Vast majority of mining projects experience steeper cost over-runs - MINING FINANCE / INVESTMENT | Mineweb

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MINING FINANCE / INVESTMENT

Vast majority of mining projects experience steeper cost over-runs

Mining companies need to admit that a 10% cost overrun for mining projects has become an anachronism as more and more projects are coming in way over budget.

Author: Dorothy Kosich
Posted:  Wednesday , 30 Nov 2011

RENO, NV - 

Mining companies which only factor in a 10% cost over-run for mining projects are asking for trouble, warned experts in mining financing Tuesday during a session at the Northwest Mining Association convention in Reno.

Resource Capital Funds' Jasper Bertisen said the "vast majority" of mining projects have been coming in "way over budget" for the past couple of decades. As a result, RCF now automatically factors in an average cost overrun of 25% when it considers the cost of mining projects.

RMB Resources' Alvaro Belevan said the traditional 10% overrun contingency has been insufficient in recent years. Worse yet, the magnitude of mining project cost overruns are greater nowadays, he added.

"Cost over-runs means the economics of your projects has changed, and changed for the worst," Belevan warned.

Unexpected cost overrun often complicates arranging additional project funding, he observed. Delays in obtaining additional funding may compound the problem in an inflationary cost environment; throw-off procurement schedules causing significant delays; and increase the costs of debt/equity and decrease project returns.

"Management must set up a Cost Overrun Provision (COP) when project development begins," Belevan advised. "These are readily available funds held in reserve specifically available for cost overruns."

A COP may be funded from equity and/or a Cost Overrun Facility (COF). A COF is most advantageous to emerging producers, single-assets companies, and companies with multiple development assets who wish to limit cross-subsidies, he suggested.

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