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Mine Planners Lie With Numbers: For More Information
Mine Planners Lie With Numbers: For More Information
By
Dr Graham Lumley BE(Min)Hons, MBA, DBA, FAUSIMM(CP), MMICA, MAICD, RPEQ
30 November 2011
Abstract
The most significant risk in developing a mine is that planner’s forecasts are not met. Cost and time
allowances are rarely met and returns on investment are lower than predicted in 80-90% of
developments. A primary input of this is budgeted output of the proposed equipment is not achieved.
Three causes are proposed for this; technical deficiencies in the planning process; planner’s optimism and
strategic misrepresentation (deliberate deception). Because the company’s balance sheet erodes every
day they operate there is pressure on the highest levels of our mining companies to convert deposits to
mines. Planners / consultants also have a vested interest in projects proceeding through the stages of
feasibility studies. It is hardly surprising that in-house planners and consultants make forecasts which
produce a result sufficient to justify the board approving the next stage of the development. This industry
in Australia uses the Valmin Code (2005) and the JORC Code (2004). The ASX also has their own rules for
listing. Each includes great detail on resource definition. However, they all pay scant regard (eg. The
Valmin Code includes four lines in a 20 page document) to equipment performance; which is one of the
primary drivers of the economics of a project, (converting a resource to a reserve). Mining companies
have tight guidelines on the resource but clearly, this is not the only potential area of error? Neither The
Valmin nor JORC Codes are protecting investors. They have simply shifted the source of error. The error
(deliberate or not) is explained and demonstrated through six case studies. A better approach is
recommended which includes better forecasting of equipment rates through benchmarking against
industry standards and more accountability. Not so many mines will be developed but investors and
shareholders will be better protected.
This identifies a key problem in the mine planning process. There is no prescribed process nor standard to
change a resource to a reserve. The following is the definition of a Reserve (JORC Code, 2005, Clause 28)
“An ‘Ore Reserve’ is the economically mineable part of a Measured and/or Indicated
Mineral Resource. It includes diluting materials and allowances for losses, which
may occur when the material is mined. Appropriate assessments and studies have
been carried out, and include consideration of and modification by realistically
assumed mining, metallurgical, economic, marketing, legal, environmental, social
and governmental factors. These assessments demonstrate at the time of reporting
that extraction could reasonably be justified. Ore Reserves are sub-divided in order
of increasing confidence into Probable Ore Reserves and Proved Ore Reserves”.
Any optimisation algorithm (eg. Lerchs-Grossman) will provide no help in the determination of economic
reserves nor cutoff grades nor the final shape of the mine if inaccurate inputs are provided on equipment
rates. For example, the economics of a block of ore might change dramatically if eight trucks are needed
with a loader rather than six. Similarly, if your Liebherr 996 loader is scheduled to move 32 Mt per annum
(actual best practice for this machine in 2010 – GBI, 2011) and it actually achieves 22 Mt per annum
(actual average for this machine in 2010 – GBI, 2011), then the economics of this block of ore changes
dramatically by virtue of the substantial increase in the time taken to mine it and the number of trucks
which can be serviced by this loader in a unit of time.
The mining plan requires a range of inputs as detailed in Figure 1 (taken from Beniscelli, et al, 2000). Most
of those inputs revolve around production rates and costs and can be subjected to error from incorrect
inputs. Production rates and costs are the real keys to the DCF or ROR analysis but are normally done with
minimal input apart from the potentially subjective opinion of the person doing the planning, (Lumley and
Beckman 2009).
Industry standards (actual operating results) are available in great detail from mines around the world,
(GBI, 2011). The question is posed, “Why do people not use industry standards when completing mine
development plans?”
Accurate inputs are recognised as paramount and the Valmin Code, JORC Code and ASX listing rules
attempt to address this need. Much of the focus has been in tightening the specifications of resources and
reserves, ie. the geologic inputs. However, this improvement of the geological inputs is difficult and adds
significant cost to a mine development. Drilling programmes are high cost, have high lead times, and have
diminishing returns. While the codes’ requirements for geological, processing and cost inputs are high, the
same cannot be said for mining inputs, ie. the way a deposit will be mined and the rates predicted. The
codes are very quiet on this issue.
Case Study 1.
