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.
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.
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).
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.
