ONE speaker keeping delegates on the edge of their seats during a recent three-day conference in Perth was AngloGold Ashanti’s explosives and drilling commodity manager Andre Oberholzer.
“For maximum cost reduction, a total cost of ownership approach must be adopted. I cannot emphasise it more,” Oberholzer told delegates.
“It doesn’t help you to just look at specific things — you must have a bigger picture.”
At around 2.2% of total costs, AngloGold’s explosives costs may seem small beer compared with its mining contractor costs, which were around 23%. Nevertheless, explosives were among the top 15 expense items for the company, making the category big enough to register on the company’s cost-reduction radar.
According to Oberholzer, last year AngloGold removed about $40 million in costs from its bottom-line calculations by employing various techniques.
He said AngloGold estimated that, typically, 12-18% could be saved on almost anything. And cost savings of up to 30% for a given commodity were possible by using every avenue available.
Before costs for a commodity could be reined in, a company needed to know what was going on in the world. Who were the major suppliers and what were the dynamics between them? A market analysis, starting on a global scale, helped provide that knowledge.
“The explosives market is something of a mess. There are so many companies and all of them are linked and in joint ventures,” Oberholzer said.
The next step was to home in on the relevant nation’s market to see how many supplier firms were involved, what their sizes were, and what buying and selling was going on among them.
To get an even better handle on the market, a Porter’s five forces analysis could be done, by looking at the degree of rivalry among suppliers, the size of entry barriers for new suppliers, the availability of substitutes, and the extent of suppliers’ and buyers’ market power.
Then it was a case of “buyer, know thyself”. What are your major purchases in that market? For AngloGold’s open-pit mines, emulsion-based bulk explosive formed about 70% of its explosives, Oberholzer said. It meant ammonium nitrate, a component in that type of explosive, was the big issue. Keeping tabs on the ammonium nitrate price was all-important.
Instead of taking the prices suppliers gave as gospel, AngloGold demanded “absolute transparency”, Oberholzer said.
“You start off with the ex-work price, then [add] the inland freight cost, port cost, ocean freight. And so you carry on with this line until you get to the 100% [price] mark.”
If you are lucky, he said, in this way you can see whether you are being overcharged, or see if the supplier is putting a risk premium on the product to cover possible future rises in input costs. With this knowledge comes the power to start negotiating price.
Oberholzer said AngloGold had removed the risk component in suppliers’ prices by setting up a rise-and-fall formula.
“We said, ‘Let’s put all the ammonium nitrate on a quarterly basis. We will revise the price, to prevent you from asking us [to pay] a risk factor.’ So we linked it to an independent index like the world ammonium nitrate price.”
What has also worked well for AngloGold was establishing standing monthly charges to suppliers and then adding on a system of extra-volume rebates. This was because as a supplier’s sales volumes went up, its overheads typically went down — an effect that needed to be built into prices. The standing charge covered the supplier’s fixed costs.
Another area where quite a lot of money could be saved is the supplier’s depreciation schedule, according to Oberholzer. The standing monthly charge paid to a supplier could be lowered after, say, five years if the cost of the supplier’s plant had been fully depreciated by then.
Bottom-up analyses of prices can also reveal a great deal to a buyer.
For AngloGold’s underground mines, where shock tubes were a major purchase item, the company estimated it was paying about 50% too much for the product.
Oberholzer said further in-house calculations revealed another price anomaly. Suppliers seemed to be cross-subsidising other explosives products such as anfo with the profits made on shock tubes. It gave the company ammunition to haggle with shock tube suppliers.
“It just shows you, if you don’t analyse and see what’s in [a price], then they can do whatever they like with you.”
If you were keeping track of where prices should be, you could also anticipate legitimate price increases from suppliers, he said.
The proof of the pudding has been AngloGold’s per-unit explosives cost. Oberholzer mentioned what had taken place for the company’s underground mines.
“In 2004 we were sitting at around about R51 per square metre. It actually came down with all our initiatives, and also dropping prices and [another] shock tube supplier coming in.”
“We are still sitting in 2007 below where we sat at 2004, so I think that’s good going.”
*This article was based on a presentation delivered at the Marcus Evans’ conference: Optimising Productivity in Drilling and Blasting — harnessing advanced technology and techniques to optimise mineral recovery, increase performance and reduce costs. For more information about Marcus Evans’ conferences, visit www.marcusevans.com.
Commodity manager — explosives and drilling
+27 11 637 6224