Investment appraisal of mining capital projects - PwC

pwc.com.au
Investment
appraisal of mining
capital projects
Pedro Bueno Da Silva
Brian Gillespie
Fabio Buckeridge
July 2012

Contents
Introduction 01
The case for global portfolio optimisation 02
Linking growth plans to strategy 03
Phased project planning 04
Identifying investment alternatives 05
Selecting the investment alternatives 06
Bringing it all together 07
Integrating risk and uncertainty 09
Maintaining the rigour in boom times 10
Conclusion 11
Mining Excellence@PwC 12

Introduction
The level of growth in the mining industry correlates strongly with the growth
of the broader global economy although with a noticeable lag in time. The
globalisation of commodity markets now drives the approach to investment
appraisal of major capital projects.
Advancements in trade agreements, information systems, mining technology
and human capital exchange are assisting mining companies of all sizes to
diversify into an increasing range of countries and territories.
Operating a global asset portfolio requires continual effort to be expended on
portfolio optimisation. This is at its most complicated when considering major
capital projects situated across both developed and developing nations.
Whitepaper June 2012 1
June 2012 1

The case for global
portfolio optimisation
It is likely that the highest
proportion of capital investments
over the next two decades will be
in rapidly developing territories
such as Latin America, Western and
Central Africa, China and countries
that were formerly part of the Soviet
Union. Many companies will enter
into unfamiliar areas of the world
resulting in increasingly diverse
asset portfolios.
Sovereign risk metrics are now a
common input to financial models
alongside currency hedges and
infrastructure costs. In theory, this
should allow a potential project in
Mozambique to be easily compared
to another in Australia and yet
another in Brazil. In practice, such
comparisons are often made using
a number of qualitative assessments.
The aim of the top tier global
resource sector companies is to
manage a robust portfolio focused
on the long term growth plan but
can also deal with the changes
in local operating conditions and
global market movements. In this
way an organisation should hope
to have a portfolio with strong
alignment to both their long term
growth plan and shorter term
financial and operational objectives.
At the highest level, asset portfolios
should maintain an A grade credit
rating and deliver a steady dividend
stream to shareholders.
However many organisations
can compromise their long term
growth plans by adopting a singular
appraisal approach to each project
under consideration.
A singular approach, no matter how
robust, has the potential to knock out
high potential value at many stages in
the investment review lifecycle. In the
current environment, it is common
that shortages of qualified labour, long
lead times for specialist equipment
delivery and high sovereign risk factors
can all sink a project with an otherwise
attractive value. This is particularly sub
optimal when an organisation seeks to
maintain as much flexibility as possible
across its growth portfolio while
understanding and managing the
aggregate demands on working capital.
Many organisations remain at a
modest stage of maturity in terms
of how they evaluate investment
alternatives, prioritise their capital
allocation and measure the overall
position of their portfolios.
There are many potential
consequences of poor portfolio
optimisation:
• Misalignment of stakeholders’
expectations of risk profile
• Misalignment of shareholders’
expected return on
equity investment
• Poor long term working
capital forecasts leading to
credit downgrades or lumpy
dividend streams.
The principle reason
why some companies
are consistently
successful in portfolio
management of capital
projects is due to their
strict adherence to
a standard appraisal
methodology.
2
Investment appraisal of mining capital projects

Linking growth
plans to strategy
Establishing the link between the
strategic objectives of a company
and the portfolio growth plan
provides the shareholders and the
market with a fuller explanation of
the direction of that organisation.
Most top tier mining companies have
clearly stated strategic objectives.
In BHP Billiton’s case; two key goals
are to own a portfolio of assets
that have diversity across markets,
commodities and geography and
that are long life, large, low cost,
expandable and upstream. These are
the strategic objectives that shape the
growth plan of new capital projects.
Rio Tinto has also demonstrated a
strategic focus on transforming their
capital portfolio of projects through
a disciplined portfolio management
approach with a focus on high return
production creep and modernisation
projects while delivering cost and
productivity improvements.
This focused strategy aims to reshape
the portfolio of projects resulting in
efficient operations, reduced carbon
footprint, and modern, large scale,
long life assets in the first and second
quartile on the industry cost curve
For a large global company operating
without a clearly articulated
growth plan, there is considerable
opportunity for wasted effort as
individual business units pursue
potential projects that are not
consistent with the growth plan.
Seemingly attractive projects at the
business unit level can waste tens
of millions of investment dollars in
feasibility studies due to a lack of
visibility or clarity of the corporate
growth plan.
Alignment can also provide
subsidiaries with a unified corporate
objective and focus. The integration
between head office strategy and
subsidiaries’ strategies is critical to
align portfolio development with long
term expectations of shareholders.
This is a common point highlighted by
CFOs of global mining companies.
Figure 1: Strategic alignment of business unit growth plans
1 2 3
Environment Review Strategic Alignment Business Unit Strategic Plan
Industry
Markets
Competitors
Customers
Products
Stakeholders
Corporate Strategy
Alignment
Business Unit
Strategy Refreshed
Capital Prioritisation
Capital Allocation
Growth Plan Alignment
Portfolio Optimisation
Performance Goals
June 2012 3

