billion could be needed
by 2035 to grow and replace depletion of existing supply.
Because capital is limited, improving the predictive power of cost estimates can help industry
players better decide where to allocate critical investments in the years to come. In addition,
because demand is predicted to outgrowth supply, the implications of increased cost
overruns could result in the energy transition slowing down.
With this in mind, we compiled a data set based on 80 global mining projects (Exhibit 1). The
projects in this data set are varied, with timelines ranging from less than two years up to
eight years and budgets from $0.3 billion to more than $5.0 billion and including open-pit
and underground mines for several materials, such as copper, aluminum, and nickel (among
others) from all regions of the world.
1
PHOTO (COLOR)
About the analysis
In looking at data collected by McKinsey MineSpans, we were able to better understand the
primary reasons projects went over budget and suffered delays. This entailed identifying the
most common causes and correcting the database to make each project comparable with
others. Projects were also filtered to include only Class 3 estimates as well as contingency
allowances of the same range.
Next, we corrected schedule delays from COVID-19, including direct and indirect effects for
projects from 2020 to 2022, particularly those that resulted in approximately two- to sixmonth delays for each year the project endured COVID-19-related bottlenecks during
construction. The increase in cost and schedule from the pandemic was mostly due to the
following reasons:
shutdowns: total stops on construction due to regulations
decreased productivity: fewer workers and tests, both of which consume shift time
delays on freight: significant delays on materials manufacturing and transportation
because of COVID-19
Finally, foreign exchange fluctuations and rates of inflation were corrected based on the
differences against projected value of these variables at the beginning of the project.
To meaningfully compare projects, we looked closely at the main external variables resulting
in projects going over budget and over time (see sidebar, "About the analysis"). The results
show that after correction, there are still significant delays and cost overruns. Only 42 percent
of the total projects have cost overruns of less than 10 percent, and 54 percent have schedule
overruns of less than 10 percent. On average, mining projects over the past decade suffered
real schedule delays of approximately 25 percent and real cost overruns of approximately 40
percent.
Notably, predictability performance does not vary for different surface types. Open-pit and
underground projects have statistically similar distributions and similar average delays and
cost overruns. The two most important variables that determined how well owners and
operators predicted capital expenditures and length of construction were the size of the
expenditures and the type of ore extracted.
Overall, the analysis showed that large projects (those with more than $1 billion in capital
expenditures) have worse predictability performance. Only 8 to 10 percent of the total
projects in this category avoided cost overruns and schedule delays compared with 20
percent of projects with capital expenditures of less than $1 billion. In terms of the extracted
material, copper underperformed compared with the broader industry. In fact, 33 percent of
copper projects had real schedule delays of more than 30 percent, compared with 13 percent
for iron projects and 12 percent for other metallic ores (Exhibit 2).
2
PHOTO (COLOR)
Initial assessments versus cost management: Common
challenges
Deviations from cost and schedule estimates often arise from poor initial budget or time
assessments or from poor execution. It's not unusual for both to happen at the same time,
making it difficult for owners and operators to identify root causes. Our analysis shows that
approximately two-thirds of cost overruns and schedule delays could be attributed to poor
initial assessments, with the remaining one-third related to poor execution. This is
particularly true for copper, which tends to have longer schedule delays compared with other
materials.
According to McKinsey analysis, poor initial assessments historically suffer from the following
challenges:
a lack of standard criteria for what constitutes a feasibility study with sufficient maturity
to identify uncertainty in estimates and ensure predictable outcomes
subpar management practices and taking technical shortcuts, such as bypassing
metallurgical test work
a failure to account for anticipated technological advances, particularly concerning AI
and other digital tools
misaligned mindsets and behaviors between owners and feasibility study contractors
In terms of projects with higher frequency of delays and overruns, the two most common
reasons projects experience these issues today are execution problems (73 percent of the
observations) and organizational problems (65 percent), both of which are typically fostered
by a design optimization process that lacks rigor and has little or no incentives for owners.
Other common challenges include technical challenges (46 percent), such as evaluating the
definition of feedstock, reservoir, ore body, and population growth; market challenges (40
percent), such as assessing financial health, contracting strategy, financing options, pricing,
and stress scenarios; and political challenges (27 percent), such as understanding the status
of permitting and approvals, stakeholder management, local engagement programs, and
land acquisition.
Considering the sheer number of projects affected by these challenges, it's clear that many
mining owners and operators can make moves today to help improve project outcomes.
What winners get right: Intervening early and setting a clear
focus
Winners and best performers in project deployment in mining are intervening early with a
clear focus on five aspects: investing in rigorous feasibility studies, bringing up and
improving the economics early, enabling project delivery excellence, focusing on execution
productivity, and fostering a sustainable, healthy culture that enables performance.
Invest in rigorous feasibility studies
It is much easier to influence a project's outcome in the early stages of project design rather
than the late stages when decisions have already been made and actions cannot be revised.
This is the foundation upon which the project's success depends and therefore needs to be
done properly with rigorous standards. In addition, time, effort, and resources need to be
properly allocated to initial studies.