GBI (2011b) demonstrated the performance of P&H4100XPC shovels in the northern Bowen Basin. Best
practice was 17.9MBCM per annum and median 14.1MBCM per annum. The project team was under
pressure from Executive Management to budget 25 MBCM per annum because in their opinion, “That is
what that model is capable of.” The GBI database indicates the P&H4100XPC shovel is capable of moving
Neither Valmin nor JORC Codes offer protection to financiers nor shareholders in this case.
Lumley and Beckman (2009) outlined a number of sources of error in mine planning inputs; both for
production rates and costs. The following summarise the examples of what has led to overly ambitious
production rates being used;
Dig depths and face height impact on productivity not considered,
Variation in seam dip not considered,
Planning done in 2D and then merged to 3D,
Scheduling using maximum potential rate for KPI’s and productivity rather than what can be
achieved over a longer period (sustainable rate),
Scaling performance from equipment of different capacity,
Overestimating hours of work,
Not considering fleet interactions,
Not understanding operational limitations, eg. Double side loading vs single side loading
Manipulating densities and bucket fill
Assuming every truck is full
Etc. etc
Case Study 2.
A preferred contractor, quoting for overburden removal, used rates, shown by a benchmark against
industry standards, to be in the 95th percentile for all equipment of the same make and model. Selection
The Valmin Code (2005) is described as the “Code for the Assessment and Valuation of Mineral and
Petroleum Assets and Securities for Independent Expert Reports”. The Securities Institute of Australia
(AUSIMM, 2005) describes it as, “….indicative of best practice for independent experts preparing
valuations and assessments in relation to specialist mining reports.” It is the standard for protecting
investors and financiers in mining and petroleum developments. It is however, remarkably quiet on the
issues of equipment performance and how this should be handled. The consequences on mine planning
outcomes of not having clear standards in the critical areas under address in this paper suggest a lack of
understanding within the industry of the significant implications. The code itself appears to have a heavy
bias towards geology, resources and the processing of the ore itself. Multiple sections are provided in
these areas plus other areas such as cost estimates and risk. The area of equipment rates and
performance is covered in the broadest way under one point of the six sub-sections in the Mining and
Processing Section. In Section 83, (p15), it states, “Existing and/or proposed mining and process plant
practices should be reviewed to establish the technical and economic feasibility of the operation under
consideration at its existing and/or proposed scales.” As a sub point of this the following are included;
h) labour sources, requirements and productivity;
i) operating practices;
j) equipment availability, utilisation and performance;
The JORC Code (2004) is described as, “The Australasian Code for Reporting of Exploration Results,
Mineral Resources and Ore Reserves”. It sets out a principles-based approach to minimum standards,
recommendations and guidelines for public reporting of exploration results, mineral resources and ore
reserves. The JORC Code says more than the Valmin Code on mining issues because these directly impact
the conversion of what is in the ground from a resource to a reserve. The JORC Code however, is again
The focus on geological and processing is demonstrated further in Table 1 under the heading “Estimation
and Reporting of Ore Reserves (pp17-18). It is the conversion of the resource to the reserve where
significant input on the proposed mining operation (called the mining factors) should be provided. The
guidelines are broad and demonstrate a lack of appreciation of the impact of factors such as equipment
rates have on the determination of economic reserves. In leaving it broad the JORC Code follows the
“principles-based” approach. There is no better demonstration of the failure of the principles-based
approach than the last explanation point under the criteria “Discussion of relative accuracy / confidence,”
(p. 18). That point states, “These statements of relative accuracy and confidence of the estimate should be
compared with production data, where available.” Projects representing 3% of the total mining projects
under development in Australia have accessed relevant operating, performance data to guide their mine
plans and the determination of economic reserves. Clearly, the requirements of this clause are being
ignored by the majority of “competent persons”.
This author would contend that the JORC Code, the Valmin Code and the ASX Listing Rules are failing those
people it is meant to support by virtue of it being principles-based rather than prescriptive. The target
audience for the competent person’s report is not well enough educated in the details of the mining
industry to recognise the avoidance of some key issues and deliberate deception in other areas.
Bullock (2011, p85) supports this assessment of under-representation in mining inputs when he asks,
“Why has such a tremendous effort been put forth to greatly improve the quality
and standards of the resource and reserve classifications, but with little or no
effort to improve the detailed definition of that which determines whether or not a
resource will move from a resource to a reserve classification? Does the industry
really believe that unethical practices of project feasibility studies can only come
through misrepresentation of resources?”