Phased project
planning
Mining companies must have
strong frameworks in place for the
evaluation and prioritisation of their
portfolio investment alternatives.
A structured approach to assessing
individual projects is the first step
to ensure rigorous evaluation with
investment decisions made on sound
financial, social, environmental and
sustainable development analysis.
In Rio Tinto’s case, the focus is on
the highest quality options through
a disciplined capital phased
approval process while allocating
cash for investment through each
investment cycle.
A ‘stage gate’ or ‘toll gate’ is the entry
or approval point for the next project
evaluation stage. Varying degrees of
rigour are required depending on the
level of capital under consideration.
For most major mining companies,
formal toll gating is required for all
major capital projects although the
definition of a major capital project
itself does vary. Typically though,
any project requiring upwards of
$500million investment would be
considered a major capital project by
all top tier mining companies.
A key component of stage gating
is to clearly assign accountabilities
at each stage. It is a formal process
that ensures all stakeholders clearly
understand the impact of approving
funds and resources to the next
evaluation stage, and ultimately,
the project.
Figure 2: Stage gating terminology used by major mining companies
Anglo Coal
Xstrata Coal
Vale
Concept Pre-feasability Feasability Implementation
Rio Tinto
Order of
magnitude
Pre-feasability
Detailed
feasability
Implementation
Peabody
Concept
Front End
Engineering
Detailed Design
Construction
BHP Biliton
Indentification Selection Definition Implementation
Methodical and phased approach:
• Establish a formal approach to portfolio optimisation
based on consistency and a strong structure
• Identify and assess the key portfolio risks as part
of the stage gate process
• Communicate the strategic objective of each stage
to all individuals involved
• Assign clear accountabilities to key stakeholders.
4
Investment appraisal of mining capital projects

Identifying investment
alternatives
Prior to any portfolio consideration,
potential projects should be considered
for basic financial feasibility.
A portfolio approach at a minimum
should rank projects on such metrics
as NPV, IRR and Capital Efficiency
Ratio. Good methodologies will
also include key indicators such as
cost curve percentile, margin curve
percentile, future option value and
a metric representing some internal
measure of strategic fit. The best
methodologies will also identify and
quantify key enablers or the drivers
of cost and margin.
Most major organisations will at this
point also evaluate the likely project
position on relevant industry cost
and margin curves. Best practice
organisations will go one step further
and evaluate project risk, strategic
fit and any major dependencies
such as enabling infrastructure.
As an example, BHP which has the
biggest global pipeline of capital
projects, considers all these factors
when undertaking initial project
evaluation.
This initial project evaluation
should give a strong picture of the
robustness of the project as a standalone
proposition with the only
portfolio assumptions at this stage
being the delivery of any other major
projects deemed as critical enablers.
Figure 3: Ranking and prioritising future growth options for further
study based on strategy, value and dependencies
High
Corporate Fit
Priority projects
Low
Capital Efficiency Ratio
High
June 2012 5

Selecting the investment
alternatives
Major mining companies use a
variety of decision rules such as
benchmarking and option analysis
when analysing capital investment.
Best practice requires the early
development of a comprehensive
study with option analysis that can
be carried through to the execution
stage with modification as required.
Interactive workshops with
operational and business unit
stakeholders at the early stages of
options development is a practical
starting point to develop a realistic
set of opportunities and choices for
any particular investment.
Framing investment alternatives at
an early stage is designed to highlight
the following :
• How might the alternatives affect
the portfolio?
• Which alternatives do we really
need to approve?
• What are the capital requirements?
• What is the impact on logistics,
such as rail and port capacities?
• What is the potential
incremental value?
• What major site infrastructure will
be required?
• What type of workforce will be
required?
This evaluation process should
become a structured approach
to deducing and quantifying the
most noteworthy matters related
to the investment case and should
provide a logical path to arriving
at the most attractive options.
It should also enable the full array
of possible risks and constraints to
be identified, from localised
operational matters to changes in the
global market environment.
A key tenet in this analytical
progression is that investment
alternatives are aligned with the
growth plan and the strategic goals
of the company.
This process ensures a robust
consensus of the alternatives
reducing the likelihood of costly and
time-consuming rework.
Figure 4: Framing the opportunity encourages creative thinking to capture all strategic drivers and objectives
to select a preferred option
Opportunity framing
Opportunity realisation
High level
mine schedule
Economic
evaluation
Alternation
ranking
Alternating
selection
Go forward
alternative
Capital and
operating cost
Risk
evaluation
Sensitivity
analysis
Benchmarking
Production
profiles
HSEC
evaluation
Marketing
assumptions
Configuration
assumptions
Financial
Assumptions
6
Investment appraisal of mining capital projects

