Part 4 in the series ‘Development of Mining Projects from Scoping Study to Commissioning successfully for the benefit of your shareholders’

Essential Project Management Systems to ensure completion on time within budget.?

This is Part 4 in a series of Articles dealing with critical issues to ensure that a mining company generates optimal value for its shareholders. Links to earlier parts in the series are at the end of this article.

In Part 3…we discussed the? importance of…… creating and maintaining a process whereby, the company’s objectives and board decisions can be managed and owned at all levels and some suggestions how this can be achieved.

Most mining companies do not complete their projects on time and within budget. This is not because these projects are highly complex and have many variables that can’t be foreseen or controlled, because this is true of all mining projects. It is because the initial plan and process to manage them is often flawed.

At the start of a project, there is always a great deal of pressure to produce a plan that supports investment in the project. It is important to be able to show that the financial and risk criteria of your project are robust and that they meet generally accepted norms for the commodity and region of proposed development.

This means that, in order to secure funding by way of equity or finance, there is a tendency and bias towards underestimating risk as well as the cost and time it will take to build the project. If you are pushing in this direction, it should send up a danger signal and you will need to correct your course in order to avoid problems.

It may feel as though this is easier said than done. Which is why developing a clear understanding of the key criteria for successful organisations and projects in today’s environment is so important.?

Expectations Versus Reality

?Financial institutions that invest in projects want to ensure they have priority to secure return of the funds advanced. Equity providers have many project proposals under consideration at any one time. That is true for both shareholder equity and external financing deals.

The projects that are most attractive are the ones that have the best chance of being considered for negotiations for external finance. Having a past track record of a proponent is a plus. That’s why it is in your long-term interest to ensure that the projects you have ultimate responsibility for mature into success stories for everybody involved.

A project may initially look marginal. If this is the case then the temptation is to tweak it to make it look better. This is seldom the answer and is full of pitfalls.

Market disclosures, comprising a statement of facts about a project not meeting previously announced goals, is usually spiced-up with a set of reasons to remain optimistic with respect to future plans and goals. The effect on informed analysts and investors is negative, despite the promise to do better.

That translates into a falling share price as sellers outnumber buyers. The reality is that many projects and, by extension, the senior executives, set themselves up to fall short before they have even begun.

Depending on how sensitive overall company results are to a project being off budget, the impact on the organisation of not having the correct systems in place can vary. For “single project” mining companies it can be devastating because everything hangs off the success of that one project. I was an expert witness in a case against a mining construction company which didn’t have management systems or skills in place. As a result, they totally stuffed up a project and were unable to fulfil their commitments to their shareholders.

They assured their shareholders that, because they had many other projects on their books, it wasn’t going to have a significant effect on the bottom line. Unfortunately, in spite of their reassurances, the failure of this one project had a very significant effect on the bottom line.

Giving people unrealistic expectations of what you can achieve may get you the funds you need in the short-term. However, it is not going to do your reputation any good in the long-term if you fail to deliver.?

Why Is It So Hard To Stick To The Plan?

Once you have secured your investment and the project is up and running, there are a number of factors which come into play that can impact on your ability to deliver on time and on budget.

For example, senior executives who transition from exploration companies to mining companies often don’t appreciate the skill sets, systems, and disciplines that are required to successfully initiate, plan, and implement the changes needed to ensure the success of the project.

Project management and controls are highly specialised disciplines which are central to strategic value creation in the mining industry. Developing a project is a very labour-intensive exercise.

Thousands of hours go into conducting feasibility studies, doing engineering design, managing test work, and numerous other tasks. In the majority of cases, all of this work requires input from more than one external organisation.

It is essential to establish an appropriate structure, which may comprise external as well as internal resources, not only to manage multiple subcontractors but also to scope their work to ensure that the interests of your company are being looked after.

