The Art and Science of Feasibility Studies

Ron Douglas, our EVP Project Delivery, discusses the factors resulting from poor Feasibility Studies that contribute to failure.

I recently read an article titled, “Optimising mining feasibility studies: The $100 billion opportunity” and whilst agreeing with the arguments presented, I then contemplated that as an industry we stubbornly fail to exhibit improvement. The industry is plagued with management speak on this matter and the following article attempts to simplify my thoughts on the purpose.

The “Art and Science” of feasibility studies has been the subject of innumerable papers over the decades and have been performed since commercial mining commenced and yet the success rate of the development of mining assets (the ultimate test of a feasibility study) is cited at 20% in the above paper (source: McKinsey & Company survey of 41 major projects with capex greater than $500million completed between 2008 and 2018) and Lawrance (1997) reports that: “There is strong evidence that, at least for major projects, there is an unwelcome record of failure (Morris and Hough, 1986, page 5). The World Bank (1978) lists 109 operations of which a quarter had cost overruns of 25% or more, 10% had cost overruns of 50% or more. Apparently half had time overruns of 25% or more and a third had time and cost overruns of 50% or more.”

Whilst my personal data set is obviously lesser than these cited reports, I consider that the failure rate could be understated as there is little published comparisons of the development expectations (the feasibility study) and the actual operating performance of the assets. This occurs as there is little appetite to expose the shortcomings and failures of an earlier piece of work (feasibility study) as the operator focuses on running the mine and process plant often using opaque accounting methods to deal with the financial outcomes of the Project Delivery.

Interestingly following multiple development failures of Project Development in the 80s, the major mining houses and engineering companies instituted processes to improve the success rate of Project Execution. This generally consisted of the following;

  • Development of processes and procedures for each study phase.
  • Development of estimating guidelines.
  • Development of risk management tools.
  • Development of agreed study approaches.
  • Rigorous gating for each phase of a study.

However, as evidenced by the data above these additional processes resulted in little fundamental improvement in the success rate as measured by the performance of the operating mine and plant.

Let’s contemplate the nature of feasibility studies before we “Bell the Cat” on resolving the improvement pathway and the value to be gained by performing these well, “i.e. the $100 Billion opportunity” referenced by McKinsey.


Undertaking a feasibility study

Undertaking a feasibility study is fundamental to evaluating an opportunity prior to its development. A resource project requires rigorous analysis across most engineering disciplines, namely geotechnical, mining, metallurgical, chemical, civil, mechanical, electrical and the geosciences associated with the environment in which the ore body is located.

No two orebodies are the same and therefore by definition all feasibility studies are bespoke, and it is the challenge of the study team to understand the critical issues and business drivers that relate to each specific asset/opportunity.

A feasibility study should address the technical issues as well as the broader commercial, economic and social issues that provide a comprehensive business plan for the development. This should include “stress testing” to understand the sensitivities of the critical issues in addition to CAPEX, schedule, OPEX and commodity pricing sensitivities.

The expectation of a feasibility study is well summarised as follows:

A Feasibility Study assesses in detail the technical soundness and economic viability of a mining project and serves as the basis for the investment decision and as a bankable document for project financing. The study constitutes an audit of all geological, engineering, environmental, legal and economic information accumulated on the project. Generally, a separate environmental impact study is required (United Nations, 2004).

... ‘feasibility study’ means a comprehensive study of a deposit in which all geological, engineering, operating, economic and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production (NI 43-101).

Understanding the expectations of a Feasibility Study

A feasibility study (FS) is undertaken following a concept or pre-feasibility study which has indicated that the development is known to be feasible. The FS has a single objective and that is to demonstrate that the project is economically viable if designed, constructed and operated within the parameters set forth in the study.

All major decisions about how the project will be developed should have been made during the FS and it is the accountability of the Project Development team to follow this “recipe” and approach. An adverse finding in a feasibility study usually indicates a lack of rigour in the earlier study phases or assumptions not tested. These study phases are explained in the project development framework Figure 1 below.








                                                   Figure 1 — Project development framework

The questions to be answered in the FS are:

  • What will the development/project comprise?
  • What risks will this development/project involve?
  • What rewards will this development/project provide?
  • Is the investment case sound and capable of being delivered?

A feasibility study is the final step that leads to a development phase where Net Present Value and Capital requirements are used as a key measure of success, however production ramp-up duration, product quality, operating costs within an established banding and a social licence to operate are all critical to success.

The following illustrates the capital flows associated with a Project and the importance of ramp-up / production in delivering the investment case. An inordinate amount of attention is focussed on the Project Development Capital and Schedule (as these are easy to measure), however the ramp up and performance of the asset often impacts the NPV in a more significant manner than Development Capital.





                                    Figure 2 — Value driven by operational performance

So, the focussing question to the cited data of failure is actually “with all this rigor and process why is the industry still suffering significant adverse outcomes resulting in the destruction of shareholder value?”

It should be noted that the complexities of developing mineral ore bodies (resources, reserves, and process established by statistic methodologies) by their nature do provide significant opportunity for adverse outcomes to occur however most often adverse outcomes occur where a feasibility study has been poorly executed.

Factors I have identified resulting from poor feasibility studies that contribute to failure are as follows;

  • Poorly defined objectives
    Whist there is there a risk of “goal seeking” it is important that all study team members are aware of what success looks like (poorly defined is often merely a communication issue within a team). Technical teams tend to replicate their recent designs, and this often will not provide the bespoke design that the ore body warrants.
  • Separation of accountability
    Successful outcomes of mining developments are an iterative process and best enabled with the core team (geotechnical, mining, processing) in a work share environment. Often the study leadership acts as a “gate keeper” between the technical teams resulting in sub-optimal information exchange, delays and loss of context. Trust is a critical matter in creating the optimal business case.
  • Sponsor bias
    Sponsor bias results when the ultimate owner seeks to present the business case in the most positive manner utilising the optimal outcome to each discipline without considering the statistical probability of risk. This results in a business case that the execution team has little probability of achieving. Appropriate gating and third-party reviews can mitigate this risk.
  • Commoditisation of engineering
    Engineering companies are more often being selected on price with insufficient analysis of the quality aspect (qualitative) of their output. In this manner smaller regional organisations are tasked with a feasibility outcome when their corporate experience is limited to few selective skills. The rule of business that “you get what you pay for” holds true for engineering services as well as material goods.
  • Appropriate Risk Analysis
    Developing an orebody that is not visible and has been interpreted to a JORC standard contains sufficient risk without overlaying additional risk during the development phase. Development is about risk management and the allocation of risk to those best placed to manage. A robust statistical or semi-quantitative risk analysis is critical to establishing a robust business case that can be delivered.
  • Schedule Constraints
    Feasibility studies completed to meet schedule requirements with unresolved items (technology, execution strategy, scope definition etc) that will be ‘finalised during execution’, often underestimate the impact of these unknowns due to scope interdependencies. Managing stakeholder expectations during the feasibility study and allow schedule extension if required to fully define the project prior to execution approval avoids inefficiency during project establishment that can negatively impact both cost and schedule.
  • The value destruction of ego
    This appears to be a victimless crime when study leadership uses preferential engineering to establish a development they prefer (or most are most comfortable supporting) resulting in potential destruction of value through overcapitalisation, poor execution or higher OPEX.
  • Finally – People, People, People
    Find the most capable, smartest, talented individuals in the field of the development being considered, and with good leadership in a supportive team environment they will “generally” deliver the best business outcome that can be achieved!
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