McCarthy P L, Internal AMC Paper

Cost Estimation
By P L McCarthy 1

Scoping Studies Equipment Cost based on Weight

This method works for most equipment. It is described here for
The cost estimates for scoping studies are usually derived from underground equipment. It assumes that the cost of fabricated
rules of thumb, comparison with similar projects and some machinery is proportional to its dry weight. This works well for
estimation from first principles. This approach can be mobile equipment, but a cost premium is added for the
surprisingly accurate when compared with subsequent sophisticated hydraulics in a drilling machine. Factors in 1994
estimates. However there is a risk that a significant factor were:
pertaining to the proposed operation will be misunderstood or Mobile Units:$20/kg.
ignored causing a substantial error in one or more of the
estimate components. Examples of some rules of thumb are Drill Units: $270,000 + $20/kg.
presented below.
Ideally, all estimates would be within 20% of actual costs.
The "Six-Tenths Rule"
To use the six-tenths rule, a capital or operating cost for a Prefeasibility Studies
similar operation of known capacity must be available. In such
cases... As much direct estimation as possible should be done to
(Cost1/Cost2) = (capacity1/capacity2)0.6 maximise the reliability. In practise time and resources limit the
amount of work done and reliance must be placed on factoring
For example, a 30,000 TPD concentrator cost $60x106. The costs. The study accuracy is unlikely to exceed plus or minus
cost of a similar 40,000 TPD plant is; 20%. This is usually sufficient to establish confidence in
expending the cost of a final feasibility study or underground
Cost1 = 60 x 106 x (40,000/30,000) 0.6 = $71.3 x 106 exploration.
To update the cost for inflation, a current cost index must then
be employed. The exponent, 6/10, is an average and in fact The recently published Cost Estimation Handbook for the
depends on the type of plant. Some estimators prefer to use a Australian Mining Industry (Noakes and Lanz 1993) provides
"7/10" rule. Such factors as type of site, economic conditions guidelines for cost estimation at a prefeasibility level of
prevalent, geographic location and regional productivity are accuracy. That publication is an invaluable reference for people
responsible for substantial variation. It is also possible to apply involved in feasibility study work. It must be emphasised
the method to components of operating cost. The relevant however that it is no substitute for experience and for detailed
exponents are set out below (Mular, 1982): estimation, particularly as the prefeasibility study advances
towards a final feasibility study.
Estimate Required Capacity Exponent The necessary detail depends on the extent to which items may
Open Pit Mine Labour Costs tpd(mined) 0.5 be sub-contracted out. For example mine preproduction
Open Pit Mine Supplies tpd(mined) 0.5 stripping could be let as a contract and in that case several
indicative prices from contractors may be accepted as a
Underground Mine Labour tpd(mined) 0.7
sufficient estimate. This reduces the need for detailed
Underground Mine Supplies tpd(mined) 0.9
equipment selection, manpower estimates etc. For an
Treatment Plant labour tpd(treated) 0.5 underground mine typical equipment requirements would
Treatment Plant Supplies tpd(treated) 0.7 include, for example;
Open Pit(mine & mill)Electric Power tpd(treated) 0.5
Underground (shaft mine & mill) Pump station.
tpd(treated) 0.7
Electric Power
Workshop equipment.
Note that for operating costs the rule is applied to the annual Power distribution.
total cost, not to the unit cost per tonne. If applied to unit costs Loaders.
it makes smaller operations cheaper! (The procedure can be
Trucks.
applied directly to unit costs, however, if new exponents are
calculated by subtracting 1 from the exponents listed above). 4-wheel drives.
Graders.
Forklifts.
Ventilation fans.
1. MAusIMM, CPMin, Managing Director, Australian Mining
Consultants Pty Ltd, 19/114 William Street, Melbourne Vic 3000 Blasting equipment.
.E-mail: [email protected]
Rock drills.
Cost Estimation

