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Addressing the realities of the cost of mining

Mining truck

Because infrastructure represents as much as 80 per cent of a mine’s cost, it should be a key consideration in the optimisation process and not an afterthought.

The cost structure of mine projects has changed dramatically. Adherence to traditional mine development methods could now be the tail wagging the dog.

Andrew Keith, Leader for Mine Services at Aurecon, sums up the state of mining development and explains.

What are the fundamental changes affecting the cost of new mines?

While ore grades have declined, the cost of infrastructure has risen and, according to the Australian Bureau of Statistics figures, since 2004 has been rising steadily to about 75-80 per cent of the capital cost of mine development in Australia.

While figures are not so readily available for other countries, for less developed countries in Africa, South America and Asia, the infrastructure costs are likely to be even larger as a percentage of mine development cost.

What has triggered this change?

Traditionally, the mining industry has quite naturally targeted quick returns by accessing the easier, cheaper, higher grade ores first. As these easy pickings became depleted, the industry has had to develop mines in further, less developed geographies and with lower ore grades. This is reflected in the average ore grade of global mineral operations for certain ores declining by as much as 30 per cent this century.

Sustainability issues have been exacerbated by these same factors: the larger the proposed footprint of the project – geographical, logistical, energy intensity, environmental and social – the more complex and potentially delayed the time-to-market becomes in terms of achieving social licence to operate and authority approvals.

Surely the boom in commodity prices in recent years will have offset these challenges?

The development of mining projects necessarily tracks the commodity cycles and it is generally accepted that we are currently in the upswing of the primary commodity cycle – that is iron ore and metallurgical coal to meet the steel demand for infrastructure – which will last in excess of 20 years.

However, the primary commodities are infrastructure intensive, while even the recent ‘boom’ prices are part of a long-term decline in commodity prices in real terms, compared with an escalating trend in capital and operating costs.

How is the industry dealing with the challenge of rising costs?

Typically, the industry is responding with a ‘more of the same’ approach, focusing on improving time-to-market (granted, this is critical in a highly competitive market) and maximising profitability in the early years of mine operation in order to rapidly recover their capital investment. 

The traditional methodology of achieving maximum profitability within a tight timeframe is not being questioned. Ironically, this compounds the challenges posed by lower ore grades in harder to reach areas. 

The customary mining development approach is a linear progression through exploration for the resource; geological modelling or characterising the resource; mine planning with decisions on extraction techniques and target annual volumes; designing an appropriate process plant, and finally, adding the infrastructure needed to service the mining activity.

Historically, this may have produced some sound business decisions, but in today’s world, out-dated or even invalid assumptions are leading to false economies and/or excessive capital expenditure.

Is it possible to justify this view?

In 2005, PricewaterhouseCoopers’ global review of major mining capital projects indicated that over the previous decade, just 2.5 per cent of projects successfully achieved the desired outcomes in terms of cost, timing, scope and business benefits.

It is difficult to believe that this impoverished success rate will attract the necessary investment to meet global demand for commodities.

How is Aurecon working to improve profitability?

Aurecon uses a methodology which evaluates all of the factors that will significantly impact the success of a project holistically rather than linearly. For instance, instead of fitting the process plant to the mining plan, and the infrastructure to the mining and plant needs, we integrate all mine development elements and focus on optimal plant and infrastructure to suit the type of ore and achieve sustainable volumes.

Because infrastructure represents as much as 80 per cent of a mine’s cost, it should be a key consideration in the optimisation process and not an afterthought. When the infrastructure planning is integrated with the plant design and mine planning, bottlenecks are identified, enabling the design to be adjusted to maximise profitability.

Aurecon is strong and experienced in pit to port logistics, infrastructure and integrated development planning in a broad range of economies. What’s more, the group understands that the mining industry globally is under immense pressure to provide sustainable economic and social benefits to the communities in which they operate, and has a service offering which enables project owners to achieve just this.

Has this theory been put to the test?

The benefits of the approach are well illustrated by a recent example of a nickel company that wanted to bring a new ore deposit on stream as rapidly as possible in a race to get concentrate to market.

The mine had used existing concentrator and infrastructure designs from another one of its projects in order to fast track the mine (‘cut and paste engineering’).

The final project grossly underperformed and the loss of value over seven months of lost recovery completely swamped any cost savings and NPV benefits from accelerating the schedule.

Unfortunately, the lesson was not well learnt and in a subsequent project their scoping study planned along similar lines ignoring geometallurgical factors that had contributed to the lost recovery in the previous project.

Our subsequent review of the scoping study and holistic opportunity identification concluded that for no additional capital investment, the mine could deliver up to 13 per cent increased recoveries at tow per cent reduced operating costs, and, importantly, at highly reduced risk of failure to achieve target plant throughputs.

Are clients sold on the Aurecon approach?

While our approach may trigger some concern at the extra work this approach requires in the early stages – the higher front-end loading, including social licence to operate and approvals requirements – we can show that it adds immense value, especially in the critical first years of operation, thus maximising NPV. In particular, it wins the key prize of delivering a mine on budget and on time when, evidence shows, it is clear just how many projects are not achieving these outcomes.

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