Bringing it
all together
Optimising a portfolio requires
an organisation to maintain
alignment to business objectives
and ensure projects are still
integrated with the growth plan.
Project sponsors must be able to
effectively report any deviations
or changes to project scope to
senior stakeholders. In the event
of adjustments arising in the
execution phases, there should
be a defined process to rigorously
manage these changes. This process
should incorporate analysis of both
direct and indirect impacts on the
outcome of the project and on the
optimisation of the portfolio.
Strong portfolios tend to have
regular independent reviews across
the portfolio. It is critical that key
stakeholders are well informed on the
progress of all projects at all times.
Figure 5: Portfolio management focuses attention on closing the gap
between anticipated performance and strategic goals
US $ M
2000
1500
1000
Target
Gap closure
Target
Gap closure
500
0
Historical
Forward looking
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1
Quarters
Forecast
Budget
In 2010, the PwC global review of mining
trends found that over the past decade,
only 2.5% of major capital projects in the
mining sector were successfully achieved
across the critical dimensions of schedule,
cost, scope, and business benefits.
A portfolio model ought to be able to
integrate all pre‐selected investment
alternatives and future value options.
June 2012 7

D J B G H C I
E F C Short-term Capacity
D J B G H C I E F A Rail Line
30
G H A Rail Line B Rail Line C Rail Line
300
160
25
140
N X AG SUM (D:BJ) 250
Sales Revenue - Cash Stream 1 US$M
Operating Cost - Cash Stream 2 US$M
Cum Underlying Asset - Nominal US$ Million Nominal net cashflow of underlying asset - nominal US$ million nominal
20
120
Capital Cost - Cash Stream 3 US$M
Taxes and Royalty - Cash Stream 4 US$M
200
Net Cashflow of Underlying Asset - Real US$M
1,500
100
1,500
15
150
1,000
80
60
10
100
1,000
500
40
50
0
5
20
500
0
-500
0
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 HQCC/HCC FY9 FY10 FY11 FY13 FY14 FY15 FY16 FY17
US$/tonne
-1,000
-
SSCC
US$/tonne
-1,500
C Short-term Thermal Capacity B Rail Line
G H C Rail Line
Y Z Capacity Terminale
US$/tonne
80
0 25 50 75 (500) 100 125
100
60
-2,000
90
70 CER 0.5
Production (Mt)
Production (Mt)
-2,500
1,500
CER 0.1
50
80
(1,000)
60
-3,000
70
40
50
60
Total Stripping Cost ($/bcm)
Mining Cost - Underground and Opencut ($/t)
-3,500
Processing Costs ($/t)
Minesite Cash (1,500) Cost (4/t)
1,000
Project Group 1, 8
Project 1 Project 2
50
Project 3 Project 4 Project 5 Project 6 Project 1 Project 2 Project 3 Project 4 Project 5 30
40
Project 6 Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 1 Project 2 Project 3 Project 4 Project 5 Project 6
40
30
20
10
-
60
50
40
30
20
10
0
700
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
600
500
400
300
200
100
0
Coal Sales Revenue - HQHCC (Product 1) US$ Million Real
Coal Sales Revenue - PCI (Product 4) US$ Million Real
Total Plant Production Mt
Capacity
Terminal
Coal Sales Revenue - SHCC / SSCC (Product 3) US$ Million Real
Coal Sales Revenue - Thermal (Product 5) US$ Million Real
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
20
10
0
55
45
35
25
15
5
-5
30
Sales Revenue - Cash Stream 1 US$M
Total Operating Cost - Stripping A$ Million Real
Total Project Plant Group Production 6, 6 Mt Total Growth Capex US$M Total Sustaining Capex US$M
Total Operating Cost - Mining A$ Million Real
Total Operating Cost - Processing A$ Million Real 20
Project Group 3, 9
Total Closure Cost A$ Million Real
Total Cost - Rail A$ Million Real
500
Total Cost - Offload and Port A$ million real
Total Operating Cost - Indirects A$ million real
1,600
FOB Margin excluding Royalties
10
Project Group 4, 5
1,400
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY11 FY12 1,400 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
0
1,200
1,200
Project Group 5, 4
YYY ZZZ XYZ Terminal
XYZ Capacity Ports
Project Group 7, 5
1,000
Project Group 2, 7
60
1,000
- 2,000 4,000 6,000 8,000 10,000 12,000 14,000
-500
800
600
400
200
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
-1,000
50
40
30
20
10
0
800
600
400
200
0
Capex Growth (US$M Nominal 100% Share)
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
It is therefore critical that all
stakeholders understand the
intricacies of portfolio optimisation.
The best way to speed up an