Pumps. For a prefeasibility study the indirects may be estimated as a

ANFO loaders. percentage of estimated capital cost, with allowances for
specific project location and complexity. Working capital is
Crib room equipment. typically 10 weeks of operating costs plus the cost of the spare
Mobile toilets. parts inventory. Factors affecting working capital are described
in detail under "Working Capital", and it may be worthwhile to
Safety equipment and mine rescue equipment.
consider these briefly at prefeasibility level to confirm the
suitability of the 10 weeks figure.
Included in the capital cost estimates will be decline or shaft
development, vent raises, levels and advance development at
least 6 months ahead of production and a mill stockpile of ore. Final Feasibility Studies
There is an increasing trend for both pre-production and
production mining cost estimates to be based on contractor's For each activity or process, complete equipment lists must be
indicative prices. This is true for open pit and increasingly for prepared as a basis for estimation. General arrangement
underground mines. An experienced consultant will have access drawings then show how these components are related with
to a database of recent and current contracts to cross-check connecting services and enclosures. From the lists and
these estimates. For larger and international projects, it is drawings, material takeoffs allow estimation to a 10% to 15%
essential that "first principles" estimating be applied rather than accuracy.
relying on contractor's estimating skills. Free advice is worth
what you pay for it. For owner-mining, "first principles" It is usual to specify the type and capacity of each major piece
estimating is essential. of equipment and to obtain written quotations from two or three
suppliers. Preferably the final selection of a particular supplier
After determining fleet requirements the cost of drill rigs, is not made in the feasibility study although this may be
loaders, trucks, excavators etc. would be estimated from recent necessary for proprietary metallurgical processes. Tenders may
feasibility study quotations or purchases, adjusted for exchange also be called for major earthworks and mining as part of the
rates and inflation. feasibility study, but only if "fast track" development is
anticipated and the tender can be awarded within the currency
Unit rates or estimated unit costs would be applied to site of bids.
clearing, grubbing, topsoil removal and stockpiling, preparation
of stockpile pads, haulroads etc. Major civil works such as access roads, hydro dams and tailings
dams may require detailed site investigations and design before
The process plant costs would be estimated from a combination indicative prices or bids are obtained.
of equipment factoring and "takeoff" based costs. ("Takeoff"
indicates quantities etc. which have been "taken off" plans by Detailed drawings and equipment specifications would be used
simple measurement or counting.) A general site plan would be to obtain quotations for process plant components. Material
prepared, along with a flowsheet, equipment list and process takeoffs would be used for steel structures, earthworks,
plant general arrangement drawings. Piping and electrical costs concrete and cladding. Pipe and electrical layouts would be
would be factored from delivered and installed equipment costs used to estimate costs on a unit length basis, with allowance for
as detailed in Noakes and Lanz (1993). fittings, valves etc.

Buildings including stores, administration, changehouses, For some buildings such as accommodation and office units,
laboratories etc. would be estimated per square metre of floor costs per square metre or per person may be acceptable based
area, with special items such as laboratory equipment, on floor and layout plans.
computers etc. separately listed and factor costed.
Indirect costs should be separately estimated wherever possible.
Preliminary designs or at least floor plans are required. More These include:
detailed designs may be required for very site-specific items
such as concentrate handling and shipping facilities and water Engineering: The cost of engineering can be estimated from
supply dams or borefields. Earthmoving volumes should be a drawing list, specification list, estimate of workhours by
estimated. Some package items such as diesel power stations discipline, and allowances for disbursements and consumables.
may be factored directly from other projects despite their Estimates should include travel, accommodation and site
underlying complexity. allowances.
Procurement: Costs include land transport by the supplier,
Camp costs may be estimated per person, with pro rata shipping, land transport to site, import duties, nett value-added
allowance for messing and common facilities. taxes in some countries and the cost of inspection visits to
Indirect costs are often underestimated. They include: suppliers.

Engineering. Construction Management: Manpower requirements can

General site costs. be estimated from the construction schedule. Consultants and
vendor's engineers costs should be included. The capital and
Procurement. operating costs of camp accommodation; commutes and
Construction management. bonuses should be included.
Administration.
Administration: This may also include Owner's Costs as
working capital.
discussed under "Owner's Costs". It includes owner's staff
Insurance. seconded to the project and any administration or management
fees that will be charged against the project.

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Cost Estimation

Working Capital: A properly prepared estimate of working a) Capital cost codes will be 200, where;
capital is required as discussed in "Working Capital".
1st Digit (2) designated mine capital.
Start-up costs may extend into the early production period. 2nd Digit (1-6) designated equipment type.
These should be carefully considered, including an allowance
for the learning curve as discussed in "Learning Curve". b) Operating cost codes will be 0200, where

Cost Codes 1st Digit (0) designated operating cost.

