capital productivity
Mining and metals megaprojects
Contents
03
Why spending millions in up-front planning, engineering and
design is not driving improved predictability and control
Cost and schedule control: a key risk and major opportunity
Capital megaprojects: declining but still massive
05
Drilling down to the core issues and causes
Scarce capital driving a focus on capital productivity
The devastating impact on capital productivity
The impact of overruns
09
Achieving capital productivity
Addressing the risks
Driving improved predictability and control
Implementing effective governance and reporting frameworks
Allocating adequate cost and time contingency
Enhancing the value of contingency planning
14
Conclusion
15
How EY can help
62%
average
budget overrun
on megaprojects
2012
1. Riding The Rising Tide of Global Growth, Deutsche Bank research, 19 February 2014, via Thomson One.
2013
2014f
2015f
Mining
201213
201112
201011
200910
200809
200708
200607
200506
200405
200304
200102
200001
199900
199899
199798
199697
199596
200
180
160
140
120
100
80
60
40
20
0
199495
All sectors
EYs view of the dynamic relationship for capital project and investment planning
Drivers
Portfolio
prioritization
Business strategy
What
Why
Project/program
delivery strategy
and governance
How
Assessment
Commodity prices
Economic conditions
Technological evolution
Political environment
Setting business
direction for sustainable
competitive advantage
Prioritizing projects by
allocating capital in-line
with strategic objectives
Our analysis found that cost and time overruns were not
correlated to whether a project had reached FID, nor were they
restricted to a particular commodity or region. Of all the global
regions reviewed, Oceania experienced the highest level of
average budget overruns. Contributing factors across the sample
set included:
Labor costs
*Projected up-front engineering and design spend in the typical range of 5%15%
Overvalued currency
Logistical challenges of remote geographies
US$52b
North America
Europe
Asia
US$147b
US$23b
US$33b
Latin America
US$26b
Oceania
Africa
Copper
Iron ore
Gold
Coal
Nickel
US$87b
Others
2. Stakeholder
conicts
3. Resource
constraints
4. Regulatory
and policy-related
challenges
5. Unfavorable
external
environment
Inadequate
planning
Conicts between
project operators
and the
government
Human capital
decit
Health, safety
and environment
(HSE) compliances
Geopolitical and
security issues
Conicts among
partners
Equipment and
services-related
issues
Regulatory
delays
Changes in
market
conditions
Optimized owner
and EPCM and
contractor
relationships
Conicts with
the local
community
Inadequate
infrastructure
Relationship between the project life cycle and the ability to inuence the risk prole and expenditure
Inuence
Expenditure
Risk
Time
Relationship between key causes and critical areas of underinvestment that can assist to address these
Governance and reporting
of emerging risks
Project
management
issues
Stakeholder
conicts
Resource
constraints
Regulatory and
policy-related
challenges
Unfavorable
external
environment
Inadequate
planning
Conicts
between project
operators and
the government
Human
capital decit
HSE
compliances
Geopolitical and
security issues
Poor rigor in
cost and schedule
estimates
Conicts among
partners
Equipment and
services-related
issues
Regulatory
delays
Changes
in market
conditions
Optimized owner
and EPCM and
contractor
relationships
Conicts with
the local
community
Inadequate
infrastructure
Aligning contingency
plans to scenario plans
Key questions
Do your dashboards focus on lag or lead indicators?
Are you getting the right information to change
direction before risks eventuate or poor
performance is reported by a lag indicator?
Broad contextual
environment forces
1
Working environment
forces
6
Organization
forces
5
Scenario A
Scenario B
Scenario C
Scenario D
Example scenarios
A
Working environment
Forces:
1. Threat of new entrants
2. Buyer bargaining power
3. Threat of substitute products
4. Supplier bargaining power
5. Existing competitor rivalry
Organization
Forces:
1. Owners' team
2. EPCM and contractor
3. HSE & quality systems/
processes
4. IT infrastructure
5. Operational performance
culture
Portfolio
Program
Project
Conclusion
While commodity prices are driving belt-tightening and capital scarcity
across the mining and metals sector, megaprojects continue to face
unacceptable cost and schedule overruns. Long lead times and the
need to prepare for the next cyclical upswing will make capital project
execution a critical skill of leading mining and metals companies. As
our study of global projects reveals, despite increasingly mature
delivery skillsets, over two-thirds of projects were facing cost overruns.
These overruns were directly impacting the capital productivity and
commercial performance of mining and metals companies across the
globe, and new perspectives are essential to turn this trend and deliver
to boards and investors the predictability and condence they require.
Considerations when planning (or
re-planning) a project
How are we ensuring that we are aware
of future and emerging risks while they
can still be efciently mitigated?
How are we optimizing EPCM and
contractors relationships and global
buying power to delivery strategic
outcomes and mitigate risks?
Are we allocating enough cost and time
contingency to account for the real
risks that could impact our project?
Contacts
To discuss how we can help you with capital projects, please contact
any of the following members of our global team:
Paul Mitchell
Global Mining & Metals
Advisory Leader
Tel: +61 2 9248 5110
paul.mitchell@au.ey.com
Loretta Hudson
Partner, Portfolio & Program
Management
Tel +61 3 9655 2595
loretta.hudson@au.ey.com
Claus Jensen
Global Portfolio and Program
Management Leader
Tel +44 (0)75 5227 1165
cjensen@uk.ey.com
Richard Noble
Executive Director, Portfolio &
Program Management
Tel: +1 41 6943 3151
richard.noble@ca.ey.com
United States
Andy Miller
Tel: +1 314 290 1205
andy.miller@ey.com
Oceania
Scott Grimley
Tel: +61 3 9655 2509
scott.grimley@au.ey.com
Canada
Bruce Sprague
Tel: +1 604 891 8415
bruce.f.sprague@ca.ey.com
Brazil
Carlos Assis
Tel: +55 21 3263 7212
carlos.assis@br.ey.com
Japan
Andrew Cowell
Tel: +81 3 3503 3435
cowell-ndrw@shinnihon.or.jp
Chile
Lachlan Haynes
Tel: +562 2676 1886
lachlan.haynes@cl.ey.com
Africa
Wickus Botha
Tel: +27 11 772 3386
wickus.botha@za.ey.com
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Area Contacts
Commonwealth of
Independent States
Evgeni Khrustalev
Tel: +7 495 648 9624
evgeni.khrustalev@ru.ey.com
ey.com/miningmetals