investment is to front end load as
much of the feasibility study as
possible and effectively plan the
concept and feasibility phases. This
makes it easier to ensure that the
project will fit with the portfolio,
particularly from a timing perspective
around capex requirements.
Once a robust identification
process has been put in place and
the investment alternatives are
narrowed, stakeholders must then
measure and rank all reasonable
value creating options.
This process should be followed by
a ranking procedure, evaluating
projects based on the pre-established
KPIs that are aligned to corporate
strategy such as NPV, IRR, Capital
Efficiency Ratio, operational drivers,
cost curve percentile, margin curve
percentile and strategic fit.
A portfolio model should integrate all
pre-selected investment alternatives
and future value options, ranking
projects by their respective return
rates. Amalgamated dashboards can
be used to summarise the entire value
of the portfolio and highlight further
constraints.
Figure 6: New approaches to portfolio management are essential if
returns are to be maintained
From
Non-integrated
Finance owned
Process
Ownership
To
Strategically grounded
Collaborative across divisions and units
Spreadsheet driven
System Integrated systems
Static, finance focus
Siloed, inconsistent
Cost Curve
Dashboard 4 : Benchmarking
Outlook
Data
Delivering
Higher quality and value
Better, faster decision-making
Greater efficiency and lower cost
Improved control and compliance
Margin Curve
Dynamic, financial and operational focus
Integrated, Transparent
Figure 7: A holistic portfolio model enables project ranking,
prioritisation, internal and external benchmarking and links
to potential infrastructure bottlenecks
120
100
Dashboard 5 : Rail and Port Capacity
Project Comparison
First Coal
Free on Board
Capex
Internal Rate of
Total Tonnage Max Tonnes
Last Coal Free on Rail
Strip Ratio Mine Cash 90Costs
Yield Rail Port Approx. NPV
(inc. Dev)
(exc. Royalties)
Growth
Return Capital
Payback Period
A$ / Prod t A$ / Prod t
Strip
Mining Process A$ / Indirects
Avg
A$ / t
US$ M
US$ M
Efficiency Ratio
100
Project Product Mt Product Mt Year Year
Avg
A$ / t Railed
A$ / Prod t
% Real
Real
Real
A$ / Bcm A$ / ROM t Feed t A$ / Prod t
%
Shipped
Real
100%
Production Dashboard 1 : High-Level Project View
Total Capacity Rail Line
Project 1 300 10.0 2015 2080 80.0 90.0 10.0 5.0 16.0 80 7.0 13.0 75% 7.0 4.0 1,500 9.0 250 15% 0.5 15
Project 2 200 6.0 2020 2080 70.0 80.0 11.0 6.0 15.0 8.0 14.0 76% 8.0 5.0 1,600 8.0 350 10% 0.4 10
Project 3 400 8.0 2018 2080 60.0 70.0 0.0 14.0 9.0 15.0 77% 9.0 6.0 2,500 7.0 400 12% 0.3 10
Project 4 100 5.0 2015 2080 60.0 85.0 13.0
70
10.0 16.0 73% 10.0 4.0 2,000 10.0 -200 13% -0.2 11
80
Project 5 Project50 2.0 2021 2080 Project 70.0 1
75.0 7.0 3.0 12.0 11.0 16.0 75% 10.0 5.0 1,500 12.0 -100 18% -0.1 12
Project 6 800 12.0 2021 2080 80.0 95.0 8.0 4.0 10.0 11.0 15.0 79% 9.0 6.0 3,500 10.0 -300 20% -0.1 20
60
Project 7 Value 100 Driver Summary 10.0 2025 2080 80.0 90.0 Payback 10.0 Period 10.0 14.0 80% 8.0 6.0 1,300 13.0Valuation Cash 250Streams
15% 0.2 15
Project 8 120 7.0 2025 2080 70.0 80.0 12.0 9.0 13.0 69% 7.0 5.0 500 15.0 350 6% 0.3 13
Measure Unit FY12 FY12-16 FY17-21 FY22-26 Life
Project 9 400 8.0 2024 2080 60.0 70.0 5.0 2.0 13.0 8.0 12.0 74% 6.0 4.0 1,200 14.0 200 8% 0.4 14
60
50
Project 10 10 1.5 2021 2080 D-H 60.0 I-M 85.0 N-R 9.0 D-AG 5.0 14.0 7.0 11.0 73% 5.0 3.0 1,500 9.0 150 10% 0.5 15
A$/Product Tonne - - 10.0 50.0 35.0
Project 11 FOR 120 2.0 2017 2080 70.0 75.0 15.0 7.0 10.0 79% 4.0 5.0 1,600 8.0 -200 12% -0.2 10
US$/Product Tonne - - 8.0 40.0 28.0
Project 12 140 4.0 2018 2080 80.0 95.0 16.0
40
8.0 11.0 90% 10.0 6.0 2,500 7.0 -300 15% -0.1 10
Project 13 FOB 500 5.0 A$/Product 2019 Tonne 2080 - 80.0 - 90.013.0 12.0 65.0 45.56.0 16.0 9.0 15.0 60% 9.0 4.0 2,000 10.0 -150 6% -0.1 11
40
Project 14 (Excl Royalty) 400 10.0 US$/Product 2020 Tonne 2080 - 70.0 - 80.09.0 11.0 45.0 31.55.0 15.0 10.0 12.0 65% 8.0 4.0 1,500 12.0 250 14% 0.2 12
Project 15 200 5.0 2020 2080 60.0 70.0 14.0 30 11.0 13.0 70% 7.0 5.0 3,500 13.0 350 15% 0.3 20
Project 16 50 2.5 2019 A$M Real 2080 - 60.0 - 85.0 1,950.0 6.8 35.4
13.0 11.0 15.0 80% 5.0 6.0 1,300 10.0 200 6% 0.4 15
Project 17 Total Capex 10 1.5 2018 2080 70.0 75.0 10.0 4.0 12.0 10.0 11.0 85% 6.0 4.0 500 9.0 150 8% 0.5 13
US$M Real - - 1,580.0 5.9 29.3
