001 PWC Capital Investment Mining Bisaga-millan

Advisory

PwC Mining Conference 2015 America's School of Mines Driving value from capital investment strategy through execution and into operations

Strictly Private and Confidential Draft

19 May 2015

PwC 4 May 2015 Confidential Information for the sole benefit and use of PwC’s Client.

Draft

Discussion Leaders

2 PwC Mining Conference

6 PwC CP&I - Who we are and what we do

Brett Ryan Bisaga P.E.

Director PwC US (Philadelphia)

[email protected] +1 267 330 - 1784

•  Professional Engineer with 16 years experience providing program, project, and construction management services.

•  Structural Engineer with experience in the design, project management and construction of several complex capital projects with a BS - Civil Engineering and BS Architectural Engineering.

•  Assist clients with the development and construction of various mining infrastructure projects throughout North and South America.

•  Recent South America mining experience includes open pit extraction, copper and gold flotation, leaching, flotation concentrator and solution extraction (SX) and electrowinning (EW) facilities.

Germán Millán Partner

PwC CP&I, Santiago, Chile [email protected]

+56 2 2940 0689

•  Germán is a Partner of PricewaterhouseCoopers and part of PwC’s global Capital Projects & Infrastructure (CP&I) practice leadership team. He is responsible for the CP&I practice’s activities in the Spanish-Speaking Countries of South America.

•  He has over twenty years of experienced in project, program and procurement management in both Latin America and Europe. He has led and/or delivered Technical, Project Management, Procurement, Commercial, Facilities Management and specialized Public Private Partnerships assignments.

•  Germán has also provided strategic advice, developed estate management strategies, and led the development of business plans and business cases for a number of capital investment projects.

PwC Mining Conference


Draft

Agenda

1 Trends in the market 4 2 Increased selectivity for capital projects 7 3 Contracting Strategy 12 4 Reducing Risk 20 5 Case Studies and Sector Experience 30 6 PwC CP&I - Who we are and what we do 33

Page




Draft

Trends in the market


1 Trends in the market

Mining companies historically face significant challenges developing and delivering capital projects to meet the need for production while balancing speed, profitability, and safety. Over the last few years, PwC identified several core differentiators to help mining clients drive value even during times of commodity price decline and limited capital investment.

PwC has identified three core differentiators drive value. 1.  Increased selectivity in capital investments,

2.  Commitment to capital discipline, and

3.  Increased transparency, in costs and performance



Draft




Increased focus on capital deployment on projects…. Increased selectivity while considering cash flow and capital efficiency.

“We must be disciplined with our deployment of physical and financial resources to focus on those assets that will provide us with the greatest returns and potential upside” Mark Cutifani, CEO Anglo American

Vale S.A. (Vale) announces that its Board of Directors approved the investment budget for 2015, with capital expenditures of US$ 6.358 billion for project execution and US$ 3.809 billion dedicated to sustaining existing operations. This is the fourth consecutive year in which Vale reduces its capital expenditures, maintaining capital discipline and focusing only on world class projects. - Vale CAPEX 2015 Report



Draft




With primary focus on cost reduction, mining clients require effective and agile decision making. Reducing future production capacity and neglecting capital investment may leave the company in a weak position to react to opportunities ahead. Emphasis on operational excellence is crucial, but alignment between capital investment programs and long-term strategy needs to be maintained.

Today’s discussion will focus on 1.  Increased selectivity for capital projects

2.  Implementing the appropriate Contracting Strategy, and

3.  Reducing Risk for the company



Draft

Increased selectivity for capital projects


2 Increased selectivity for capital projects

Increasing the likelihood of success for a capital project

- establish effective governance at the outset



Draft

Stage gate approval process



Capital Discipline and Governance are supported by a gated project development process. Stage gate approval require incremental planning and design of projects, to encourage orderly development of the project while enabling executives to make informed decisions about interim funding authorizations and allowing for project “off-ramps” prior to full funds authorization.

§  Is the business need legitimate?

§  Does it generate sufficient ROCE?

