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Optimizing mining
feasibility studies: The
$100 billion opportunity
With mining and metals projects becoming increasingly complex, more
rigorous feasibility studies help prevent cost and schedule overruns, and
maximize value.

by Matthieu Dussud, Gregory Kudar, Patrick Lounsbury, Piotr Pikul, and Filippo Rossi

© Getty Images

August 2019
After getting badly burned in the commodities stage, companies have few benchmarks to go
bust earlier in this decade, miners and metals by for a wide swath of other elements, such as
producers are embarking on another round of engineering definition, execution and operational
capital investment. As a new build cycle begins, readiness, business objectives, or commodity price
owners and contractors have the opportunity to predictions—all of which can change a project
reflect on where they’ve excelled in planning and calculus significantly. In one example, a major
executing capital projects—and where they’ve fallen mining company failed to align its FS and marketing
short.¹ Several common issues tend to erode value in strategy on a large project, causing it to delay
mining projects, ranging from inadequate design to submitting the project to its investment committee.
insufficient supervision. But one issue is persistently As a result, it lost hundreds of millions of dollars in
under-addressed: a lack of rigor at the feasibility- net present value (NPV).
study (FS) stage.
Second, FS often suffer at the hands of subpar
Many mining executives still rely on the same FS management practices. Owners may impose
processes they did years ago, when resources were artificial schedule constraints to rush to get a
more accessible and projects less risky to plan and project live or meet timeboxed key performance
execute. That’s a problem because today’s projects indicators (KPIs). They may also take technical
are becoming larger, more complex, and often more shortcuts, such as bypassing metallurgical test
remotely located—making them more susceptible work, or undertake risk assessments that are
to cost overruns.² It’s clear that the methodology of incomplete. One international miner eschewed
years past simply won’t suffice: when we studied the value-improvement exercises on a project due to
financial statements of more than 40 recent mining a cited “lack of time,” leaving approximately $500
and metals projects, only a fifth of them delivered million of NPV on the table. The project failed
the financial returns predicted at feasibility stage investment committee review.
(Exhibit 1). The potential value at stake is significant
here—if we believe that moving a feasibility study Third, many FS continue to rely on the current state
from “good to best” could generate some 10 percent of technology rather than account for anticipated
additional value on projects,³ changing FS practices technology advances such as autonomous vehicles,
may be worth over $100 billion to the mining and advanced analytics, and other digital tools. When
metals project industry over coming years they become operational five to seven years later,
(2020–25).⁴ such mines run with outdated technology and
owners leave value on the table.

Lack of rigor impairs feasibility studies Finally, the typical contracting environment at FS
Most FS that we see are developed with insufficient stage rarely incentivizes EPCM⁵ contractors to
rigor, largely attributed to a combination of maximize value for the owner and to find creative
structural industry issues and habitual shortcuts solutions—leading to “habitual” designs and
taken by owners. suboptimal FS.

First, the industry does not widely use standard

criteria for what constitutes a FS with sufficient Five ways to enhance feasibility studies
maturity to ensure a narrow estimate band and Five key changes to mining and metals FS can
predictable outcomes. While some standards increase the certainty of project outcomes.
exist for resource estimation and reporting at FS

Matthieu Dussud, Mark Kuvshinikov, Piotr Pikul, Ryan Price, and Robert Samek, “Avoiding mistakes of the past: A CEO’s checklist in a
commodity upswing,” August 2018, McKinsey.com.
McKinsey analysis of publicly available data finds that projects built above 3,000 feet run overbudget by an average of approximately 47
percent, underground mining projects by an average of some 55 percent, and largest open-pit projects by around 40 percent.
Edward Merrow, Industrial Megaprojects: Concepts, Strategies, and Practices for Success, John Wiley & Sons, March 31, 2011.
A 2018 McKinsey Basic Materials Institute study forecasts approximately $1,200 billion in mining and metals capex between 2020 and 2025.
EPCM = engineering, procurement, and construction management.