Project 18 20 1.0 2017 2080 80.0 95.0 11.0 5.0 10.0 20 9.0 14.0 75% 8.0 2.0 1,200 8.0 -200 10% -0.2 14
20 Project 19 150 6.0 2021 2080 70.0 80.0 10.0 8.0 13.0 65% 9.0 3.0 600 10.0 -300 12% -0.1 13
Project 20 250 8.0 2024 2080 - 80.0 - 85.030.0 35.6 35.9
12.0 7.0 12.0 55% 10.0 4.0 800 12.0 -150 15% -0.1 12
Project 21 100 6.5 2025 2080 90.0 90.0 9.0 5.0 13.0 10 8.0 10.0 70% 9.0 5.0 100 15.0 250 6% 0.2 14
Rail Line
Project 22 Price 15 5.0 2025 2080 - 50.0 - 75.0- 12.0 - Rail Line - 6.0 14.0 9.0 15.0 80% 8.0 6.0
Terminal
1,200 13.0 300 14% 0.3 13
Project 23 30 6.5 2021 2080 40.0 80.0 15.0 10.0 13.0 85% 7.0 4.0 3,500 14.0 100 15% 0.4 10
0
- - - - -
0
0 Capital Expenditure 25 and 50 Net Cash Flow 75 Forecast 100 125 150 175 200 225
Project Profiles
Growth Capital Expenditure
A$/Product Tonne - - 30.0 10.0 9.2
Max
(A$M Real 100% Share)
Cash
Tonnes
Margin
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Total
US$/Product Tonne
Project 1
- - 22.5 7.5 6.9
10.0 - - - - 500 650 800 700 1,600 1,000 - 5,250
Key Performance Project Indicators 2 6.0 - - - - - - - - - - - -
Project 3 8.0 - A$/Product - Tonne - - - - - 137.5 34.3 - 34.7- - - - - -
Project 4 Mine Site 5.0Cash Costs 500 1,900 1,500 80 580 414 248 82 (84) (250) - 4,970
Project 5 2.0 - US$/Product - Tonne - - 200 - - 128.3 31.6 - 32.0- - - - - 200
Project 6 12.0 600 700 130 150 - - - - - - - 1,580
Project 7 10.0 - - 150 160 50 40 - - - - - 400
2004 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Project 8 Sales Revenue 7.0 Breakdown - vs Product - Tonnes - 205 1,500 2,100 120 1,068 Opex Breakdown 1,102 vs Sales Revenue - - 6,095
CAPEX Breakdown vs Product Tonnes
Project 9 8.0 - - - - - - - - - 500 1,500 2,000
2005 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Project 10 1.5 - - - - - - 5,000 5,000 - - - 10,000
2006 Project 11 2.0 2.0 2.0 2.0 2.0 - 2.0 - 2.0 - 2.0 -2.0 2.0- 2.0 - 2.0 - 2.0 - 2.0 - 2.0 2.0 - 2.0- 2.0 - 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Project 12 4.0 - - - - - - - - - - - -
2007 Project 13 2.0 2.0 2.0 5.0 2.0 - 2.0 - 2.0 - 2.0 -2.0 2.0- 2.0 - 2.0 - 2.0 - 2.0 - 2.0 2.0 - 2.0- 2.0 - 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Project 14 10.0 - - (1,000) (500) 190 250 1,200 1,100 500 - - 1,740
2008 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
Project 15 5.0 - - - - - - - 150 600 400 300 1,450
Project 16 2.5 - - - - - - - - - 150 700 850
2009 3.0 Coal Terminal 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Coal 3.0 Terminal 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Terminal 3.0 3.0 3.0 3.0 3.0
Project 17 1.5 - - - - - - - - - - - -
2010 Project 18 3.0 3.0 3.0 1.0 3.0 - 3.0 30 3.0 703.0 3.0 50 3.0 70 3.0 80 3.0 - 3.0 - 3.0 - 3.0 3.0 - 3.0- 3.0 300 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Project 19 6.0 100 190 350 350 350 350 350 350 - - - 2,390
2011 Project 20 3.0 3.0 3.0 8.0 3.0 5 3.0 40 3.0 803.0 120 3.0 3.0- 3.0 - 3.0 - 3.0 - 3.0 - 3.0 3.0 - 3.0- 3.0 245 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Project 21 6.5 40 25 50 20 (10) (40) - - - - - 85
2012
Project 22
4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
5.0 30 150 50 (50) - - - - - - - 180
Project 23 6.5 - 70 210 160 160 - - - - - - 600
2013 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0
2014 Total Capex Growth 5.0 A$M 5.0 5.0 5.01,275 5.0 3,105 5.0 1,5905.0 945 5.0 5.0 3,390 5.03,844 5.0 7,718 5.0 8,450 5.0 3,718 5.0 1,800 5.0 5.0 2,500 5.0 38,335 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Total Sustaining Capex A$M - 40 160 170 180 220 280 330 390 500 2,360
2015 Total Capex A$M5.0 5.0 5.0 5.01,275 5.0 3,145 5.0 1,6805.0 1,105 5.0 5.0 3,560 5.04,024 5.0 7,938 5.0 8,730 5.0 4,048 5.0 2,190 5.0 5.0 3,000 5.0 40,695 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Total Production Profile Mt - 5 15 26 30 20 25 40 50 60 70 341
2016
Total Net Cash US$M
5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
(1,200) (3,000) (1,500) (500) (80) (1,000) (4,500) 400 (150) 700 800 (10,030)
FOB Cash Cost US$/Product Tonne
Tonnage (Mt)
Tonnage (Mt)
Tonnage (Mt)
Dashboard 1 : Portfolio View
Revenue (US$M Real)
Tonnage (Mt)
Tonnage (Mt)
Tonnage (Mt)
Product Tonnes (Mt)
FOB Margin US$/Product Tonne
(A$M Real)
Cumulative NPV (US$M)
NPV (US$M 100% Share)
Tonnage (Mt)
Tonnage (Mt)
Tonnage (Mt)
Cash Streams (US$M Real)
CAPEX
Product Tonnes
8
Investment appraisal of mining capital projects

