In the October 31, 2006 NI 43-101 Independent Technical Report (ITR) for the Galore Creek project, Hatch writes the following about cost and currency risks associated with the project:
Construction material costs: current prices for steel, mining and processing equipment are on an upward trend driven by supply and demand. Although the project budget has been updated to reflect the prevailing market conditions, these trends may continue.
Exchange rate fluctuation: many components for equipment and materials are manufactured in the USA or Europe and consequently the prices of the finished products are affected to some degree by exchange rate fluctuations which could lead to increased costs.
In the light of what has actually happened, these words are proven true, but proven too timid and wiggly to have prevented a cost estimating disaster.
Let us take a look at the notorious tailings impoundment that is reported to have jumped significantly in cost and pushed the project to oblivion. The tailings embankment HATCH describes is a 120-m high earth and rock fill structure with a 30-m wide crest (rather wide seems to me?) and 1.7:1 downstream and 2.5:1 upstream slopes (a bit flat I would have thought?) This impoundment is much bigger than the one described in a 2004 ITR, so maybe it is just the size and not the cost that has increased?
In the 2006 ITR we read some badly written prose about these risks associated with the tailings impoundment:
- Missing the winter low-flow period to construct the coffer dam for embankment construction.
- Placement of the till core over two summer construction seasons may not be sufficient time to do the work needed.
- Potential increased costs associated with potential high foundation seepage.
At some point in the ITR, somebody had the courage to write: “This is a complex project that has several items, both on site and off site, on the critical path schedule. The failure to complete any of these items in accordance with the project schedule will likely have a consequential impact on the remainder of the projects, both with respect to time and cost.”
I notice HATCH used @RISK to compile a probabilistic cost estimate. In essence use of the RISK code entails entering into the code potential variations in cost along with a probability of variation. The computer then uses repetitive sampling to come up with probabilities of cost over-runs. I have used similar approaches in the past and know that engineers and acocuntants are lousy at estimating cost variations and admitting reasonable probabilities of exceedance. We engineers are too conservative and proud to admit of potential variation from our careful estimates. We are essentially deterministic creatures and shun the random.
For example, in the Galore Creek ITR they note that in their probabalistic cost estimate, they do not take into account potential variations in currencies (they used 81 cents to the US dollar.) Nor did they account for “prices escalations after second quarter 2006.” Moreover they take no account of the possibility of bad weather or failure to secure necessary permits. They note that such factors may affect prices and probabilities of over-runs. But one gets the impression they were again too timid (or intimidated?) to model reality. Or at least reality as events a few short months later demonstrated.
Overall, in reading this NI 43-101 report, I get the impression the engineers knew the risks, but we too timid (or imtimidated?) to fully and honestly explore the risks of a risky project in risky times. They appear not to have followed through on their concerns or instinct; and they appear to have taken refuge in that all too common engineering response: I estimated it carefully, therefore it must be right.
Possibly a sophisticated investor would have been able to read through all the timidity and ass-covering to the truth of the degree of risk. It is conceivable the market did just this and set the price just right with regard to Teck Cominco but not with regard to others. But I submit this NI43-101 report is another glaring example of a significant report that was not peer reviewed or subjected, I suspect, to any critical scrutiny or even gently-sceptical or informed comment.
If as an investor, you relied on it in 100% confidence of project success, you have only yourself to blame for gulibility and maybe even stupidity. Maybe in future you will review these reports with a great deal more caution. Good luck.