Risk Management In The Mine Development Construction Essay

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Mining sector is a high risk investment which includes high investment cost under uncertain condition of nature reserves, metal price fluctuations and increasing operating costs resulting in the mining plan and sequences get frequently changed to ensure that the ore delivery meets with the plant requirement and yearly production target. This condition affects the mining development project especially in the active mine pit area is sensitively changed in regards to project scope and all assumption of parameters used to estimate the project's schedule and cost. In fact, a standard risk management framework is not addressed in current project management practice. Results all risks associated in the project planning are not clearly defined, quantified and control managed which are believed it has been contributed on project schedule slippage and cost overrun. Research methodology uses a process of risk management plan includes main activities i.e. identifying and classification risk factors (risk assessment), analyzing and quantifying the properties of factors (risk analysis), mitigating the impact factor, and developing risk management plan (risk mitigation). The risk analysis addresses into three areas i.e. technical risk analysis, schedule risk analysis and cost risk analysis to allow integration of risk concern into project planning and determine contingency reserve. This paper is intended to model the risk management plan in one of mine development projects i.e. main haul road development project at mine pit active area as a model which could be practically applied to similar projects in manner that all risks identification are quantified and used to determine a contingency value applied to the project schedule and cost. In addition, this paper would like to present that the risk management framework would be appropriately tools and recommended to apply in the current practice of project management to consider earlier warning of threats to the schedule, determine a realistically budget and a desired confidence level of contingency reserve.

Introduction

Looking at mining project characteristic which is influenced by some uncertain circumstances on nature resources and accuracy reserve data affecting the mining plan are often changed whether daily, weekly, monthly periods in manner that the ore chemistry is on specification delivered to the process plant to meet yearly production target. Otherwise, these circumstances whether predictable or not, depending on confidence level on the mine plan and reserve data accuracy are going to affect all assumptions of parameters used to generate the project scope, schedule and cost estimation of mining development project such as mine haul road, environment facilities, dykes where will be plan to develop in the pit area or adjacent of the active mine pit area keep changes. The scope changes might continue during project implementation depending on how much the changes of current mining plan will influence the project scope and the design. This condition has frequently occurred in previous projects and has contributed to change of scope, delayed project schedule and deviation on the budget plan. In fact, the risk assessment is not quantified in the schedule and cost estimated on current mine planning or not well formulated to address mine project issues in current work practice.

A process to identify the problems brings some of these uncertain conditions into risk analysis of the project which is typically addressed into three areas i.e. technical risk analysis, schedule risk analysis and cost risk analysis. The technical risk analysis results in risks category which are required to be given high attention and the need to develop mitigation plan to eliminate the risk by reducing risk impact. Schedule risk analysis is addressed to consider earlier warning of threats to the schedule and to allow integration of risk concern into project planning which are concluded two analyses from the critical path and the highest risk path. The cost risk analysis is performed using Monte Carlo simulation to determine a realistic budget and a desired confidence level of contingency reserve. This paper would like to explore how the risk assessment and analysis are performed as appropriate tools to be implemented into mine development project which is sensitively influenced by change of mine plan as a result of uncertain condition on natural reserves as well as to address all associated risks on project activities.

Risk Factor Identification

A process to identify the risk is required to include some of these uncertain conditions into risk analysis of the project whether using classical brainstorming or nominal group technique. This process needs to consider risk events or drivers including both project specific and external risks that may impact the project. Tree analysis as shown Figure 2 is supported to identify all associated risks drivers and root causes influencing sector performance.

Figure 3 shows the diagram flow of risk assessment in the Earned Value Project Management process.

Technical Risk Assessment - Quantify Risk Factor Impact

Project scoping and Work Breakdown Structure (WBS) using the Norsok Z-014 Standard Activity Breakdowns are utilized to perform development of the technical risk analysis. The root cause analysis brings on risk identification and generates the classification of risks which is required to quantify the risk factor based on category of risk instead of each individual risk activity. Project planning information, including schedule (Modified Bar chart), costing (Activity Base Costing model), resources availability, procurement planning, historical information of contractor equipments performance, and equipment specification, are used to quantify the scale risk factor against performance, schedule and cost. Risk scales approach in association with risk analysis using expected value, AACE International Recommended Practice is used to develop and quantify risk factor impact where its most basic form can be expressed as follows

Risk scale approach is quantified using a scale definition both probability of risk and impact (severity) of risk against performance, schedule and cost to have better and consistent judgment to be applied on the quantification of risk. The probability is expressed as whether an event may occur or not or as likelihood of alternative possible event and determined by expert judgment. Severity risk is determined by considering the possibility of maximum severity occurrences referring to history data and simulated by using the equipments model calculation then applied on the activity base costing and duration schedule. Further, the mitigating risk will be applied to eliminate the maximum impact of risk .The scale definition of parameters performance; cost and schedule are shown in Appendix A.

