EPC & EPCM
Building up for change
Wood’s recent award at Antofagasta’s
Centinela SA division will see the company
carry out a PFS on the centralisation of
monitoring and control for its mining
operations in Chile through a “technologically-
advanced integrated operations centre”
Offloading risk
After several lean years, EPC and EPCM contractors are
starting to refill their order books. Dan Gleeson spoke to
several of the biggest providers and found out how they are
improving cost and schedule accuracy through technology
t’s fair to say EPC (engineering, procurement
and construction) and EPCM (engineering,
procurement and construction management)
contractors were hit hard, post-2011.
As mining companies took writedown after
writedown during the bear market on revised
commodity prices and project valuations,
contractors were left without any work and a
number of previous developments that had
suffered from schedule and cost blowouts.
As Dave Lawson, President, Mining and
Minerals at EPC/EPCM provider Wood (which
took over Amec Foster Wheeler for $3.3 billion
last year), said: “The less than prudent M&A
and project developments seen during the last
commodity Super Cycle had a dramatic negative
effect on mining companies.
“There were many projects that endured
significant overruns and delays that delivered
serious damage to miners’ balance sheets.
“This not only soured the mining companies
but, possibly more importantly, the sources of
their capital.”
The returns mining companies had promised
failed to materialise, leaving project financiers
out of pocket and unwilling to fund more
developments.
This sentiment is continuing to affect project
investment today, and is why most of the capital
invested is, so-called, ‘stay-in-business’
expenditure; typically replacing reserves
through brownfields.
I
Risk reduction
In keeping with this conservative theme, risk
allocation and reduction have become key
features in the development of new projects.
8 International Mining | DECEMBER 2018
As Lawson said: “There is still a tendency to
shy away from mega-projects and push toward
smaller, less capital-intensive and, sometimes,
peripheral projects or phased development (of
what would have previously been one-shot,
mega-projects) with early cash flow generation
funding further phases.”
This risk aversion does not mean projects are
not moving forward – there are plenty of
brownfield assets on the table, even more
blueprints for expansions and the odd greenfield
asset – but there are more elements being
considered before developments are signed
off.
Many contractors IM spoke with said project
funding arrangements have a direct bearing on
what type of projects are approved.
Ron Douglas, Executive Vice President,
Project Delivery, Ausenco, said: “Investment
thresholds are often determined by where the
development capital is sourced. If commercial
debt (or new equity) is required, then a
development is required to indicate robust
economics. However, if financed from internal
cashflow, then it may proceed with a higher risk
profile or a lower return.”
Mark Wainwright, Managing Director of
Mining for Turner & Townsend – a company
often contracted in by EPC/EPCMs for technical
assessments – said not all project owners are
after the same type of returns.
“Returns can be impacted by the nature of
the programme – greenfield, brownfield and
stay-in-business – which are funded differently.
We also see resource constraints, political
pressures and funding sources as other factors
playing out in returns,” he said.
In order to affect the projected returns, EPC and
EPCM contractors are increasingly seeking early-
stage involvement. This should provide them
with the ability to take ownership and
responsibility for the future direction of the asset
in question before it gets too far down the track.
Wood’s Lawson said: “Each stage of a
project’s development is built upon and around
the previous engineering phase, be it
prefeasibility study (PFS), feasibility study (FS),
basic engineering or detailed engineering. The
incumbent, with experience in the previous
phase, should be in the strongest position to
win the next phase provided they have the
requisite expertise and have delivered
successfully.”
Ausenco’s Douglas says: “It is difficult for a
client to trust an engineering company with
their funds (usually significant sums of money)
without early involvement, as it is foolish to just
rely on commercial contracts to protect your
interests.”
This trust works both ways.
Mining companies, still cautious of
developing projects based on the capital cost
overruns coming in and out of the recent boom,
are trying to ensure project schedules and cost
estimates are kept to.
There are various ways to do this – employing
a contractor from an early stage being one –
with some mining companies looking at a fixed-
price EPC route. Others are trying to incentivise
accurate scheduling with additional payments
on top of a normal EPCM package.
Bechtel’s Mining & Metals President, Paige
Wilson told IM that the company’s metals and
mining division has been including incentive
and penalty-based contracts for over 25 years.
“We frequently have key performance
indicators tied to ‘how we work together’ in
addition to ‘the results’ we deliver.
“This approach fully aligns objectives with
our clients, creates a feedback-rich environment
and drives the right behaviour on projects.”
Wood’s Lawson expanded on this theme:
“There appears to be a resurgence in the EPCM
space of a risk/reward approach where some
enlightened customers realise the EPCM partner
has many factors within its control that can form
the basis of equitable risk sharing.
“The project failures of the Super Cycle have
produced a reaction from owners who want
stronger mechanisms to hold their EPCM
contractors responsible.”