Beckman (pers. comm. 2011) advises that in equipment selections for new or existing projects a great deal
of effort is directed towards optimising the understanding of geology and costing predictions but the mine
GBI (2007) shows that most mine planners are producing plans which simply don’t produce the outcomes
predicted and clearly under this scenario, the shortcomings of the relevant codes and rules should be
addressed.
Case Study 3.
The following is from a recent due diligence of a mine plan for a mine expansion. The mine plan used 18
Mt per annum as the output for Hitachi EX5500 hydraulic excavators. This assumption was not tested
against industry standards. It was simply accepted as input into the mine design. The median annual
output of this model was 13.5 Mt in 2010, (GBI, 2011). Consider also, that 50% of the people using this
make and model will be less than 13.5 Mt per annum. In fact only 1 in 5 users of this make and model will
achieve the specified rate. The implications of a significant shortfall for this and other site equipment
would likely be financially devastating to a range of people investing in or financing the project.
Case Study 4.
A copper mine in Zambia failed to meet forecast performance over a number of years after
commissioning. It was described as a “ramping up in performance” but when the technical documentation
is investigated the mine was planned to be running at full production rates by 2009 but continues to the
present at equipment rates well below plan. To meet budget total output they have employed additional
equipment. It has been reported that their difficulties are with operating hours and operating rate. It is
known that rates are well below worldwide average for the equipment they are using. This is partly
understandable, given the fact that the mine has used a largely unskilled workforce being trained from no
experience. In this situation, a significant ramp-up period is expected. The author (who was not involved in
the planning nor provided data to this development) can only surmise how such optimistic rates were
used in the planning process. The real issue is that the mine will exceed the input costs that were used in
the feasibility studies partly because the planning has used optimistic and probably unrealistic
assumptions. The planner (a large, well known consulting company) has never been held accountable.
In the case of mining data this can be seen in the following areas;
Outdated data
Older data tends to have significant issues with accuracy and also relevance.
These sources of error in mining data and analysis may be reduced or eliminated by developing better
forecasting models, better data and more experienced planners (Lumley & Beckman, 2009). However, if
technical issues were the dominant or even a significant contributor, the distribution of errors would be
Psychological issues account for inaccuracy in terms of optimism bias or planner’s bias (Lovallo and
Kahneman, 2003). In the mining industry this is often called “planner’s optimism”. It is a cognitive
predisposition (unintentional self-deception) to judge future events in a more positive light than is
warranted by actual experience. It is a weakness in the way the human mind processes information and is
thought to be a universal problem (Lovallo and Kahneman, 2003).
If the primary cause of failure to meet ROR on mining projects was unintentional planner’s optimism then
this could be predicted and standards established for developments along those proposed by HM
Treasury, (2003) for large scale infrastructure projects in Britain. They recommended that adjustments be
made to a project’s cost, benefits and duration, and that the adjustments be based on data from past or
similar projects elsewhere. Again, the lack of normality and consistency in the inaccuracies in project
outcomes indicates that planner’s optimism is not a significant cause of the inaccuracy (Bullock, 2011).
The third explanation for inaccuracies in project outcomes is political-economic issues. They explain
inaccuracy in terms of strategic misrepresentation, which Wachs (1990) puts bluntly as intentional
deception. In this case, when forecasting the outcomes of projects, forecasters and planners deliberately
and strategically overestimate benefits and underestimate costs in order to increase the likelihood that it
is their project and not the competition’s, that gains approval and funding. Strategic misrepresentation
can be traced to internal organisational pressures.
Wachs, (1990), suggests that in the early stages (project approval) of a development plan there are strong
interests and incentives to emphasise benefits and de-emphasise costs and risks. Development teams and
consultants need a pipeline of future work. Mining companies need future mines. Wachs, (1990), finds
that this is not predominantly caused by non-intentional technical error nor planner’s optimism (which is
also non-intentional). He states that it is deliberate misrepresentation which can be represented by the
following Machiavellian formula.
The need for the industry to access (speculative) funds is driving this problem. Companies and mines
compete for those funds. Consequently, the better a project looks the more likely will be its success in
attracting those funds. The low accountability provided by the principles-based JORC Code (2004) is
fuelling this reverse-Darwinism; “survival of the unfittest”, (Flyvbjerg, 2008) outcomes for our mining
developments.
Case Study 5.