▪  Is the best option still viable after scoping?

▪  Can it be de-risked?

▪  Is best option still viable given the refined estimate?

▪  Is there any reason the project should not be built?

▪  Is the project ready to begin operation?

▪  Is the project ready to be turned over?

▪  Were project benefits realized?

▪  (ROCE, capacity)

Project Lifecycle Stages

Execution Operations

Pre-concept Concept Pre-feasibility

Feasibility Engineering Construction Start-Up Post-imp. review

▪  Do any feasible options exist?

▪  Are lower risk options availably?

How well is the stage gate process understood, deployed, monitored and updated for effectiveness?



Draft

Portfolio Management – Identifying Options



Who develops, confirms and updates the investment selection criteria and prioritization based on constraints, long-term strategy, ROI and risk profile?

Financial metrics

Strategic

alignment

Risk

Embedded value



Draft

More defined scope and quantified risk at FID



Pre-concept Concept Pre-feasibility Feasibility Implementation

•  Plan for resources

•  Define roles •  Define

success criteria

•  Define models and scope

•  Identify opportunities and scenarios

•  Classify risks •  Align

objectives •  Identify quick

wins

•  Quantify economics

•  Define options and portfolio

•  Rank by value, risk and effort required

•  Basic engineering

•  Operations plan

•  Risk plan •  Contracting •  Sanctioning

•  Detailed design

•  Plan and logistics

•  Risk management

•  Execution •  Supervision •  Measurement

Post Imp. Review

•  Track plan vs. real

•  Measurement •  KPI

monitoring •  Plan

correction

Concept Feasibility Pre-feasibility

Front End Loading

Influence Cost

Mechanical Completion

Implementation Detailed Design Construction Operations

FID

Based on the investment selection criteria and long-term strategy are capital projects receiving appropriate scope definition and risk identification?



Draft

Three lines of defense within the delivery model



Execution

Oversight Assurance Project

Sponsor

Project Director

Project Controls Engineering

Procurement

Contractor

Subcontractors

Fabricators Material Suppliers

Quality Management Commissioning EHS

Executive Steering

Committee External Advisor

Construction

Internal Audit

Are checks and balances in place to select, advance and execute the capital portfolio?



Draft

Contracting Strategy


3 Contracting Strategy

We have a good mining project, now what?



Draft

Organizational delivery capability



•  Integrate capital project planning and execution with corporate functions •  Scale organization to align with planned and active projects •  Establish transparency and early warning mechanisms •  Create the framework and financial mechanisms for driving capital efficiency

Portfolio Management

Financial Management Annual Planning & Budgeting Norms

Portfolio Optimization Project Planning

HR Management

Project Management and Controls

P & SC Management

Project Estimating & Costing Norms

Project Accounting

Strategic Planning

Contractor

Management

Ensure “Readiness” aligns with Contract Strategy

Fully understand the internal capabilities before selecting any contracting strategy



Draft

Contracting strategy discussion overview


Contracts are risk allocation tools, but there are limits to risks that can or should be transferred to vendors. Risk allocation should consider:

•  Which party is best capable of mitigating risks? •  To what extent is the Owner willing to pay the

contractor for assuming risk? •  Is the owner willing to transfer authority to

mitigate risk along with accountability for risk? •  What controls are necessary to monitor risks

allocated to others? •  Can the Owner enforce risk shifting contract

provisions that may be contrary to public policy (i.e., No Damage for Delay clauses)?

•  Does the vendor have the financial capacity to assume and mitigate risk allocated to it?


Project Delivery Strategies

Contract Pricing Strategies •  Fixed price / lump sum

•  Unit price

•  Guaranteed Maximum Price (GMP)

•  Time & Materials (T&M)

•  Cost Plus Fee

Consider both project delivery and contract pricing strategies

•  Traditional Design-Bid-Build/ Self-Perform

•  General Contractor DBB

•  Construction Manager Agency (CM in an Advisory Role) & Engineer, Procure, Construction Manage (EPCM)

•  Construction Manager At-Risk

•  Design-Build (EPC)



Draft

Different project, business, and market drivers define a capital project’s risks, which are allocated to project participants.