Integrating risk
and uncertainty
A number of risk
management activities
should occur at each stage
of project evaluation:
• Enhancing the
consideration and
quantification of risk
into standard commercial
project evaluation
methodologies
(NPV, IRR, etc.)
• Identifying project
options and impact on
project design and value
• Reviewing uncertainty
around project delivery
parameters
• Review of OH&S
compliance parameters
and KPIs
• Sovereign risk from
changes to tax, royalties
or environmental law.
As projects become comparable
on a time and value basis, the
risk component must also be
incorporated into the ranking
process. At this stage, analysts
should undertake detailed reviews
of any portfolio risks.
Key risks for mining capital projects:
• Change in project scope
• Poor project cost estimations
• Undisciplined project
management approaches
• Unrealistic availability
estimates for labour,
equipment and materials
• Poor understanding of projects,
and interdependencies
• Lack of independent review,
assessment and reporting.
It is important that all stakeholders
understand the possible challenges,
risks and potential returns across the
selection of investments.
Key benefits of early formal risk
management are:
• Established contingency and
mitigation strategy
• Established risk distribution
modelling
• Increased stakeholder awareness
of “unknowns”.
Risk workshops should also be
undertaken to challenge and discuss
the magnitude or materiality of the
impact of the identified risks to the
portfolio. These workshops should be
attended by both project members and
independent assessors. An integrated
risk register must be maintained and
updated with mitigating actions across
the portfolio.
At both BHP Billiton and Anglo
American, risk and project evaluation
practitioners work closely together
using a number of problem-framing
techniques, including workshops and
strategy table discussions.
“Once projects have
undertaken a rigorous process
of analysis and review, it is
vital for a portfolio to highlight
the connection between risk
and return on investment”
Mike Allen, General Manager Infrastructure
Strategy, Anglo American
Figure 8: An ongoing process of identification and mitigation of risks
against project value
High
Project Value
Low
Project Risk
Dogs
High
June 2012 9

