Geological uncertainty and bankability
The thesis
Financial sustainability of a project is a derivative of the variance in its physical parameters. The variance is set by the quality of the preliminary investigations. An investment case built on a thin preliminary investigation is not conservative; it is an expensive option on geology that hasn't been done yet.
The EUR 35M per kilometre (±12M) envelope for comparable tunnel projects — cited in our team's peer-reviewed work — is not a benchmark for building a project. It is a benchmark for judging how much preliminary work it will take before a benchmark becomes meaningful.
Where the cost variance actually comes from
Cost overruns on underground and sub-surface-dominant projects rarely come from construction. They come from the moment between preliminary investigation and final design when the design team commits to assumptions that the site later refuses. Ground conditions that were assumed to be uniform turn out to be fractured. Water inflows that were assumed to be incidental turn out to be structural. Rock mass quality that was assumed to be consistent turns out to vary by two classes over a single kilometre.
Each of those moments is a decision that the preliminary investigation could have informed but didn't, because the budget for preliminary investigation was set as a percentage of the total project rather than as a function of the variance the project could survive.
What this means for a capital stack
A capital stack is a prediction about cash-flow variance. Debt sits where the variance is narrow. Equity sits where the variance is wide. The calibration of that stack depends on how confidently the project's physical parameters have been bounded.
A project that has not invested adequately in preliminary investigation cannot be capitalised with the same stack as one that has — even if the headline capex number is identical. The right stack for the under-investigated project is more equity, more contingency, and tighter covenants. In practice, the under-investigated project gets the same stack as its peers because the market does not price variance cleanly. That is how a project ends up financed on terms it cannot meet.
The asymmetric economics of preliminary investigation
The preliminary investigation is the cheapest kilometre of the project and the one with the highest return on information. A site-investigation budget of 1–2 per cent of total project capex, well deployed, will usually pay for itself several times over in the construction phase. The same budget spent on the wrong investigations will not.
The judgement of what counts as the right investigation is where geological expertise stops being optional and becomes the difference between a bankable project and a marketable one.
What a bankability review should actually test
Bankability, in the technical sense, is not a single threshold. It is the composition of three questions:
- Does the geology support the assumed reserve, at the assumed grade, recoverable with the assumed process, within a bounded range?
- Is that range narrow enough that a reasonable capital stack can be tolerated by it?
- Has the preliminary investigation been done with sufficient rigour that the range itself is credible?
The third question is the one the market routinely skips. It is the one a technical-validation engagement has to make its primary focus.
Bankability is not what the deck says the project will cost. It is what the project will still cost after the geology is allowed to object.