Our view of the drivers that impact a project’s risk environment



Project drivers

Design maturity, cost v. schedule driven, ROI requirements

Business drivers

Internal project delivery capabilities, risk tolerance, public relations

Market drivers

Contractor / skilled labor shortages, supply chain capacity, regulatory environment

Risk environment

• Schedule

• Cost

• Quality

• Production and reliability

• Resource availability

Risk allocation

• Mitigation capability

• Accountability consideration

• Tradeoffs

Contract strategy

• Delivery Strategy

• Pricing Strategy

• Award options

Control environment

• Governance

• Project management processes

• Project execution procedures

• Contract compliance

Key to successful project execution is the alignment between the selected contract strategy and capabilities of organization, processes and system to establish and manage the appropriate control environment throughout the project life cycle.



Draft

Evaluating strategy options

Define strategies & drivers

•  Define the available strategies (project delivery & contract pricing) as well as the important drivers that will impact selection of each.

•  Each strategy is ranked by its relative effectiveness to implement each driver.

•  Define the project requirements with respect to each driver chosen.

•  Analyze requirements in context of the drivers, and select most appropriate strategy for each driver.

•  Choose the best fit strategy based on an aggregate view of the most important drivers.

•  Identify gaps in the chosen strategy and the associated risks. •  Based on the identified gaps and risks, assess contract, control

& governance mitigation measures that can be taken to increase likelihood of project success.

Define project requirements

Analyze inputs & choose best fit strategy

Identify gaps in strategy and assess contract, control & governance mitigation


3 Contracting Strategy PwC Mining Conference


Draft

Owner or EPCM – Project Management Systems & Tools



High Performing EPCM’s: §  Leverages multiple accelerators,

frameworks, tools and proprietary methods.

§  Process and procedures based on best practice, experience and lessons learned.

§  Reporting tools that help the team accelerate analytics and early warnings

As a Result: §  Timelines are shortened §  Increased efficiencies at all

stages §  Reduced disruption to

procurement, mobilization, execution and start-up

§  Effort is more predictable, §  Project Development has higher

level of confidence



Draft

Owner or EPCM – Project Management Systems & Tools


3 Contracting Strategy PwC Mining Conference


Draft

Reducing Risk


4 Reducing Risk


- Promote a risk based management approach with enhanced decision support



Draft

Establish consistent requirements


4 Reducing Risk

Governance protocols and common processes should be established with a defined hierarchy that takes into account all types of capital projects across the organization.

Project Procedure Manual

Portfolio Oversight Policy

Project Execution Plan

Portfolio Oversight Policy (POP) Corporate standards applied to all projects within the capital project portfolio. Project Procedure Manual (PPM) The PPM includes detailed processes, procedures, standards and requirements. Project Execution Plan (PEP) The PEP is the detailed execution plan for each of the projects within the portfolio.



Draft

Implement ‘playbook’ – document framework


4 Reducing Risk

Policies Mandates compliance with the Stage Gate Process for large projects; defines the model for project segmentation

Standards Defines mandatory project management requirements by project stage (project scope, cost estimating, scheduling, project GOES, risk analysis, etc.)

Implementation Guides

Provides instructions, examples, and best practices on how to meet the requirements within the Standard

Templates Provide the documentation for the business case, technical, and project management requirements (Project Charter, Project Execution Plan, Risk Register, Dashboards, etc.)