2 Optimizing mining feasibility studies: The $100 billion opportunity

Web 2019
Optimizing feasibility studies: The $100 billion opportunity
Exhibit 1 of 3

Exhibit 1
Only 20percent
Only 20 percent of surveyed
of surveyed miningmining andprojects
and metals metals areprojects
completedare completed
within within
parameters predicted
predicted during feasibility during
study. feasibility study.

A survey of 40+ mining projects completed in the last 10 years shows an average overrun of 60% vs. metrics
announced at feasibility study

% of projects Average budget Average schedule

surveyed overrun, % overrun, months
disasters - 1 in 5 projects surveyed overran
>100% over the original budget by over
19% 188 29.0 100% with the average cost
sanctioned budget
~3x the initial estimate

- Over half of all projects exceeded

Project disasters the sanctioned budget by at least
44% 49 7.5 15%, with an average overrun
15-100% over of 49%
sanction budget

Within estimate
<15% over sanction 17% 9 -2.5
budget - Only 37% of projects surveyed
came in within 15% of the
No cost overrun announced sanctioned
At or under 20%, 0 6.0
sanctioned budget

Source: McKinsey & Company survey of 41 major projects with capex greater than $500m and completed between 2008 and 2018

1. Define prescriptive standards for key FS sidebar, “A comprehensive set of standards for a
components feasibility study”).

Mining project developers would do well to follow a 2. Enforce a systematic and holistic project value
set of standardized criteria when conducting an FS. improvement (PVI) process at FS
Some design their own standards, while others not
positioned to do so may refer to existing third-party Mining project owners frequently treat PVI as a
processes and criteria, such as those provided by one-off exercise at the end of FS. However, this can
the American Association of Cost Engineers. We lead to suboptimal trade-offs between the most
believe that any FS team should approach a study appropriate design on the one hand and schedule
with a minimum of 11 core criteria in place (see and cost pressures to avoid design changes

Optimizing mining feasibility studies: The $100 billion opportunity 3


A comprehensive set of standards for a feasibility study

At a minimum, any feasibility study of third-party engineering reviews, of processing equipment and
should be undertaken with a prescriptive (for example, preliminary hazard and construction contracts in value)
standard for the following elements: operability analysis, constructability,
operability, and so on) 9. methodology for estimating both
1. ore body exploration requirements, contingencies and provisions for
resource classification standards 5. material take-off methodology by risks (for example, probabilistic range
(for example, confidence limits discipline (for example, as defined by analysis)
complementing NI43-101/JORC AACE, ACostE, IPA, or ASPE¹), and
guidance), minimum inputs to the guidance for establishing design 10. definition of key input parameters,
geological and geo-metallurgical growth allowances calculation methodologies, and
models, and so on depending on structure for the financial model and
regional requirements 6. level of maturity of the contracting metrics for investment decision, such
strategy and extent of due diligences as net present value, internal rate of
2. requirement for site surveys, on potential partners return (IRR), cash cost, and so on
environmental and social studies,
and advancement of the permitting 7. desired level of project, logistics, 11. a process of independent, third-party
process construction planning, and reviews, integrated with a formal
operations readiness stage-gate process
3. level of detail required for technology
selection and test work 8. capital-expenditure and
operating-expenditure estimating
4. level of engineering development methodologies, desired level of firm
desired by deliverable type, extent quotes (for example, 80 percent

AACE = American Association of Cost Engineers, ACostE = Association of Cost Engineers, IPA = Independent Project Analysis, ASPE = American Society of Professional Estimators.

and conclude the FS on the other. Instead, new underground development through an
we recommend that PVI should be deployed extensive value-improvement effort over several
continuously—for instance, via a dedicated team months, including optimizing the mining method
or entity—starting at prefeasibility study stage, to accelerate first ore and reduce development
through the duration of the entire FS, and beyond. costs, modularizing parts of the surface facilities,
Owners should create a recurring process and leveraging suppliers in high-value countries.
to improve a project’s NPV by using capital- Another potential strategy might be to apply
expenditure (capex), operating-expenditure analytical methods to existing data (such as
(opex), commercial, and schedule-optimization drilling records), allowing miners to refine their
tools throughout the entire FS. understanding of ore body or mine plan and
optimize process-plant design accordingly.
We saw an example of how this works when
a gold miner doubled the project NPV for a

