Real cost of mining

Changing world at the mine

Andrew Keith, general manager of JK Aurecon.
The cost structure of mine projects has changed dramatically.
Adherence to traditional mine development methods could now be the tail wagging the dog. 
Aurecon’s Andrew Keith, general manager of JK Aurecon, sums up the state of mining development and explains the rationale for the alliance partnership between JKTech and Aurecon.
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% to 80% 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% 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?
An authoritative survey has indicated that over the past decade, just 2.5% of major mining capital projects successfully achieved the desired outcomes in terms of cost, timing, scope and business benefits. (PWC 2012). 
It is difficult to believe that this impoverished success rate will attract the necessary investment to meet global demand for commodities.
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Issue 42