Ramiro Zuiga

SIGEMIN
Lima, 09 Agosto 2013

Introduction

What is Front End Loading?

Concept Study

Pre-Feasibility Study

Feasibility Study

Execution Stage

Conclusions

SIGEMIN, Lima 09 August 2013

During recent years, Mining Industry has returned to its

original Strategic Direction Cost Leadership

Source: http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/

SIGEMIN, Lima 09 August 2013

In the recent 5 6 years, costs of key strategic consumables

have raised materially.
For new projects: steel, workforce
For ongoing operations: power, diesel, workforce
Oil Price Chronology- June2007

SIGEMIN, Lima 09 August 2013

In the current market, it is not only important how much NPV

positive is a business opportunity.
It is also important, what would the position in the cost curve
in the future

Source: UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 8-K

CURRENT REPORT NORANDA ALUMINUM HOLDING CORPORATION

SIGEMIN, Lima 09 August 2013

Source: Wood Mackenzie Ltd, Dataset 2010 Q2 Subset of random assets

SIGEMIN, Lima 09 August 2013

Gap between labour productivity and labour cost raise

200
150
100

Market factors are becoming more

restrictive for Mining Industry

Costs + 82%
Productivity + 36%

50

Each new mine development will be more

expensive over the time
A solid approach has to be taken in each
new development

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Cost of Manpower Index
Adjusted Productivity Index (1)
(1) Grade and stripping ratio is sustained during that period
Source: Cochilco, Mc Kinsey analysis

Production Costs
(cUS$/lb)

400

100%

350
300
250
200
150
100
50

255

229

299

257

80%

343

60%
40%

15%

26%

15%

8%

0
High Grade /

Mid Grade /

Low Grade /

High Scale
High Scale
High Scale
Production Cost
Long Term Price

20%
7%

Low Grade /

0%

Low Grade /

Mid Scale
Low Scale
Domestic Production Share

Source: Wood Mackenzie, Mc Kinsey analysis

SIGEMIN, Lima 09 August 2013

Basically, we must improve our cost position from design

Therefore, each new Capital Investment, should include as
part of its DNA, ways to reduce operating cost in the longterm or increase productivity
Nevertheless, in some cases, it implies a trade-off: Capex /
NPV that each organization must assess carefully
In this case, robustness on Front End Loading methodology is
required to achieve a superior result

SIGEMIN, Lima 09 August 2013

Introduction

What is Front End Loading?

Concept Study

Pre-Feasibility Study

Feasibility Study

Execution Stage

Conclusions

SIGEMIN, Lima 09 August 2013

Front-End Loading maximises value by rigorous phased

definition of an opportunity prior to the investment decision
It has demonstrated its advantages:

70% major US capital investments in 1990s failed to meet at least

1 key objective
98% benchmarked best practice Front-End Loaded investments
met all key objectives
The best companies turn a 15% nominal IRR investment into
22%; the worst deliver 9%!
Companies using such Front-End Loaded systems include
Chevron, BP Amoco, Woodside, Dow Chemical, Du Pont,
ExxonMobil and Alcoa

Source: US Business Round Table

SIGEMIN, Lima 09 August 2013

10

Good project, well-defined,

-optimised and -executed

Potential Value

Good project
definition

Same good execution does not off-set

poor-definition

Concept

Pre-Feasibility

Feasibility

Execution

Operation

Level of Uncertainty
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Increasing Number of Investments

Easy to distinguish
between outcomes

Improved Process
Difficult to distinguish
between outcomes

- ve

Total Shareholder Return

+ ve

Source: Legg Mason Funds Management

SIGEMIN, Lima 09 August 2013

12

Introduction

What is Front End Loading?

Concept Study

Pre-Feasibility Study

Feasibility Study

Execution Stage

Conclusions

SIGEMIN, Lima 09 August 2013

13

Concept

Pre-Feasibility

Feasibility

Execution

Operation

What does usually industry believe?

It is the time to justify this business case and robust
engineering level is required
What is, in fact?
Primary objective: demonstrate that an investment
opportunity is sufficiently attractive to justify more
detailed study
It should establish strategic fit of the business case
It identifies all possible alternatives to be evaluated
during the next phase

SIGEMIN, Lima 09 August 2013

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Key Questions
Is this the right investment? Why?
Is there sufficient potential value associated to justify
further analysis?
Does the investment fit with the current business
strategy?
Is there an adequate go-forward plan for the PreFeasibility Study?
What are the potential major risks that could negate the
investment value?

SIGEMIN, Lima 09 August 2013

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Common Mistakes
Doing more than is necessary. Eg: detailed
engineering
Opportunity is not fully aligned or contradicts the
business strategy
Investment opportunities are based on the solution,
rather than a broader objective
Belief that the solution is known
Not completing the documentation

SIGEMIN, Lima 09 August 2013

16

Introduction

What is Front End Loading?

Concept Study

Pre-Feasibility Study

Feasibility Study

Execution Stage

Conclusions

SIGEMIN, Lima 09 August 2013

17

Concept

Pre-Feasibility

Feasibility

Execution

Operation

What does usually industry believe?

