Part 5 in the series ‘Development of Mining Projects from Scoping Study to Commissioning successfully for the benefit of your shareholders’
Sten Soderstrom
OPEN TO BOARD APPOINTMENT AND ADVISORY ROLES, MAUSIMM, FAICD & ENGINEERS AUS, MINING CONSULTANT, TRUSTED MINING PROJECT PROJECT EXECUTION SPECIALIST >30 YEARS' GLOBAL EXPERIENCE IN BASE AND HIGH VALUE MINERALS
As We Grow, We Should Be Constantly Asking Ourselves If We Have Leaders With The Right Technical Skills Making The Right Strategic Decisions
This is Part 5 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 4…we discussed critical factors following securing of ?investment funds for the project that will ?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 complexities and potential pitfalls? to successfully initiate, plan, and implement the changes needed to ensure the success of the project. In particular collective ownership and trust are essential for strategic value creation.?
In this Part 5 we discuss challenges in adapting our organisation through different phases of development.
When there are changes in your organisation, the skill sets required to undertake the new activities are often quite different to the skill sets required in the early phases of a project.
In the early stages of a project, you may be carrying out mineral exploration, preparing geological models, and creating mine plans. So, when you move beyond that phase, the skills required to successfully take the project forward may fall outside the scope of your current leaders’ knowledge and abilities.
This problem is not limited to new projects. You may have a situation where you’ve got a mine that is already operating, and you are making improvements to the plant or project. In this case, you will have a number of people who are already operating that plant.
For example, you may have contract miners who manage the underground or open-cut mines. The skill sets of management operating the mine and existing plant will be quite different to the skills required to develop or make changes to existing plant. This is because the skill sets needed to make these changes are associated with investment, design, risk management, project management and so on.
Whether you are embarking on a new project or making changes to an existing project, the challenge for senior executives is to make the right decision about management and consulting resources, in order to effectively manage changes to existing plant or new projects.?
Internal Pressure
?One difficulty that executives face is that there will always be some internal pressure from those who are already part of the team to be given additional responsibilities. As a result, senior executives may be persuaded that these team members can take on the new roles, when in reality they do not have the skills or experience required.
It is natural for managers to want to move ahead and step into roles they perceive as more important than the role they currently have. This can be associated with some risk. Rather than taking the easy option and going with the person who is already working within the organisation, the question should always be, “How do we get the best possible outcome for the company?”?
Clearly Define Your Aims
?Leaders need to ensure they are making the right strategic decisions about the organisation in order to accommodate the changes in the company’s activities. The functions and skill sets required need to be determined, so that the new challenges will be properly understood and managed by those who take on the new roles.
There will be times when it’s clear that you need to engage outside help. However, there are still several ways you can do this to ensure you are protecting the company’s aims.
Are You Being Held Captive By Third-Party Service Providers?
?Let’s say that you are looking to carry out a feasibility study. Who is determining what the standards and scope of the study will be? Is it going to be you or will you make a choice based on what is being suggested by the companies you have invited to submit proposals?
You’re most likely looking at investing millions of dollars in fees to an engineering services company to deliver a feasibility study, for instance. If you do not have experience to decide on the appropriate level of study, such as what data is required as a prerequisite or how to frame detailed invitations for proposals, and you do not have anyone within your organisation who has the correct skills to fully understand what is required, it’s easy to become held captive to external organisations and take their word for what needs doing.
Engineering services companies are not any different to other commercial organisations when offered an opportunity to define what the customer needs. In most cases, they will ensure that the commercial interests of their own company take priority over your needs. This does not imply that the work performed is not professionally done, but it may imply that it could have been done at a lesser cost and perhaps with less redundant steps.
Cost And Accountability
?If you don’t have the right people resources, either because your existing leaders lack the right skills or because your external contractors have not been given well framed and considered briefs about what you really require, then the project is unlikely to receive the focused attention it probably deserves.
This strain may not only be financial, it may also be in terms of the organisation’s culture. Particularly if nobody’s really quite sure of what they’re meant to be doing or why something’s gone wrong in the first place.
Then there are the challenges you face with third-party service providers, such as engineering companies for scoping studies, feasibility studies, mine development and geological plans. As they charge by the hour for the resources that they have employed on the project, there is rarely any risk to or liability by the service provider for the service they provide, unless they are proven to have been negligent. It is not uncommon to be faced with situations where additional funds need to be employed in order to achieve the stated level of definition sought in the study, or face a qualified/ conditional report.
The most common contract for service providers is the Engineering, Procurement, Construction Management (EPCM) contract. The cost of the project when completed is initially based on an estimate prior to procurement and construction contracts being in place. The problem is that the initial estimate is provided with no true accountability as to how close or far it will be from final cost.
There are contracts which place a lot of the onus on the contractor, who then becomes accountable for delivering the project at a fixed price at some point in the future. However, many contractors, especially engineering services companies, are very reluctant to enter into fixed-price lump sum contracts.
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This is mainly because of the high insurance premiums required to cover cost overruns, and also because they generally have small cash reserves beyond working capital. They rely on selling man hours, and many of them walk away from taking responsibility for financial outcomes.
To determine which type of contract would suit your situation best requires complete familiarity with the risk carried by both parties, the rights of each party, and many other factors. This is why having an owner’s representative is so important. Having an interface between the company and third parties can help ensure senior executives make the right decisions.
Often, having the right skills to ensure the organisation is being best served is not a binary problem. You will always have to go through a process of considering the best way of doing things and decide when it is appropriate to use internal people and when it is appropriate to bring in external people resources.
The aim is always to ensure there is the minimum risk to shareholders’ equity and the maximum probability of success for the company. It really comes back to living the strategy the company has defined for ensuring asset value growth.?
Key Takeaways
There is a solution for fully achieving your objectives of your organisation.
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
0418918310
?Links to earlier Parts in Series:
Part 1:
Part 2:
Part 3:
Part 4:
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?? Sten Soderstrom