The mining industry is fraught with capital cost overruns.   A quick internet search will turn up many examples. The results quickly high-light that as many as two-thirds of mining projects see cost overruns. Moreover, the researcher can see that it is a decades-long problem.  That is, the industry doesn’t seem to be getting better at their cost estimating. We aren’t learning from our mistakes.

Where does the problem lie? Our industry’s cost overrun problem is multi-faceted. There isn’t a single reason or error that we can definitively say is the key to the solution. Poor engineering assumptions, a lack of understanding of key risks (either actively choosing to “kick the can” or a simple failure to recognize risks), bias (both intentional and unintentional), aggressive timelines, and other reasons may play a role. These issues can contribute to cost overruns individually, although they more commonly occur in tandem.

To highlight a single, yet profound example, consider Teck and Newmont’s Galore Creek project in northwest British Columbia. All of the information presented below is publicly available via company or securities websites. It is representative of the company and project information that would be available to investors.

Project example

The Galore Creek project is an alkalic porphyry copper-gold-silver system with at least three mineralizing events that deposited bornite, chalcopyrite, gold, silver, and other base metals, primarily in association with potassic alteration. Exploration and development are difficult due to its remote location and helicopter-only access. The project was originally discovered by Hudbay Mining in 1955 and has since been explored and partially developed by several companies.

NovaGold was the 100% owner immediately prior to June 2007, however it has since divested itself in full, via an initial partnership with Teck Resources in 2007, followed by a more recent agreement with Newmont. The project is currently being worked by a partnership of Teck and Newmont under the name Galore Creek Mining Corp. The first assessment of the development potential for the project was completed by Kennecott in 1992, but this example focuses on information from the last three publicly available studies of the project: a 2004 preliminary economic assessment, 2006 feasibility study and a 2011 pre-feasibility study.

The 2006 study resulted in the first declaration of reserves on the property. Permits were obtained and initial development (preconstruction) activities began based on this study. Then a third-party review of costs and work completed in 2007 (after a new partnership with Teck) showed that the economies of the project were ultimately not favourable.

Development activities were halted at that time, with the stated reasoning for the stoppage focused primarily on the complex sequencing related to the construction of the tailings dam and water management features. As we will see shortly, there was a much larger concern that likely played into halting