Training Educates project stakeholders on client’s Project Delivery System including Policy, Standard, Implementation Guide and Templates



Draft

Establish chain of custody – Time management


4 Reducing Risk

Integrated schedules that provide visibility to the time management from the work face of a sub-project through the required project management levels up to the highest level portfolio summaries

Portfolio- high level overview for project schedules within the portfolio

Program - Level 1 schedules with some level of integration between projects

Project – Level 2 schedule integrated with all sub project data

Detail – Detailed level 3-4 schedules using standard coding for activities at the work face for sub-projects



Draft

Estimating uncertainty and scope definition


4 Reducing Risk

Recognizing the direct correlation between estimate accuracy and the level of project definition (design) [need for appropriate contingency]



Draft

Consider equipment lead times and labor supply


4 Reducing Risk

Lead time outlook (years)

Gas generators Wagons

Reclaimers Tyres

Large Haul trucks Crushers

Barges Locomotives

Grinding mills

Draglines Ship

Loaders

Rope Shovels

0 5 1 2 3 4

Worse case delivery time Current delivery time Normal delivery time

Heavy equipment lead time



Draft

Quantitative Risk Management


4 Reducing Risk

•  All estimates include assumptions. •  Contingency is;

-  a risk-based estimate of unforeseeable factors in defined scope.

-  a recognition that project costs are likely to exceed the base estimate due to known-unknowns

•  Contingency is not; -  a "cushion" or a "safety net." Expect to

spend it during execution. -  an allowances for escalation, unforeseen,

revised or additional work scopes (unknown-unknowns)

0

0.02

0.04

0.06

0.08

0.1

0.12

13.2

13

.5

13.7

14

.0

14.2

14

.4

14.7

14

.9

15.2

15

.4

15.7

15

.9

16.2

16

.4

16.7

16

.9

17.2

17

.4

17.6

17

.9

18.1

Con

fiden

ce

Estimated Cost $M

Expected Value

(Estimate) 80%

Confidence

Contingency



Draft

Comprehensive Cost to Complete Modeling


4 Reducing Risk PwC Mining Conference


Draft

Cost variance monitoring


4 Reducing Risk

Earned Value and Quantitative Risk Assessment tools provide insight into project performance, trending and cost growth to enable: •  Confirmation of base estimate and targets •  The ability to develop effective mitigation

measures to minimize impact or avoid risks

•  Prioritization of mitigation actions would most efficiently benefit the project

•  Allow cost overruns and deviations to be quickly identified and investigated

•  Allows drilling down into cost variances by Work Breakdown Structure (WBS) detail

•  Focus on top risks driving the project. •  Focus on disciplines, areas of project

driving cost deviations.



Draft

Schedule Analytics – Beyond Critical Path


4 Reducing Risk

Constraint analysis—identify areas of potential schedule manipulation and constraints Changing logic, open ends and logic integrity over time— preferential logic, excessive leads and lags Criticality over time—Float is a relative, quantifiable value which can and should be treated as a resource. Float degradation— float reduction over time, sub-critical path monitoring, pacing and concurrent delays Float density analysis—provides insight into areas of the schedule that are compressing at risk of delay Activity duration analysis - original and actual durations over time and excessive activity durations. Activity level variance – planned vs as-built start/finish date tracking

0

10

20

30

40

50

60

70

80

90

100

Numbe

r of A

ctivit

ies Sc

hedu

led to

Comple

te

11/23/2010 12/20/2010 1/24/2011 2/21/2011 3/21/2011 4/25/2011 5/23/2011 7/25/2011



Draft

Case Studies and Sector Experience


5 Case Studies and Sector Experience


- Lessons Learned from Mistakes of Others



Draft

Recent PwC CP&I Mining Experience



Client Project Location Project Attributes Project Cost Type of Engagement

Global Mining Company

Peru Our client acquired the greenfield mining Project from another mining company including the construction of all of the facilities required to process copper ore from mineralization through to a new sulfide flotation concentrator at a rate of 140,000 tonnes of ore per day. As well as all associated processing, transportation, and infrastructure supporting facilities. The project includes the construction of a new-build community, to resettle displaced area residents

+$7.0 B USD Cost Review – focused on the increased EAC during and following the due diligence period

North American Mining Company

Republic of Panama Largest base metal reserve open pit, greenfield mine with main earthworks, port, process and power plants, coastal road, pipeline, balance of plant and tailings management facility

$6.2 B USD Project Excellence – Baseline Governance and Controls Review Developed IA plan for quarterly deep dive reviews

Global Gold Mining Company

Islamic Republic of Mauritania (West Africa)

New processing facility with primary crushing, grinding, gravity separation, 38,000 t/d Carbon In Leach (CIL) capacity, CIL circuit, thickening and cyanide destruction, and reagents mixing, storage and distribution. Upgrade and expansion to existing facilities, infrastructure and utilities.