Bring up and improve the economics early
When it comes to the business case, owners and operators can evaluate each project as an
independent business. Each mine investment should make sense on its own, and leaders can
make decisions early about front-end engineering design (FEED) and pre-FEED based on the
net present value (NPV). With these early estimates in hand, everything should be seen as a
business case that can be optimized using early project value improvement, design-to-value
analysis, and optimization of early project decisions. Owners and operators should not aim
for perfect technical solutions or try to enhance a project by adding features that do not
represent an economic return, commonly known as "gold plating."
For example, a company developing a new underground precious metals mine in a remote,
mountainous region conducted a prefeasibility study that revealed an internal rate of return
of less than 10 percent. The company needed to improve these economics before meeting
with the investment committee, which allowed it to address core areas for value creation,
such as capital expenditures and operating expenditures for surface facilities and tunnels;
mine plan and design; project execution and contracting strategy; and selling, general, and
administrative expenses. These value improvement initiatives led to an NPV upside of
approximately $600 million to $700 million and restored project economics back to their
original expectations.
Enable project delivery excellence
Leading mining companies have shown that strengthening the stage gate process, selecting
and onboarding a winning project team, and defining an optimized contracting strategy—
including a delivery model and the right level of collaboration with partners and key suppliers
—are critical steps to enabling the best possible configuration and strengthening the chances
of the project being successfully deployed. In addition, owners and operators can establish
transparent project delivery systems that consider future operations.
For example, a leading natural resources company delivered a $2.5 billion project in North
America during the COVID-19 pandemic with cost overruns and schedule delays smaller and
shorter than those of its peers. To achieve this, the company strengthened the owners' team
in key roles with additional internal and external capabilities. The company then reset
contractual relationships with key mechanical and electrical contractors focused on
comprehensive and collaborative setup, including joint problem solving and incentives for
both sides. Last, it ensured transparency and the ability to intervene through a project
control tower and cadence of meetings and escalations, including a weekly CEO review.
Focus on execution productivity
Once the project has moved to execution, there are still several levers and actions that can be
prioritized and implemented to increase the chances of having a successful project outcome.
As leaders have shown, one action companies could take is increasing transparency in
megaproject execution by implementing new technical solutions to capture and analyze
project data, paired with improved processes for project performance management that
enable rapid and effective decision making based on critical data. Another lever is fostering
collaboration between EPCs (engineering, procurement, and construction players) and
owners with formal meetings that ensure that opportunities to reduce costs and increase
efficiency are accounted for and implemented. Last, companies could consider deploying the
next generation of field productivity tools, such as project or database management systems,
which would allow them to increase workforce productivity results.
Recently, a leading player in the mining and oil and gas sector recognized the need to
improve productivity to accelerate its rate of production and development of its latest mining
project. After several iterations—and then deciding to do a complete turnaround on
execution productivity—the company focused on implementing project production
management systems, ensuring performance targets and KPIs were cascaded correctly into
the field while keeping track of main variables with a new process for project management.
This allowed the company to identify the main sources inhibiting performance, which
primarily involved construction materials and waiting for needed materials to be installed. It
quickly adjusted these points, enhanced its performance, and ultimately returned to its
preestablished performance targets.
Foster a sustainable, healthy culture that enables performance
Companies can improve performance across the organization by focusing on cultural health
and ensuring the workforce is diverse across multiple commodities. This includes
performance transparency, talent development, consequence management, operational
discipline, and knowledge sharing.
In the face of a dwindling skills pool for mining talent, a South Africa–based mining company
focused on providing resources for its employees to gain technical skills. The company
invested in training programs for employees at all levels of the organization, with programs
ranging from leadership development and engineering and mining training to science and
language enhancement and study assistance programs. On average, employees receive
more than 60 hours of training a year. By implementing these programs, the company was
able to fill technical skills gaps and enhance the value proposition for employees.
The time to act is now, and the opportunity is enormous. Conservative estimates place the
total opportunity from copper and nickel at $75 billion to $110 billion through 2035, with the
potential for companies to accelerate 1.0 to 1.5 years of critical production for the energy
transition by moving from current industry standards to the top quartile of performance. As
the requirements for how capital is deployed across new projects evolve in the years to come,
predictability will gain increased relevance. To avoid poor initial assessment and cost
management, owners and operators will need to focus on project stages and implement
robust business cases early. Enabling a project delivery excellence process and focusing on
execution productivity while prioritizing preconstruction excellence will not solve all the
problems and fix predictability, but it will enhance results and outcomes, preventing loss of
capital and allocating resources to where more is needed.
Eduardo Mencarini is a partner in McKinsey's São Paulo office, Matthieu Dussud is a partner
in the Paris office, Piotr Pikul is a partner in the Toronto office, Steffen Fuchs is a senior
partner in the Dallas office, and Sergio Ariztía is an associate partner in the Santiago office.
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By Eduardo Mencarini; Matthieu Dussud; Piotr Pikul and Steffen Fuchs
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