The following is a very simple but common deception perpetrated on higher level management in Coal
Mines. The output of mining equipment in the Australian coal mines is described in terms of Bank Cubic
Metres. Equipment monitors measure tonnes and numbers of passes, loads, cycles, etc. Total output is
tonnes per cycle multiplied by the number of cycles. To convert tonnes moved to BCM’s one must divide
the tonnes by the in-situ SG. The output of a mine’s stripping fleet can and is being manipulated by the
choice of in-situ S.G.’s. The use of a smaller S.G increases reported output in BCM’s. Conversely, in the
development phase, the use of a higher SG means less tonnes to move and the required specification of
trucks and loaders (and/or numbers of pieces of equipment) can be lower. Further to this the changing of
SG over time in planning of new mines and in existing mines has been used to create an illusion of
improving outcomes. An unnamed mine in Central Queensland and its Mine Manager received kudos for
increasing mine overburden output. An investigation of the performance demonstrated over a 3 year
period the in-situ SG had reduced from 2.40 t/CuM to 2.08 t/CuM.
Case Study 5.
A new technology, implemented in the Bowen Basin, was justified on assumptions which led to an
indicated 25% increase in productivity. Many millions of dollars were invested in machine modifications
and hundreds of millions of dollars were lost through coal not available to be sold. The trial results were
presented by the marketer of the technology (someone who had a direct financial interest in the further
rollout of the technology) and the mine where the trial was held. The company which owned the mine
also had a direct financial interest in the technology through a shareholding in the company which owned
the IP. The industry was told productivity had improved by 28%. Verbal feedback provided by the
operators suggested it was not that good. The author analysed the data and found actual productivity had
It needs to be emphasised that this paper is directed at a portion of the Australian Mining Industry where
deception is being perpetrated at single or multiple levels. Some Boards of Directors are complicit. Some
Executive Management are guilty. Some development teams and consultants are supporting them.
However, some mining houses do conduct rigorous procedures and insist on honesty to ensure their
projects are appropriately ranked for development. Unfortunately, they are also subject to deception by
people with interests not tied to the financial return from the resource in the ground but rather in the
development process. The result is that Boards of Directors, financiers and shareholders cannot trust
information provided to them about mine developments. There is a strong need to establish incentives
and methods that produce more reliable information for the benefit of those providing money for
developments.
A better way
It is clear that many mine developments are proceeding based on doubtful engineering and reform is
needed. This has been recognised by the ASX (2011) and JORC (2011). It is a macro issue but comprises a
series of micro problems. In this paper the focus is on one of those micro areas; the use of accurate
equipment rates in mine plans. Until the Valmin Code, JORC Code and the ASX Listing Rules address the
issue of engineering inputs they will remain fatally flawed and won’t achieve their noble aims. Less error
(deliberate or other) and more accountability are needed in the estimation of prospective mine returns.
Two key inputs are recommended to achieve this;
1. Better forecasting of equipment rates through benchmarking against industry standards, and
2. More accountability of engineering input
The first of these two issues is described in European literature as “reference class forecasting” (Flyvbjerg,
2007 & 2008). In the mining industry it is called “benchmarking against industry standards” (Lumley,
2007). This involves taking an “outside view” (Flyvbjerg, 2008) on the particular aspect, (In this case
equipment performance rates). In the mining industry a “benchmark” is based on a population of similar
machines. This similar population may reflect, make and model of equipment, commodity, geographic
location, diggability, pit layout, etc. This should not try to forecast what events will impact a particular
Figure 2 and Figure 3 are two examples of how this data may be presented.
Figure 2. Tabular presentation of benchmark data for a mining truck, in Queensland coal mines,
with 242 tonne nominal payload with a flat, 13km cycle distance
1,600,000
1,400,000
Best Practice
1,200,000
1,000,000
800,000
600,000
400,000
4th Quartile 3rd Quartile 2nd Quartile 1st Quartile
200,000
0
0 10 20 30 40 50 60 70 80 90 100
Percentile
Figure 3. Graphical presentation of benchmark data for a Mining Truck with 242 tonne nominal
payload with a flat, 13km cycle distance
The planners, in conjunction with the owners, must develop a rationale for likely performance. It is the
author’s experience that nearly all mine people believe they can perform in the 75th percentile or above
and this is where forecasts are often targeted. Logically, only 25% of mines using a particular make and
model of equipment achieve this rate. This should not provide comfort to financiers and shareholders.
Case Study 6.