The score risk matrix as shown in Figure 4 and 5 presents that most of the risks are distributed at moderate to high risk level as result of the uncertainty risk of changed on mine plan will affect the high score of risk probability. As the risk score matrix result, risk management plan will be applied in which risk has range between moderate to high risk level. The risk management plan shall accommodate special attention and close government monitoring can probably overcome the high risks. Otherwise, low risks will only require normal effort.

As the level of categorized risks have been defined and screened in which risks require to have high visibility, the risk management continue to develop the mitigate impact plan to eliminate the risk which is considered threat response strategy such as avoid, transfer, mitigate or accept. As unexpected geological condition associated with changed on mining plan results uncertainty of the mine development project in the mine active area, which cause the uncertainty of risk will be kept to be existed in the project. However, the mitigation plan could eliminate the probability of risk by developing preventive plan and minimizing the exposure of risk (severity). A summary of all risks identification, outline of steps and considerations that have been found effective to prevent, anticipate or minimize the risk is shown in a customized risk template in Appendix B.

Figure 6 below shows the mitigation plan applied to eliminate the score risk and makes it into acceptance management risk to moderate and low range level.

Most of mitigation plans are defined as preventive action plan to reduce the probability of risk such as developing better planning control, optimizing mine planning, quality control plan, effective work methodology, geotechnical assessment and traffic management plan. Detail topography survey is required to provide more accurate data to eliminate the severity risk level of volume material more than the estimated. As the highest risk is potentially accident on fatality using local contractor small fleet surround PT Inco heavy equipments in the active mine pit area, traffic management will be inadequate to mitigate the risk into an acceptance risk. Therefore some options are defined to seek a possibility of using heavy equipments to construct the road in manner that the risk is mitigated into acceptance risk i.e.:

Contract out to national contractor. This option is unlikely because it will be costly to mobilize heavy equipments from out of site just for 6 months duration of contract. Also it will raise social issues as the work is not given to the local contractor who has experience and capability in similar work on site.

Direct award to the local contractor who has heavy equipment on site as there is a local contractor that owns heavy equipments on site. This option will not provide competitive bids and will potentially get expensive bidding by single contractor as well as raising local social issue.

Contract out to local contractor for activities having low risk such as loading, dozing, compacting, base construction and allocating PT Inco heavy equipments for the hauling activities (dump trucks) as this activities will only generate high score risk of fatality. Otherwise, there is estimated 75,000 BCM ore with stripping ratio overburden : ore = 3 : 1 located in the road section. Therefore allocating PT Inco heavy equipments for 3- 4 months duration to construct the road shall not affect on significant lost of mine production. It is considered as the preferred option.

Schedule Risk Assessment

Critical Path Method (CPM) is just the beginning of a complete schedule risk analysis but does not explore the likelihood of other durations occurring where the highest risk path are generally identified at long duration and risky, but may not be the critical path. Results can be serious when the potential impacts of high risk schedule path are ignored such as on the contractor's side: incurred penalties, lost of incentive payments, additional costs may be incurred in the rush to accelerate efforts in an attempt to meet the completion schedule. Also on the owner's side are lost revenue and profits on a daily basis because of the unavailability of the product as well as late schedules which will lead to budget overrun. Schedule risk assessment includes estimating the likelihood of overrunning the baseline schedule and identifying paths that are potential problem areas. With CPM, the critical path is identified and with risk analysis, the distribution of the various paths at the end of the project can be compared explicitly.

Critical Path Method Analysis

First, Precedence Diagram Method (PDM) is created to develop logical network activities which will be applied on the Critical Path Method in the Mine Road Development Project. The PDM shows three possible relationships i.e. : Finish to Start (FS), Finish to Finish (FF), Start to Start (SS) and most activities consist of logic patterns of series, parallel and divergent with an exception of convergent pattern at commissioning activities where all activities have to be completed for commissioning.