2nd Digit (2) designated mine.
A cost code structure is essential to bring together the various
parts of the estimate and as a checklist to ensure that major 3rd Digit (0-9) designated equipment/event type.
items have not been forgotten. 4th Digit (1-4) designated.
operating/maintenance/parts/labour
The cost code should permit identification of the physical area
and the type of work within that area. Scott (1993) gives the c) 3rd Digit designations.
following example:
(021) 1, Blasthole drilling, BE45R IR DM 25th.
Code Area: (022), 2, Blasting.
2XX Mining. (023), 3, Loading, Demag 185, Cat 992C.
1XX Site Development. (024), 4, Hauling, Cat 785.
3XX Milling. (025), 5, Auxiliaries, Dozers, grader, lighting plant, heavy
service vehicles, dewatering.
4XX Tailings/Reclaim.
(026), 6, Staff Salaries.
5XX Utilities.
(027) 7, Engineering, Operating supplies & training,
6XX Ancillary Facilities. maintain supplies, mine engineering, construction.
7XX Indirects . (028)8, Vacation/Sickness/Absenteeism
Within 3XX, Milling, a further breakdown could be d) 4th Digit designations.
as follows:
(0231) 1 Operating labour (distributed).
31X Crushing/Stockpiling.
(0232) 2 Operating "consumables" (fuel, tyres, ground
32X Grinding. engaging tools, drillstring).
33X Flotation. (0233) 3 Maintenance labour (distributed).
34X Thickening/Filtration. (0234) 4 Maintenance "parts" (oil, filters, pm, repairs,
35X Concentrate Handling 38X Reagents. component exchange).
39X Structures.
The Learning Curve
The second subdivision of the cost code for plant
construction might be: Refer Fatseas and Vagg, 1982.
Code Description: In any new task that is repeated, people experience a learning
effect. The first time a new task is performed one is unfamiliar
1YY Civil. with it. The second time it is performed, with the benefit of
2YY Concrete. experience, it is usually performed better and in a shorter time.
3YY Structural Steel and Platework. Over repeated performances one becomes more skilled and
usually shortens the time taken, at least up to a point. The
4YY Architectural.
reason that the time taken decreases is that there is a learning
5YY Mechanical. experience occurring. Obviously the majority of the benefit
6YY Piping. from learning occurs over the first few performances, but there
7YY Electrical. does tend to be a continual slight improvement over time.
8YY Instrumentation. This phenomenon is described as the learning curve, because if
9YY Indirects . the average time taken to manufacture new products is plotted
against cumulative units of production, the points plotted form
Additional numbers can be included as required. For example, a curve. The learning curve has been noted in many industries,
the concrete foundation for the number 2 grinding mill might be the most notable being airframe manufacturing. Formally, the
coded as 320 - 210 - 02. Pipework for the third bank of cleaner learning curve proposition is: Each time the quantity of
flotation cells might be 333-620-03. production is doubled, the cumulative average unit time will be
some constant percentage of the previous cumulative average
The cost code within each area must be adapted to suit the time. An 80% learning curve is common, meaning that each
activities. Another example of the breakdown within Area 200 time production quantity is doubled the cumulative average unit
(Mining) for a large open pit is set out below. time is 80% of the previous average. The following tabulation
illustrates an 80% learning curve:

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Cost Estimation

Cumulative The learning index is different for different parts of the project.
Units of Output Add. hrs Cumulative hrs
Av.hrs/unit It may be 70%, for example, where an experienced contract
1 100 100 100
crew does overburden stripping. It is close to 50% for the
startup of underground mining with an untrained crew.
2 60 160 80 Examples which conform to the theoretical curve are the
4 96 256 64 advance rates in a new decline or shaft with an inexperienced
crew.
8 153.6 409.6 51.2

A non refractory open cut gold operation with simple

The first unit required 100 hours to produce. When the output metallurgy will achieve processing proficiency quickly but it
was doubled (that is, a second unit was produced), the second may take longer to optimise the grade control methods. A multi
unit required 60 hours, giving a total of 160 hours for the two metal base metal underground operation will take considerably
units, or a cumulative average of 160/2 = 80 hours per unit. The longer to achieve full proficiency. It can take as long as 6
new cumulative average is exactly 80% of the previous 100 months to optimise the process and the probability is that the
hours per unit average. underground operators may take two years to reach their
potential. The process optimisation is likely to be on a number
When output is doubled to 4 units (i.e., another 2 units are of interdependent fronts - concentrate quality versus recovery,
produced) the additional 2 units required 96 hours for a total of concentrate A versus concentrate B, throughput versus
256 hours for the 4 units; this gives a cumulative average of recovery.
256/4 = 64 hours per unit, which is 80% of the previous
cumulative average of 80 hours per unit. Similarly, when output
is doubled to 8 units (another 4 units are produced) the
Working Capital
cumulative average is 51.2 hours per unit, which is 80% of the
Working capital must be estimated as one of the project capital
previous 64 hours cumulative average per unit.
cost items. It can be substantial particularly in a base metal
deposit which requires a large concentrate stockpile prior to the
One can observe that the doubling of progressively larger
first shipment and where final payment is not received until the
output quantities to give the 80% reduction in cumulative
concentrate is received at the (foreign) smelter. It could be
average hours per unit means that the curve of cumulative
necessary to fully finance the operation for a few months.
average hours per unit will quickly flatten out, indicating
progressively smaller gains from learning, as expected.
The main components of working capital are:
Mathematically, the learning curve can be expressed as the
exponential equation: Inventory

