Mining - Energy

Interview with the Newmont Mining's Chief Economist

Written by: Fleming. Team

1. How would you compare the position of EPC & EPCM projects in the mining industry to other industries? Are they still a developing field, or have the mining companies adapted well?

We are definitely in a buyer's market and are currently seeing a lot of competitive bidding. Most of our projects and their aspects are bid out. Overall, the industry is down in terms of prices and revenue. This applies not only to mining companies, but to engineering firms as well. From our view, we still see a fundamental disconnect between our objective in the project (cost-effect and on-time completion), versus the objective of engineering firms (emphasize selling labor and equipment hours). As a result, we are starting to look at splitting out various aspects of projects to different firms. That is how we would expect new construction projects in the future to develop. In the past, we would have firms that have expertise in engineering handling the project definition and those which can handle the construction and management. There was the tendency to have one company in charge of all aspects, but it has come down to the lack of expertise in the mining industry for them to handle everything.

2. What have been the primary reasons for budget overruns and project postponing in mining EPCM?

In our engineering team, there is often a temptation to advance a project without the proper definition. If there are gaps, you will have to go back and re-work many aspects. That directly increases the cost and schedule overruns. Regarding EPC, we are also seeing issues with engineering quality, again, resulting in a significant amount of re-work. The whole situation links to a huge trend in the industry, both within mining companies and in engineering firms, where many engineers are starting to retire. That is creating a huge gap in terms of the lack of experience of the people who still remain on the job. At the same time, there is a dearth of people coming from the under-graduate and graduate schools, and that stands as a key challenge. They tend not to have the experience to move the project forward cost-effectively.

3. In general, have the budget and schedule overrun issues in mining been improving? What steps have the EPC companies taken to help the situation?

So far, we have not seen the EPC firms implement any significant changes. The model (selling labor and construction hours) remains unchanged, more or less, trying to put in as many hours onto the project as possible. Of course, there are marginal issues, such as layoffs. However, in terms of structure, the way of addressing these problems we would prefer – training quality engineers, project managers and project control specialists – is not happening at this point.

4. Which of the commodities whose prices are currently low do you expect to be the leading ones for EPC & EPCM projects in the next upcycle?

Many commodities, such as oil, iron ore etc. are in global over-supply. For example, there is currently an over-supply of residential and commercial buildings in many Chinese cities, and it is going to take at least two years to work through these excess inventories. For the mid-term, I continue to believe China will be a source of significant demand for many infrastructure related commodities. China’s current urbanization rate is roughly 50%, whereas in most developed countries, the urbanization ranges from the high 70% to 80%. There is still a lot of people to move into the cities, and there is a lot of infrastructure required. So, for the near future, I would say we are over-supplied for many of the commodities, but I see positive developments.

5. How is the EPC & EPCM sector preparing for this awaited future upswing in commodity prices?

Internally, we are trying to increase the rigor with how we evaluate investment opportunities, both internal development projects and external investments. We do include cost escalation, even with prices staying relatively muted in some scenarios. This is mechanism we use to impose further discipline throughout the company. We also have an independent value assurance group that carries out their own, independent assessments of investment opportunities. That is how we are handling the current environment and, even in an upswing, that is how we would try to move the business forward.