$1.77 B USD

Project Excellence – Governance and Controls Review for Internal Audit and Executive Steering Committee



Draft

Recent PwC CP&I Mining Experience



Client Project Location Project Attributes Project Cost Type of Engagement


Canada Brownfield mine expansion from 7.1Mtpa to 14.3Mtpa including pre-stripping new pits, mine development and mobile equipment, concentrator, infrastructure, environmental upgrades, tailings management, port and rail. Due to iron ore pricing volatility project was delayed. PwC helped with the restart efforts.

$1.14 B CAN Restart assessment of work completed, contract closure , and governance and controls assessment. Contract strategy support. Conducted a quantitative risk assessment of the restart estimate. Developed risk management process and procedures.

Global Financial Organization

Quebec Greenfield project including road, airfield, open pit mine and processing equipment

$900M CAD Project Excellence – Governance and Controls Review


Canada Hematite direct ore project that consists of mining, crushing, washing, screening and shipping the sinter fines and pellet fines to our clients Steel's European steel making facilities.

$453 M CAD Project governance, budget, forecast, schedule and risk review, as well as an internal controls review.


Chile Design and construction of a leach pad, solution extraction (SX) and electrowinning (EW) facilities with a capacity to produce 40,000 tonnes annually of high quality copper cathode from the oxide ore

$450 M USD Readiness Assessment, Business Case review and contracting strategy / procurement review.


United States Project is an open pit gold mine that delivers sulfide ore to a 7,000 tpd (short tons per day) grinding, flotation, cyanide leach, carbon handling and refining facility.

$329 M USD Project Excellence Readiness Assessment



Draft

PwC CP&I - Who we are and what we do


6 PwC CP&I - Who we are and what we do PwC Mining Conference


Draft

PwC´s mining practice -  PwC is the world’s leading adviser to the mining industry,

serving more of the world’s top global mining companies than any other professional firm.

-  More than 80 percent of the world’s mining companies are our clients.

- Our strength serving the global mining industry comes from the

skills, experience and strong interconnectivity we maintain among our 1,700 mining professionals globally.

- Mining companies in the various regions can benefit from our

Mining Centers of Excellence (CoEs) and the specialised work of our teams in all significant mining territories.

- Operational, Financial and Technology specialists work with our clients to achieve their unique goals, with a strong focus on change management, sustainable savings and knowledge transfer.

- To keep miners abreast of industry issues and opportunities, our mining professionals share perspectives on emerging trends, best practices, methodologies and approaches in our mining thought leadership series and publications.

specialised Mining teams

PwC Mining CoEs





Draft

PwC’s Capital Projects & Infrastructure (CP&I) practice

PwC’s CP&I practice is represented by over 700 practitioners worldwide encompassing civil, environmental, mechanical and chemical engineers as well as project management, construction, accounting, litigation and IT professionals. This network of professionals allows us to provide our clients with: •  Energy, mining, and power and utilities industry focus; •  Experienced group of portfolio, program and project controls specialists; •  Large scale capital project execution and forensic analysis expertise; and •  Diverse perspective from our international client base across industries and sectors. •  PwC CP&I team serves the full asset life cycle from strategy through execution.

Exploration Planning and Design

Execution and Testing

Maintenance & Operations

Closure/ Rehab




Thank you... pwc.com/cpi

© 2015 PricewaterhouseCoopers Consultores, Auditores y Compañía Limitada. Todos los derechos reservados. Prohibida su reproducción total o parcial. “PwC” se refiere a la red de firmas miembros de PricewaterhouseCoopers International Limited, cada una de las cuales es una entidad legal separada e independiente.

Documents

001 PWC Capital Investment Mining Bisaga-millan