Prolonged market volatility is forcing miners to change the way they operate, making tough strategic changes in a bid to remain viable.
Releasing its sixth annual Tracking the Trends report, Deloitte global mining leader Phil Hopwood explains that mining companies are facing a climate marred by volatile commodity prices and shifting demand fundamentals.
“To rectify cost overruns, improve capital efficiency and rebuild investor relationships, companies need to sharpen their focus on productivity, sustainable cost management and enhanced shareholder value,” Hopwood said.
Deloitte warns supply-demand imbalances, falling commodity prices and lower productivity levels are challenges which mining firms will continue to face throughout 2014.
“Simply waiting out the market swing is not an option,” Deloitte said.
“Rather, pursuing innovation will help both juniors and big companies weather current headwinds.”
Over the coming weeks Australian Mining will be showing you what to expect in the year ahead, in a 10 part series which will analyse the top ten trends for 2014.
1.Mining productivity hits new lows
It’s no secret mining has suffered from the rising cost of doing business.
With significant labour, production, equipment and regulatory costs all eating away at bottom lines it’s no wonder as commodity prices stabilise that miners are attempting to reign in and minimise runaway costs.
Major resources producer Shell flagged the high cost of doing business in Australia, saying it is affecting the nation’s competitiveness.
According to Deloitte the costs of adding capacity to an existing iron ore operation jumped from $100 a tonne in 2007 to $195 per tonne in 2012, while the poor old coal sector was hit even harder.
For thermal coal adding capacity rose from $61 to $176 per tonne over the same period.
Record commodity prices over the last few years also gave way to mining lower-grade deposits which in turn saw companies’ costs spike.
“Some gold projects yield less than one gram per tonne,” Deloitte said.
“With 75 per cent of new base metal discoveries hidden at depths in excess of 300 metres, this practice is pushing up strip ratios – reducing the economic sustainability of mining lower grades.”
Mining contractor Barminco’s managing director Peter Stokes told Australian Mining the industry’s current quest to reduce costs is also a response the declining ore grades.
In fact in the last year in Australia Xstrata's enormous Ernest Henry pit made the move to underground, while Chile's famed Chiquicamata – an operation that has been mined as an open cut for more than 500 years and even appears on the currency, is even moving underground.
"Tropicana is also a surface mine that will likely go underground to access higher grades, and even long term mines such as the Freeport-Grasberg mine in Indonesia is shifting; they spent 25 years doing surface mining and will now last another 40 to 50 years as an underground operation – these are massive operations making the move to underground and it bodes well for companies like us," Stokes said.
Closer to home Barminco has been working at AngloGold's Sunrise Dam for the past five years to help it move underground.
Importantly, he added, Australians also have the skills to make this shift, as they have the experience in creating decline mines, which are cheaper to develop than conveyor or shaft mines.
"Decline mining is definitely an Australian capability which is being pushed out (particularly in Africa), as declines are more cost and infrastructure advantageous compared to shaft mining," Stokes said.
In making the shift underground "it's all about how deep you go, and decline mining makes more sense going around one to two kilometres underground, however anything below that you'd look at conveyor or shaft operations," he told Australian Mining.
He went on to say that "we are seeing a great trend towards underground contracting, and the fact that our techniques are getting better is only helping this".
Working to bring costs back inline Deloitte said many miners will be forced to produce fewer ounces or tonnes at higher grades.
Throughout 2013 miners captured headlines with their cost cutting agendas and mass layoffs.
“Mining companies have retrained their focus on capital prudence, cost discipline, portfolio simpliﬁcation and non-core asset divestment in an effort to improve ROI,” Deloitte said.
“They are shrinking the talent pool, reducing executive compensation and limiting funding approvals to only the highest quality projects in mining-friendly geographies.”
But the advisory firm warned to avoid cost creep trends miners need to go beyond traditional cost cutting measures and revaluate entire operational models, cost structures and company culture.
“Reducing costs over the long term requires mining companies to prepare for a hard campaign of changing the way they do work. This, in turn, should spur them to look closely at their culture to determine if that needs changing too,” managing director of Venmyn Deloitte South Africa, Andy Clay said.
Deloitte said bucking the trend of one off cost reductions is important if miners wish to become and remain lowest quartile cost producers.
The advisory firm said implementing new technology including automation, using analytics to identify trends, rationalising supply chains, right sizing capital projects and transitioning to modular plants and projects are all strategies which can drive continuous improvements.
Tomorrow: Trend two – Commodity price havoc