The analysis of CPM identifies the critical path at a line of activities path where the activities is tightly managed and the probability is high that an overrun, if any, would not exceed one month, i.e. :

From early start of project site preparation è clean up quarry è sub base construction è Load-haul overburden and ore è Base construction è finish (commissioning).

Two of the critical paths include the longest duration activities that are load- haul overburden and ore (84 days) and sub base construction (49 days). However, PDM shows that there are 4 activities that need to be considered on the schedule risk analysis as they have an circle interconnection and dependency of relationship i.e.:

Sub base construction could not be started and finished before drilling and blasting are commenced and finished. Indeed, that unavailability of blasted rock material will affect the road sub base and following critical path line activities are unable to construct.

Load and haul of overburden and ore could not be commenced before sub base construction is commenced. The other way, sub base construction could not be finished before load and haul of overburden and ore are completed. In fact, the load-haul overburden and ore will be stopped when sub base construction is delayed as the heavy equipments will require road pavement material to load and haul soil material (overburden and ore).

Bench sloping and clean up ore could not be started and finished before load-haul of overburden and ore are commenced and finished.

The CPM shows that the relationship of those 4 activities makes those activities to be located in the critical path even if some of the activities have duration less than it is required in the critical path such as drilling and blasting and sub base construction, but delayed on starting or finishing the activities will make the longest activity (load and haul overburden and ore) will be on delayed.

Otherwise, CPM of activity of bench sloping shows that the early/late start is in the critical path but early/late finish is not located in the critical path. As some critical path activities have less duration that it is required in the critical path duration i.e. : drilling and blasting, sub base construction and sloping the bench, these activities have potential overrun cost because contractor may add more contingency on standby cost and lower productivity of the equipments cost as should be unless the standby equipments could be allocated to support other potential parallel activities or may somehow the contract of scope of those equipments could be combined with other project at adjacent area (there is plan to contract out another project of sediment pond construction in the same period of time of the construction).

The Highest Risk Path Analysis using PERT Distribution

The highest risk path can be identified by comparing path distribution's S-curves to see which one has the longest potential duration where as path durations are distributions and a risk analysis does not accept the duration estimates as accurate. S-curve is to tell is the likelihood of overrun or under run of a particular estimated duration. The S-curve posing the greatest risk to the scheduled finish date identifies the highest risk path. The amount of risk in the CPM estimate depends on the shape of the S-curve and its position relative to the other curves.

PERT is used to forecast probabilities associated with project duration and cost. PERT is intended to determine the mean and standard deviation of the completion time of the project. The basic concept uses average durations based on the ranges of possible durations. The standard normal distribution is adopted to develop PERT probability of distribution.

The duration estimation of activity as per mentioned in the table above (Figure 8) is based on equipments calculation model using parameter from historical data, which include historical of physical availability (PA) of each equipments, circle time (loading, hauling, maneuver and dumping time) and handbook of equipments specification. The hauling distance of uncertainty overburden disposal locations is adopted using the most reliable of the longest available disposal location.

Using assumption of normal probability distribution, the cumulative likelihood S curve against possible path durations is as shown in Figure 9. The curve as shown in Figure 9 indicates that there are four (4) activities with more gradual shape of S-curve show the highest of risk path and three of them are located in the critical path i.e. : drilling and blasting, sub base construction, load-haul overburden and ore, but they are still located toward the left of the graph. However, the activity of bench sloping and clean up ore is not critical path but it is near critical as the curve toward the right of the graph and risky gradually sloped S-curve.

Considering all of the factors, activity of bench sloping and clean up ore is called the highest risk path. It is explained that as the overall high of bench slope is 20 meter and it is required to cut batter the slope to allow the loading equipment working with maximum 10 meter bench high affect that the productivity of main loading equipment will be depended by small excavators and dozers which work to cut batter slope and slope the bench to feed the main loading equipment. Other, whenever ore layer exposed, the top of ore layer needs to cleaned up by small excavator prior mining the ore to minimize ore grade to be diluted during mining activities. As the box cut of 20 meter width of design road is the minimum mining width to allow heavy equipment safely work at the loading point, the ore exposed in the road section should be cleaned up and mined for continuing of construction for the next road section. When there is a delay on the small excavator to clean up the ore and cut batter of slope, it will affect the loading and hauling of equipments as they are unable to be continued (equipments standby) and as a result, the clean up of ore and sloping the bench activity will be on the critical path.