4 Optimizing mining feasibility studies: The $100 billion opportunity

3. Stress test the FS assumptions against Exhibit 2 shows a typical cost breakdown for a
detailed capex and opex benchmarks, supported concentrator’s direct costs that can be used for
by predictive analytics high-level estimate validation.

Owners and contractors should validate capex Benchmarking also provides an opportunity
estimates through benchmarking at the discipline for the project team to identify cost-reduction
level as a minimum, and at higher levels of opportunities by reflecting on design and front-
granularity for high-cost disciplines (such as end planning choices that can lower costs.
formwork, rebar placement, and pouring for Exhibit 3 maps estimated placement rates for
concrete). Capex benchmarks should be as granular a concentrator construction and compares
as person-hours per meter of piping, or dollar per them to regional and global benchmarks. The
person-hour for labor. exercise suggests that the estimate for structural
steel work assumes less productive crews than
These detailed benchmarks can validate high- comparable projects; this creates an opportunity
level cost estimates by providing visibility into how to revisit the structural steel-erection execution
the project’s idiosyncrasies will manifest during plan with a view to capturing an estimated 15 to 20
construction, and how that will impact overall cost. percent cost reduction.

Web 2019
Optimizing feasibility studies: The $100 billion opportunity
Exhibit 23
2 of
Granular capex
Granular capex costcost benchmarks
benchmarks (ascost
(as in this in this cost breakdown
breakdown for ahelp
for a concentrator) concentrator)
help validateatcost
cost estimates estimates at high level.
high level.

Typical direct capex cost breakdown for a concentrator

% of total direct costs

Validate costs though Validate costs using

firm quotes for major placement rate and
equipment hourly cost benchmarks



10-15% 10-15%

Mech. Elect. Earth Concrete Piping Structural Others Total

works steel

Source: McKinsey analysis

Optimizing mining feasibility studies: The $100 billion opportunity 5

Opex benchmarks enable companies to stress —— General. Are our G&A expenses right-sized in
test their operating-model efficiency assumptions. relation to total cost? What is our IT cost per
However, most owners do not use opex full-time employee?
benchmarks that are granular enough, and so
can miss both optimization opportunities and key Finally, project developers may also use predictive
risks. Instead, owners should focus with an eye for analytics to simulate potential outcomes of
detail on granular opex KPIs, asking themselves various capex and opex assumptions to select the
questions across the following domains: optimum combination. For example, estimators
could predict labor productivity for a given country,
—— Productivity. How many full-time operators elevation, and facility type versus assumptions for
will the operation have per tonne of output? construction methodology, construction stage,
What will the processing plant utilization and productivity measures, camp conditions, and so on.
availability be? What will the major mining
equipment utilization/availability be compared 4. Incentivize the FS contractor to maximize
to similar operations? value and lay early groundwork for a strong
contracting strategy
—— Consumables. How efficiently are we using
our diesel, explosive, or grinding material Owners can help align incentives toward a rigorous
compared to operations of a similar size? FS by encouraging contractors to think out of the

Web 2019
Optimizing feasibility studies: The $100 billion opportunity
Exhibit 3 of33

Benchmarking commodity
Benchmarking commodity placement
placement rates
rates can can highlight
highlight cost-reduction
opportunities at granular
opportunities at level. level.
a granular
Commodity placement rate
(Manhours/unit installed index; estimate = 100)

Estimate Regional Benchmark Global Benchmark



Concrete Opportunity to Estimate is
100 estimate “import” best in conservative
in line with globe practices to on piping
both local improve regional against both
and global steel-work region and
benchmarks productivity globe