Maintaining the
rigour in boom times
During commodity price booms or
at times of optimism around global
growth, it is tempting for even the
most stringent of companies to loosen
their approach to the approval of
major capital investment projects.
Even if the basic rationale for the
investment is economically sound,
accelerated investment approval
without robust analysis methods can
result in significant delays and cost
blowouts due to practical problems
around scheduling and procurement.
For a company like BHP with an
extensive number of major capital
projects in selection, definition and
execution, maintaining that rigour
across all commodity cycles is vital.
In Rio Tinto’s case the Project
Development and Implementation
(PDI) centralised group is responsible
for partnering with Rio Tinto’s
product groups and business units
to achieve repeatable success in
delivering major capital projects.
PDI consists of a Project Management
Office (PMO) and Project Delivery
Hubs. The PMO is responsible for
developing, delivering, promoting
and governing the standards and
tools for projects. The Project
Delivery Hubs are responsible for
managing and delivering sustainable
new business and assets for Rio Tinto.
PDI manages capital projects on
behalf of the business units.
Past experience has proven that the integration of the
operating plan with the growth profile and execution
of these large scale projects can be very complex when
coordinating an investment with the portfolio of projects.
10
Investment appraisal of mining capital projects

Conclusion
The top tier global companies in the mining sector are all reasonably
sophisticated around the investment evaluation and comparison of capital
investment opportunities.
For many emerging companies venturing into new geographies, implementing
a robust approach to investment analysis is vital to maintain a healthy growth
portfolio of projects. Implementation and adherence of standard phased approach
will help ensure continuous alignment with growth plans and allow easier
comparison of significantly differing projects competing for the same capital.
This approach is most valuable when projects become comparable on a time
and value basis and the many components of risk become the deciding factor
when allocating capital.
It is most important during boom commodity cycles, when robust approaches
to project appraisal capital allocation are often circumvented. Accelerated
investment approval in such circumstances can lead to widely unbalanced
portfolios even when each singular investment is sound.
June 2012
11

Acknowledgements
This paper has been developed following insights gained by PwC while
working on major feasibility studies and operational improvement projects
with Anglo American, BHP Billiton, Peabody, Xstrata Coal and Xstrata Copper.
Jason Economidis of BHP Billiton Mitsubishi Alliance, Mike Allen of Anglo
American Metallurgical Coal and John Searls of Rio Tinto all took the
time to provide us with the valuable insights to the realities of managing
a portfolio of large capital projects. Our special thanks to BHP Billiton
Mitsubishi Alliance and Anglo American, who have engaged us to assist
in the ongoing evaluation and strategic development of major mining and
infrastructure projects for their extended coal operations in Australia.
Thanks also to our PwC colleagues; Chris Sullivan, Edina Ente, and
Gui Capper who worked with Pedro Bueno on the development of this
publication and also contributed with many ideas contained in this paper.
References
PricewaterhouseCoopers, 2010. “Mine: Back to the Boom Review
of global trends in the mining industry” Global Energy, Utilities
and Mining.
Fabio Buckeridge, Brian Gillespie and Stephen Loadsman, 2010.
“Optimising Extended Mining Operations Through Value Driver
Modelling”.
Anjuli Steffen, Jane Couchman and Brian Gillespie, 2008. “Avoiding
cost blow-outs and lost time on mining capital projects through
effective project stage gating”.
Krogh, G. and Cusumano, M. 2001. “Three Strategies for Managing
Fast Growth” MIT Sloan Management Review.
Khanna, T. 2010 “Vale: Global Expansion in the Challenging World
of Mining”. Harvard Business Review.
Kloppers, M. 2012 “Presentation to Global Metals, Mining and Steel
Conference, Miami, 15 May”
Borensztein, E. and C.M. Reinhart, 1994. “The Macroeconomic
Determinants of Commodity Prices,” IMF Working Paper 94/9.
Garnaut, R. and L. Song, 2006. “China’s Resources Demand at the
Turning Point.” TheTurning Point in China’s Economic development,
Australian National University Press.
Pain, N., I. Koske, and M. Sollie, 2006. “Globalisation and Inflation in
the OECD Economies.” OECD WP1(2006)14 on Macroeconomic and
Structural Policy Analysis.