Cost Risk Assessment and Contingency Determination using Range Estimating

Identifying the critical activities

The root cause analysis (Figure 2) and the cost risk score as shown in the risk scale template analysis (Appendix B) present that the major cost driver of risk category is the lower productivity of equipments which is caused by some circumstances such as lower physical availability of equipments, ineffective constructability, long haul distance, construction complexity , rain season, etc.

The variability of equipment productivity results in uncertainty or risk condition that drive the overall of project activities cost have a risk to overrun. As the equipment productivity is the parameter used to calculate all activities costing and simulate a risk variable to determine a contingency of project cost.

Determining the ranges and probability density functions

Historical data of equipments productivity that have been used in the active pit adjacent to the project work area since October 2009 to December 2009 is used to determine the ranges and probability density function (distribution) of productivity parameter. The data distribution as shown in Figure 10 below shows that probability density decrease is quite symmetrically as a value move the mean where the means is equals to the median. Thus, the normal distribution standard is used as probability density function to run on the simulation. The table of historical data is shown in Appendix E.

Contingency determination and probability overrun - using Monte Carlo Simulation

One way to determine whether a program is realistically budgeted is to perform an uncertainty analysis, so that the probability associated with achieving its points estimate can be determined.

The general approach to simulation using Monte Carlo method [21] is:

Develop a cost estimate model based on work break down structure

Select the group for analysis as cost variables

Identify uncertainty including selecting the probability distributions

Analyze the model with simulation

Generate reports and analyze information

1,000 iterations are selected to run Monte Carlo simulation for cost analysis. The result is shown in the Figure 11 and Figure 12.

In Figure 12 we can see the known risk of probability of project cost is ranging from $1.0855 M at 5 % probability of under-run to $ 1.2658 M at 5% probability of overrun. The characteristic of S curve shows that the gradient of slope is more gradual shape when approach more than 90 % probability, which means that it is increasing a certainty level slightly up to 100 % probability would give more increase on project cost estimated and allowing much contingency on the owner side will likely result in losing investment opportunity of other projects as this project is classified as a sustaining project to support next year mine production. Also the bidder's side may not give competitive bid and loss the contract as other bidder would get the contract. Thus, to select a contingency reserve more than 90% probability would be not worth as preference option.

However, there is no specific guideline that is considered as a best practice to determine a defensible level of contingency reserves as the selection of desired probability actually depends on the risk attitude of management. A 50% probability might have equal probability of overrun and under run, also a risk neutral approach to overbalance the corporate capital portfolio that some projects might be overrun while others will be under run. Otherwise, Dr. Paul D. Giammalvo comments that "a 50% probability of overrun or under run might be not suitable by the bidders as the project cost might still be too risky and nothing more than gambling". Moreover, the contingency reserves are necessary to cover increased cost resulting from uncertainty mining plan in the pit area which affects the project scope and parameter assumption, geotechnical risk, increasing fuel cost and equipment maintenance cost, low production working during rain season, and inaccurate topography data. Referring to the corporate policy for 10 % is maximum allowance limit for overrun and considering making a provision for risks unknown as stated above at the time but likely appears as the project progress, a 85% probability is proposed as a desirable level of contingency reserves.

Conclusion

Actually, risk management is commonly recognized by PT Inco and has been taken to address problems in aspect of safety, production issues and another corporate strategically business. However, a standard risk management framework is rarely considered and is not integrally addressed in current project management practice in regards project planning development, schedule analysis and cost estimated. In effect, the project planning does not well provides an early warning of threats to the cost and schedule risk and it allows integration of risk concerns into project planning and management. Results all risks associated in the project planning are not clearly defined, quantified and control managed which are believed it has been contributed on project schedule slippage and cost overrun. Further, a buffer of 10% to 15% of contingency that is currently applied in the project planning and cost estimating would not be longer appropriately adopted due to a buffer of contingency would not represent the project risks as result from the risk assessment and analysis.

The implementation of risk management in the mine development project as presented in this paper shows that all associated risks with the changes of mining plan as result of uncertain conditions on natural reserves could be identified, analyzed, quantified and used to determine a contingency value applied to the project planning, schedule and cost. The risk analysis of the project where are typically addressed into three areas i.e. technical risk analysis, schedule risk analysis and cost risk analysis, would be appropriately tools and recommended to apply in the current of project management practice. The risk analysis results in risks category which are required to be given high attention and the need to develop mitigation plan to eliminate the risks, considers earlier warning of threats to the schedule, allow integration of risks concern into project planning, and determine a realistically budget and a desired confidence level of contingency reserve.

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