A new hydraulic excavator was being purchased for a mine. A distribution table similar to Table 3 was
produced for the make and model, in the same geographic location for the same commodity. That is, the
population was about as tight as could reasonably be achieved. The Mine Manager subsequently insisted
rates in the 90th percentile be used in planning for the new piece of equipment (because that is what he
“knew” it achieved from his experience). An analysis of the mine’s other equipment showed that they
operated in the 42nd percentile on average. The difference was in excess of 10 Mt per annum. This has a
substantial impact on how much of the commodity is available to be sold. The piece of equipment actually
performed in the 58th percentile in the first year of operation due to additional focus on it but it never
came near the 90th percentile.
On the issue of accountability it must be understood that planners, as a way of reinforcing their forward
order book or their future job security, may not be focused on “getting it right” but rather “getting it
funded”. As defined by the previous Machiavellian formula, accurate forecasts are often not an effective
means of achieving the objective, (Wachs, 1990). Accountability will only take hold when decision-makers
can change the power relationships that govern project development. Given the pressure on Boards of
Directors to replace depleting assets this may need to be forced by shareholders, stock exchanges and/or
regulators. To achieve accountability in the area of equipment production rates (and for many other areas
in the development process) the following guidelines are proposed;
A better future
Fortunately, pockets of improvement have recently emerged in the area of inputs into equipment rates
used in large developments and the subsequent accuracy of forecasts regarding mine development cost
and benefits.
A large coal mining company has over the last 18 months accessed benchmark data for use as
inputs into their mine plans for two new mines and two existing mine expansions. They received
data on up to 20 different makes and models for each project on own company performance,
A large engineering company recently included a requirement in a contract with a specialist mine
planner that the rates used in the mine plan be benchmarked against similar operations. The
definition of the population was given great attention.
In addition, an iron ore miner accessed benchmark information for equipment they didn’t have
currently operating as part of their iron ore expansion in the Pilbara. Some of this data was for
internal purposes and some was provided to an external planner for use in the mine planning.
A small resource company conducting a DFS accessed actual results for a particular class of
excavator for a proposed mine.
While being a significant development in this critical area, it is only the tip of the iceberg in developments
in the Australian mining industry.
Conclusion
The Valmin Code (2005) is, “….indicative of best practice for independent experts preparing valuations and
assessments in relation to specialist mining reports.” It is the standard for protecting investors in mining
and petroleum developments. The JORC Code (2004) sets out minimum standards, recommendations and
guidelines for public reporting in Australasia of exploration results, mineral resources and ore reserves.
The ASX Listing Rules provide a more prescriptive approach for defining resources and reserves. They have
all failed to adequately protect shareholders, investors and financiers of mine developments. The source
of error (deliberate or otherwise) has shifted from the definition standards of resources to the processes
in shifting the mineral resources to ore reserves, ie. the engineering inputs used to define what is
economic. Because of the shortcomings in the Codes, regulators have been unable to keep mining
companies and planners accountable for the outcomes of their developments.
Failure to achieve planned ROR in mine developments have been proposed in three areas; technical
inaccuracies, planner’s optimism and strategic (deliberate) misrepresentation. The first two have been
shown to be real but not significant sources of error; while deliberate deception has been shown to be rife
across a range of industries.
This paper has presented a proposed two pronged approach to address this issue in the area of equipment
performance inputs into feasibility studies. This approach is;
1. Better forecasting of equipment rates through benchmarking against industry standards, and
2. More accountability
They are linked and proper implementation of them will address the losses which many shareholders and
financiers have incurred when investing in mining companies.
To achieve accountability in the area of equipment production rates (and for many other areas in the
development process) a range of recommendations have been made to protect shareholders and
financiers of mining projects
A series of statements should be required in all reports on developments outlining how reference class
forecasting has been implemented in the particular study. In the area of mining inputs / equipment rates a
statement along the lines of “Equipment rates used in this feasibility study conform to the XYZ standard.
Median performance is used based on (number – suggested minimum 15) other machines of the same
makes and models from the same commodity in the same geographic location”. And of course full details
must be provided as an appendix. Processing plant performance, costs, manning levels, timing, etc., even
plan outcomes (actual vs plan) should be forecast using a defined reference class and where a reference
class cannot be defined then this should be stated. Only then can shareholders and financiers increase
their confidence.
Valmin Committee, 2005, The Valmin Code, Code for the Technical Assessment and Valuation of Mineral
and Petroleum Assets and Securities for Independent Expert Reports.