It is time to start with purchasing processes, because is a clear
indication that the project will progress
Detailed Engineering is in place
What is, in fact?
Primary objective: select the single preferred go forward alternative
This stage makes a are rigorously reviewed of a chosen set of
alternatives, based on an understanding and recognition of the
competing strategic choices
After a full comparative evaluation of each of the alternatives full
value and risk profile, one preferred go forward alternative can be
selected

SIGEMIN, Lima 09 August 2013

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Mining Method

Open Pit

Underground

Plant Size

100 tkpd

75 ktpd

50 ktpd

Product
Transport

Pipeline

Trucks

Train

SIGEMIN, Lima 09 August 2013

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Mining Method

Open Pit

Underground

Plant Size

100 tkpd

75 ktpd

50 ktpd

Product
Transport

Pipeline

Trucks

Train

SIGEMIN, Lima 09 August 2013

20

Mining
Method

Open Pit

Underground

Mining
Technology

Conventional
Trucks

Autonomous
Trucks

Large
Conveyors

Plant Size

1 x 100 tkpd

2 x 50 ktpd

1 x 75 ktpd

Plant
Technology

SAG

HPGR

Other

Product
Transport

Pipeline

Trucks

Train

SIGEMIN, Lima 09 August 2013

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Mining
Method

Open Pit

Underground

Mining
Technology

Conventional
Trucks

Autonomous
Trucks

Large
Conveyors

Plant Size

100 tkpd

75 ktpd

50 ktpd

Plant
Technology

SAG

HPGR

Other

Product
Transport

Pipeline

Trucks

Train

SIGEMIN, Lima 09 August 2013

22

Mining
Method

Open Pit

Underground

Mining
Technology

Conventional
Trucks

Autonomous
Trucks

Large
Conveyors

Plant Size

1 x 100 tkpd

2 x 50 ktpd

1 x 75 ktpd

Plant
Technology

SAG

HPGR

Other

Product
Transport

Pipeline

Trucks

Train

SIGEMIN, Lima 09 August 2013

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Many Alternatives

Best
Alternative

Time
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 Autonomous
Large Conveyors (with InPit crushing units)

Operations

Power regeneration
Minimum water consumption

Less exposure of people to

risks HSEC
Reduction of workforce
Productivity Increases

Modularity concept

Maintenance

Use of robots

Reduction of Maintenance time

Lower Cost

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Key Questions
Have all reasonable alternatives been properly
considered and reviewed equally?
What criteria were used to select the best alternative?
Does the investment still fit with the current business
strategy?
Are the major risks and possible controls identified?
Does the potential value of the investment continue to
justify further analysis?
Is there an adequate plan for the Feasibility Study?

SIGEMIN, Lima 09 August 2013

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Common Mistakes
Not starting with a divergent set of alternatives
Lack of understanding of the problem at early stage of
Pre-Feasibility (or at the end of Concept Study)
Studying only a narrow set of alternatives.
Studying too many alternatives right up to the final stage
Belief from an early stage that the go-forward case is
known. Eg we know that the business needs
Fast track the project
Doing more than is necessary
Not completing the relevant documentation

SIGEMIN, Lima 09 August 2013

27

Introduction

What is Front End Loading?

Concept Study

Pre-Feasibility Study

Feasibility Study

Execution Stage

Conclusions

SIGEMIN, Lima 09 August 2013

28

Concept

Pre-Feasibility

Feasibility

Execution

Operation

What does usually industry believe?

Decision is almost made
Engineering for execution is in place

What is, in fact?

Primary objective: optimise the single go-forward investment alternative
selected
Demonstrate that this objective has been met.
The selected alternative for the investment opportunity is rigorously
evaluated in order to optimise the total life cycle costing and NPV
Establish the risk profile and uncertainties associated
Clearly define the project execution plan

SIGEMIN, Lima 09 August 2013

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Key Questions
Is there an accurate understanding of the value and risks
of the investment prior to moving to project execution?
Does the investment still fit with the current business
strategy?
Have all reasonable optimisation opportunities been
pursued?
Are the risk control action plans in place?
Is there an optimal project execution plan?
Is approval recommended?

SIGEMIN, Lima 09 August 2013

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Common Mistakes
Continuing with alternative selection type of work
Allowing significant scope changes (beyond optimization purposes)
Underestimate the time frame for legal / environmental approvals
Not ensuring completion of critical information to support the
investment decision
Belief that because the project is in Definition Phase it is 100% sure
that it will be executed
Belief that gaps from prior phases can be fixed in Definition Phase

SIGEMIN, Lima 09 August 2013

31

Introduction

What is Front End Loading?

Concept Study

Pre-Feasibility Study

Feasibility Study

Execution Stage

Conclusions

SIGEMIN, Lima 09 August 2013

32

Concept

Pre-Feasibility

Feasibility

Execution

Operation

Primary objective: deliver or execute the project to achieve

the objectives defined during the approval process
Ensure that budget and time targets will be met
Anticipate potential risks and implement action plans to
mitigate them

SIGEMIN, Lima 09 August 2013

33

Introduction

What is Front End Loading?

Concept Study

Pre-Feasibility Study

Feasibility Study

Execution Stage

Conclusions

SIGEMIN, Lima 09 August 2013

34

Each study phase has its own purpose and should not be
mixed, nor rushed; because might jeopardize project value
The most important value on Front End Loading is captured
during Pre-Feasibility. Therefore, multiple scenarios about
low cost and operational efficiency must be captured here
Although, FEL can be considered a long and rigorous process,
it will ensure that a sound decision is being made
Application of FEL must be complemented with judgment to
avoid group thinking

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Ramiro Zuiga
SIGEMIN
Lima, 09 Agosto 2013