When you bring in subcontractors, then there is a risk that you give a great deal of your discretionary power away, unless you know how to manage this risk. If you don’t have the skills internally to oversee the decisions that need to be made, then you are in effect abdicating that responsibility to the external parties.

It is so important that you have the facility to recognise that, just because a certain strategy worked for your contractors on other projects, it doesn’t necessarily make it right for your company. You need to be able to step in and provide overall direction and make key decisions.

Without having a clear and detailed understanding of what is required to hold service providers and subcontractors to account, approve or question the incremental steps, and participate in relevant meetings, your project will eventually fail to meet the original objectives.

In all these instances, people are doing themselves, and the project, a disservice. The right advice and guidance gives your project a substantially improved chance of success.

When it comes to the belief that systems are already in place, this is often because there is a lack of awareness as to what having good project management practices, systems, and processes actually means.

Are Your Systems Designed ?With Your ?Needs In Mind?

One company I worked with was unaware of how to create the appropriate systems, and so they made up their own internal system.?

One of the components was a cost-estimating package, which was essentially a black box that you couldn’t penetrate. You just put information into it and got information out of it, but there was no way of knowing how the information was processed internally.

The reason for this was that an “expert” within the organisation had created the package and wanted to protect what he considered was his “baby.” He had built this system, but nobody knew the inner workings of the package. They just provided the inputs and got the finished estimate at the end, but it wasn’t auditable. I know, this seems incredible!

There are proven methodologies behind the most credible systems. They’re not cheap and the people who know how to implement them are not cheap, either, but they deliver value and certainty.

But at the end of the day, the costs involved are miniscule compared to the penalties you pay if you cut corners. And the rewards are infinitely greater. The point of this is not to propose you buy a system. It is to ensure you buy a solution. Without having proper systems and being able to show people why you are taking certain decisions, you can jeopardise the success of your project. This, in combination with unrealistic expectations of time and budget designed to get investors on board, can put your project under huge and unnecessary strain.

Policies and directives that come from the top of an organisation may not be fully supported lower down. This could be because there has been a lack of consultation or it might be because managers believe the decisions are wrong. It all comes down to a lack of inclusiveness, transparency, and open communication.

Case Study as Expert Witness: Systemic Problems

I was asked to review provide an expert report on why a listed company in the mining industry had reduced its forecast profit by well over $70 million at relatively short notice. The revision had come as a great surprise to shareholders, who were scathing in their criticism of the board.

The company had virtually wiped off most of its annual profit. It emerged from my review that the company lacked effective systems for tracking and reporting on project progress. There were huge flaws in the processes designed to provide updated forecasts on what the project would cost when completed, and what the forecast completion date would be.

On top of this, there was virtually no vertical integration of management systems. This meant that by the time information reached the board, it had been misinterpreted and misreported with little or no effort to carry out due diligence. Another factor was the poor execution of the project, which did not follow a detailed and resourced plan.

The organisation had a silo mentality. This effectively meant that critical performance issues were going unseen. The left hand simply had no idea what the right hand was doing. This, in turn, contributed to low morale and a lack of commitment by key people in the organisation.

Key Takeaways?

• Collective ownership and trust are essential for strategic value creation.
• ?Systems are important, but they do not ensure that projects get completed on time and within budget. The crucial component is having the right people involved.

For your project there is a solution for achieving project objectives.

If your ultimate objective is to add more strategic value to your organisation, which in turn increases the market capitalisation of your company, then I can help you ensure it’s a win-win for everyone.

To find out how I can help your organisation, drop me a line or call. I am based in Perth, Western Australia.

Sten Soderstrom (FAICD, FEngAus, CPEng, MAusIMM)

DIR ID 036 62566 41832 63

[email protected]

0418918310

Links to earlier Parts in Series:

Part 1:

https://lnkd.in/gsxCH_A4

Part 2:

https://lnkd.in/gQNRbamZ

Part 3:

https://lnkd.in/g7SYwDtZ

? Sten Soderstrom