The Mining Cost Cutting Cycle and Ways to Avoid the Traps

As the industry tightens its belt due to costs exceeding cooling prices for many operations, the cost cutting machine has kicked in yet again. Having been through this same Groundhog Day a few times and seen the transitions from the overspending to the cost cutting phase of the cycle, we have noticed several traps that mining operations can get caught by.

Working with clients whilst they were expanding during the boom time, we were able to demonstrate the non-linear relationship between throughput expansions and costs. Contrary to expectations of economies of scale, costs were actually going up exponentially with the increase in production, not linearly. There were a number of well-publicised reasons for this, such as:

However, there were also some less than obvious causes for the exponential increase in costs. Mine plans that were being produced were becoming more and more aggressive as companies tried to take maximum advantage of the boom. Creating a plan on paper was seen as the value that could be achieved, disconnected from the real value in the pit. Operations were being stretched to a higher intensity than had been seen before. On paper these plans looked to be quite achievable compared to previous productivity levels, but when implemented, they tended to perform poorly.

When we were part of expansion projects, a difficult element was making sure the plans were actually achievable. The difficulty was not in getting the plans to work per se, but rather convincing the business that a lot of the methods used to increase production were merely increasing the risk of the plan, and such risks would have negative consequences well beyond the value being chased on paper.

We once calculated the odds of a more bullish productivity assumption being used for a medium term plan: the change in assumption would allow a saving of approximately $10 million in order to curb the rising expansion costs through a reduction in contractor stripping requirements. The odds of a successful outcome were very low; less than 5% based on statistical analysis of previous stripping output. We demonstrated that the downside of the attempted saving if the contractor stripping was not able to be replaced by improved owner-operator performance would be a loss in revenue in the order of $50 million that year (and site policies made it nearly impossible to prevent). So there was a $50 million bet being made in order to achieve a $10 million windfall – in gambler’s parlance it was a bet paying $1.20 the win, with less than 5% chance of paying off!

Another major cause of unmet planned targets was the implementation of new policies. Some of these policies were required to ensure the sustainability of the operation; however many were implemented for an isolated process without any analysis on the impact it was having on the overall production system. The cost to the operation from the policies was not measured or understood.

The price and the demand for resources still remains strong historically, leading to companies maintaining high levels of production, but needing to combat the unprecedented jump in costs. Capital investment for a lot of mining operations has already been spent, and there still remains a requirement to maximise the financial return on these.

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