Concrete Steel work Piping

Source: McKinsey analysis

6 Optimizing mining feasibility studies: The $100 billion opportunity

box about value maximization. Three levers can 5. Build and optimize a rigorous integrated
prompt FS contractors to maximize value (but not master schedule, and embed construction
their fees): planning, operations readiness, marketing
strategy, and digital aspiration at every step of
—— Add competitive tension by having multiple FS development
contractors bid for the project. This prevents
gold-plating and maximizes NPV, while creating Finally, teams would do well to bear in mind some
a pool of potential value-creation ideas from fundamental best practices in delivery, often
which to choose. While conducting multiple overlooked in FS:
studies does add upfront costs, we find that this
sum is typically small compared to the overall —— Develop a detailed construction execution
project and is frequently outweighed by the strategy, including defining work packages,
significant savings afforded by having a high- planning site logistics, detailing construction
quality FS. sequence, and planning for modularization and
offsite fabrication.
—— Ensure contractors have “skin in the game”
by tying part of their fees to a successful FS —— Implement rigorous constructability and
outcome. For example, contractors could operability reviews of FS design. This should
be promised a share of cost savings that are ideally be performed using a 3-D model
identified and captured versus pre-FS, or they of the facility, conducted by construction
could receive bonus or project completion professionals and senior owner’s operations
payments upon achieving start-up date and and maintenance representatives, including
design throughput. Owners might even consider short-listed construction contractors.
giving contractors an equity stake in the project
to further align their incentives. —— Invest early in operations readiness work and
address, as a minimum, the commissioning
—— Embed owner’s operations and maintenance plan and equipment strategy, performance
representatives into the FS contractor’s project management and operating practices,
team, bringing in-depth knowledge of the continuous improvement practices, roles and
company’s operating processes and challenges. responsibilities, and culture.
This often reduces rework after handover
and further forces operations teams to take —— Make the project’s technological and digital
ownership of solutions, given they have to “sleep aspirations an integral part of developing the
in the bed they made.” FS construction execution plan and operating
strategy, covering, for example, productivity,
Doing this well requires leaders to set up the safety, and reliability enhancement
foundations of a contracting strategy early on. This technologies.
starts with an in-depth assessment of the planning,
execution, and operations ramp-up risks. Owners
should also set appropriate provisions in the
contracting strategy to enable easy deployment Each of these levers is critical, but none can
of the digital/technology strategy. Once risks are succeed without a strong and cohesive team
identified and strategy agreed upon, owners can to underpin the project—fostering transparent
evaluate the contractor market based on relevant communication, problem resolution, and end-
experience with similar projects. The final step to-end accountability—supported by rigorous
involves assessing the desired level of involvement project-management science and dedicated
by the owner’s team before determining the split of capabilities in construction and operation
contract packages and the delivery model. planning.

Optimizing mining feasibility studies: The $100 billion opportunity 7

Feasibility studies are more than just a mandatory study costs—which is good practice, broadly
process step or stage gate; they are the last speaking—but any compromise or shortcut during
real opportunity for mining and metals project FS inevitably leads to surprises during execution or
developers to thoroughly define and optimize production ramp-up. Investing in getting FS right
a project business case and rigorously plan for could save the mining and metals industry some
execution and operations before the “clock starts $100 billion-plus over the next five years. As the
ticking.” An owner may often wish to minimize phrase goes, “pay now or pay more later.”

Matthieu Dussud is an associate partner in McKinsey’s Toronto office where Piotr Pikul is a partner; Gregory Kudar is a
senior partner in the Calgary office; Patrick Lounsbury is a consultant in the Chicago office; and Filippo Rossi is a senior
partner in the Paris office.

The authors wish to thank Karilyn Farmer, Patrick McCann, and Otto van der Ende for their contribution to this article.

Copyright © 2019 McKinsey & Company. All rights reserved.

8 Optimizing mining feasibility studies: The $100 billion opportunity