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June 2012 13

Authors
Pedro Bueno Da Silva
Pedro is a Senior Manager in the
PwC Consulting practice in Australia
where he focuses on the Mining sector
specialising in major capital projects,
sustainable cost management and
corporate performance management.
Pedro has several years of international
experience in both the mining and
finance sectors. Most recently, Pedro
spent two years working on evaluation
of major capital projects for BHP Billiton
Mitsubishi Alliance, the largest coal miner
in Australia. Before that Pedro worked on
the redesign and implementation of Anglo
American’s global planning and corporate
performance framework and operational
improvement projects across Xstrata’s Coal
operations in Queensland.
Pedro holds a Bachelor of Commerce
with Finance and Accounting majors from
the University of Queensland, a Masters
of Applied Finance and he is a Certified
Practising Accountant, with CPA Australia.
Pedro Bueno Da Silva
Senior Manager, Consulting
Brisbane, Australia
T:+61 7 3257 8489
E: pedro.bueno@au.pwc.com
Brian Gillespie
Brian is the Lead Partner for Capital
Projects and Infrastructure in Australia.
In recent years, Brian has led large
projects both in Australia and globally
with organisations such as Anglo
American, BHP Billiton, Peabody, Rio
Tinto, Xstrata, Queensland Rail Coal
Division and Dalrymple Bay Coal
Terminal.
Brian has published a number of
publications dealing with the specific
challenges of the mining, oil and gas
sectors, including papers on mine site
operational improvement, global credit
risk management, major capital project
stage‐gating and safety classification.
Brian holds the degrees of BSc (Hons)
and MBA from the University of
Queensland and is a Chartered Engineer
with the Institute of Technology and
Engineering in the UK.
Brian Gillespie
Partner, Capital Projects
and Infrastructure
Brisbane, Australia
T:+61 7 3257 5656
E: brian.gillespie@au.pwc.com
Fabio Buckeridge
Fabio is a Senior Manager in the PwC
Consulting practice in Australia. Fabio
has eight years of international Resources
sector experience and has knowledge of
electrical engineering, logistics, mining,
accounting and finance. He has worked
on projects in South America, USA, UK
and Australia.
In recent years Fabio has managed
large operational improvement projects
for Anglo American, BHP Billiton and
Xstrata. Fabio has experience across
several commodities and has recently
managed the development of operational
improvement models across all Xstrata
Coal mine sites in Australia.
Fabio holds a Bachelor of Finance and
Accounting (first class distinction) from
the Queensland University of Technology
and is a Chartered Accountant, with the
Institute of Chartered Accountants of
Australia. Fabio is currently undertaking
his MBA at the London Business School.
Fabio Buckeridge
Senior Manager, Consulting
Brisbane, Australia
T: +61 7 3257 8354
E: fabio.buckeridge@au.pwc.com
Contacts
Global Mining Leader
Tim Goldsmith
Melbourne
T: +61 3 8603 2016
E: tim.goldsmith@au.pwc.com
Australia
Brian Gillespie
Brisbane
T: +61 (7) 3257 5656
E: brian.gillespie@au.pwc.com
South Africa
Hein Boegman
Johannesburg
T: +27 11 797 4335
E: hein.boegman@za.pwc.com
Latin America
Ronaldo Valino
Rio de Janiero
T: + 55 21 3232 6139
E: ronaldo.valino@br.pwc.com
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& Eastern Europe
Moscow
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Steve Ralbovsky
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E: steve.ralbovsky@us.pwc.com
© 2012 PricewaterhouseCoopers. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers a partnership formed in Australia,
which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
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