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Thinking

Mining business model - due for a fresh approach

Mining

Andrew Keith, Mine Services Leader at Aurecon, explains that, as major mining capital projects fail to achieve the desired project outcomes, it is time to step away from a reliance on geology, mining and processing to drive productivity improvement.


As commodity prices continue to fall, mining costs are rising and productivity is decreasing across the value chain. Mining industry leaders are hard at work to rebuild the market’s confidence. This focus is driving the shift from maximising value by increasing production volumes to maximising returns from existing operations through improved productivity and efficiency.

Achieving enhanced profitability to regain investor confidence depends, in part, on how the industry responds to the challenge of driving productivity and maximising value. Current trends demonstrate that enabling infrastructure is the dominant cost in developing new mines. This suggests that mining companies need to look beyond traditional mine development methods to new strategies to improve productivity and ROI.

There can be said to be five elements that will change the mining business model of the future and help improve productivity. These elements are as follows:

  • Moving beyond cost
  • Leaving behind old and outdated 20th Century approaches
  • Understanding the whole mining value chain
  • Shifting focus to sustainability
  • Emphasis on new technologies

Beyond cost


The goal should determine the focus. If the raison d’etre of any mining company was to minimise cost, then to achieve this goal it would simply close its mine and let all the staff go.

At best, cost is only half the equation. Value should be the real topic of conversation. The problem with reactive cost-cutting, particularly in the industry downturn, is it’s the wrong aspect to focus on exclusively and can potentially destroy mine value.

From a micro point of view, finding out where there is waste in the system and trimming costs is vitally important. In the recent boom, the industry had a focus on ‘time to market’ - this was the most important thing - consequently cost was what it was. Accordingly, the industry got a bit ‘fat, dumb and happy.’ Now there is a downturn, paying attention to cost is obviously important to return the industry to a more sustainable footing, although it really should have been there all along.

Many in the industry recognise that the lean and innovative approach to keeping costs down and value high, which existed through numerous market cycles of price variation, had been somewhat lost through the super boom of the early 21st century.

The 20th Century approach has to go


The issue is that mines today are stuck in the past and are still using 20th century mine development methodology. This was right for when mines were less remote and less complex, but it is now outdated. This mind set focused almost exclusively on getting the resource geology, mine plan, and processing right and the rest of it took care of itself.

Current Australian Bureau of Statistics data shows that over 70 per cent of the mine development cost is in supporting and enabling infrastructure. So mine owners are potentially getting the cart before the horse by using the 20th century approach to mines. It will have worked well when mines were more accessible and of higher grades and lower complexity, but with current industry trends its relevance is waning.

PwC (PricewaterhouseCoopers) conducted a survey1 in 2005 that showed only 2.5 per cent of mining projects were successful. So 97.5 per cent were failures. That compares with mega projects across all industries in which a still poor – but nonetheless significantly higher - figure of 35 per cent failure rate prevails, according to Ed Merrow’s 2011 book Industrial Mega Projects2. The mining industry figure is therefore clearly not good enough. The industry must change the approach to mine development to support current industry realities. It cannot expect improved results by repeatedly doing the same thing.

Miners, who adopt a whole of mine business approach, looking across the whole value chain and integrating their decisions across that value chain, will align with doing business in the 21st Century. The integration of infrastructure, water and power supply, as well as haulage of product to market, into the decisions made in the traditional locations of the mine and process plant, will drive improved productivity and ROI. 

Understanding whole mining value chain


Like all modern businesses, the mining industry tends to compartmentalise roles and job functions so managers can manage and control things. For example: the mine manager manages the mine and tries to optimise the performance of the mine to his Key Performance Indicators (KPIs), the plant manager manages the plant and tries to optimise it to his KPIs, the logistics manager does the same thing. This essentially occurs in silos. The problem is not all job functions can be optimal for the overall business to be operating in an enhanced way. There will always be a bottleneck needing improvement, while other elements support the optimising of that bottleneck.

As a result the KPIs end up working against each other and against the ultimate value outcome of the business. Businesses that understand this and create integration across the value chain, removing managers from their silos so they are thinking and receiving rewards for performance across the whole business will enhance the performance of their mines.

Sustainability: the new safety


It is important for us to understand industry trends - the best reserves are more remote, deeper and geo-politically challenging. Environment and community aspects of projects will become more important and the demonstration of sustainability will be needed at every step. Enabling infrastructure can be the greatest barrier to development.

Twenty years ago, safety in the mining industry was generally merely paid lip service. While the industry identified it as important, the view was often that it was a cost to projects. This has changed. Now the whole industry has a culture where safety is the number one focus and building safety into projects through, for example, HAZOPS is a fundamental part of the way mines are developed and operated.

Sustainability is the new safety. In the future ensuring there is a culture of sustainability in mining companies and projects will be essential. Project delivery will be with the best triple bottom line outcomes. Does that mean there will be no negative community or environmental impact? Absolutely not. But getting the best triple bottom line balanced to those is where the mining industry will go.

New technologies


There is a need for sustainable per unit cost reduction, which is only achievable with increased levels of productivity from all resources. Along with savvy management techniques, the adoption of emerging technologies and automation that optimise the mining value chain will increasingly play a significant role in the creation of process improvements as well as cost control measures that lead to an efficient and streamlined business.

The emergence of driverless vehicles, driverless trains and remote operating centres is creating efficiencies in terms of being able to manage with fewer resources in places where it is possible to better control the cost of accommodation and salaries. It also provides better access to the best expertise and allows people to meet face to face rather than over the telephone, improving productivity.

Big Data mining technology drives predictive intelligence into the business process. Advanced analytics help miners predict and plan for the future, not just react. With the advent of digitised information, we now have the capability to integrate, analyse, and exploit both structured and unstructured data. In a move towards becoming more fact-driven, we are beginning to see the adoption of big data analytics.

It is vital for companies to understand how these technologies can impact and improve bottom line efficiencies.

Conclusion


The measurement of success of the mine of the future will be will be healthy margins and sustainability. The mines that retain a favourable position on the cost curve will be those that are technology driven, using integrated information technologies to develop a holistic view of the enterprise. Business decisions will be made in real-time, and will be insight-driven, forward looking and predictive. They will be based on smarter plans, a single version of the truth and advanced business analytics.

1. Avoiding cost blow-outs on mining capital projects through effective project stage gating – November 2008.
2. MERROW, W. E., Industrial Mega Projects John Wiley & Sons. 2011.

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