y = axI Mining is generally capital intensive and thus even a

three months holding of equipment spares can be
where y = cumulative average hours per unit substantial.
a = number of hours for the first unit
The combination of the remoteness of the operation,
x = cumulative number of units the source of the spares (perhaps Europe or the USA)
I = an index of learning equal to the log of the learning rate and of the reagents (xanthate, the main flotation
divided by log 2. reagent, is made in non-western countries), and the
criticality of some items, such as onsite power
If a learning curve is plotted on log-log graph paper it appears generation with the associated fuel stocks, results in a
as a straight line, and is often easier to use in this way. This can large inventory of consumables. Three months
be seen by taking logarithms of both sides of the equation, log y average is common. Six months may be necessary for
= log a + I log x to give a linear equation. critical items.

The theoretical limits of the learning curve are a 100% learning

curve, meaning no learning at all, and 50% where no time is Broken Stocks and other Flexibility
taken for the additional doubled output (1st unit 100 hr, av =
100; 2 units for a total time of 100 hr, or a cumulative average Depending upon the variability of the mineralisation,
of 50 hr). In practice, learning curves are usually between 70% it may be necessary to have perhaps 6 weeks broken
and 80%. stocks in an open cut or broken in stopes
underground.
It should be fairly obvious that when making cost predictions The mining method - for example shrink stoping,
attention should be directed to which part of the learning curve where only about one third of the tonnes can be
the project is on. For new projects there will be a large learning drawn while mining progresses - may result in high
factor over the first few weeks and months. However, the broken stock levels.
learning process continues as theory suggests and minor
progressive gains can be perceived for at least the first two Not all of the underground development required for
years. the "balanced" mine will be undertaken prior to
commencement and an "accelerated" rate will
The effect of the learning curve is often ignored or continue for some months. This may be accounted for
underestimated in feasibility studies, leading to over-optimistic in the mining costs, but it is a form of working capital
production schedules and budgets for the first 6-12 months of as is the above average waste/ore ratios required in
production. the early years of an open cut operation.

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Cost Estimation

Concentrate Shipment Frequency and Payment contractors. It could also include capitalised interest
costs.
There will be a certain minimum shipment size which During the pre-production phase of construction,
may represent several weeks production, particularly owner's costs could include recruitment and training
during the early commissioning/learning phase. costs for the workforce. There will be a number of
Furthermore, full payment (the outstanding 10% to preparatory costs incurred which, once the project is
15%) will not be received until receipt at the in operation, will be part of the normal operating
purchasers works some 6 weeks later. Therefore the costs. The boundary between owner's costs and
full cost of several weeks full operation has to be working capital may be somewhat vague in this area.
borne as working capital. Perhaps it can be defined by classifying tangible
items, such as inventory and "first fill", as working
First Fill Consumables capital, and intangibles, such as training, as owner's
cost.
Though it will vary with the complexity of the
process the "first fill" - in such respects as grinding Whatever the classification used, the important thing is to
media, carbon, reagent suite etc. - can be a substantial ensure that relevant project costs are not overlooked.
figure.
Perhaps as an extreme example the initial inventories References
for a substantial nickel operation were $14.7M. The
scheduled annual concentrate production represented Mular, A L 1982. CIM Special Volume 25.
some 6 average shipments and therefore the operating
Noakes M and Lanz T (Eds) 1993. Cost Estimation Handbook
costs incurred prior to shipment were about $15M.
for the Australian Mining Industry, AusIMM.
Scott, J 1993. "Project Evaluation" Part 4 of Mining Investment
Owner's Cost
Strategy seminar sponsored by the government of Canada,
Fluor Daniel Wright and Teck Corporation.
The definition of this is not very clear. It can perhaps
be viewed as a "catch all" category to collect the Smith, L D 1987. Inflation in Project Evaluation, CIM Bulletin.
owner's ongoing administration costs during project
Thompson J V 1993. The Feasibility Study, Engineering and
construction. This would include staff costs for the
Mining Journal, September 1993.
owner's project manager, and liaison officers and
inspectors handling relationships with construction

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