How companies can navigate the difficult phases of the mining cycle and create sustainable profitability
‘Connected mining’ is gaining momentum in the mining industry. Many of the major players are either implementing it, or talking about it. It sounds simple, but finding a sustainable and systematic way of connecting the face to the market and responding appropriately has proven elusive to many. Successfully implementing connected mining could represent a revolution in the way a mining business is managed and executed; it may even insulate the industry from volatility. This article explores the potential application, benefits, and roadblocks to the acceptance of connected mining.
What is connected mining?
It is simplest form, connected mining means connecting all the parts of the mining supply chain to all parts of the demand chain and providing the means for the components of those chains to respond dynamically to internal and external influences. Enabling technologies are providing the means for this. Autonomy, analytics and the ‘internet of things’ are amongst those technologies.
The cyclical nature of mining
The recent mining downturn has highlighted (yet again) how vulnerable the sector is to changes in operating conditions. The downturn in Australia was and is particularly severe because it was a combination of factors that affected profitability.
Specifically, a sharp drop in commodity prices in the face of a skills shortage, combined with over capitalisation, sharply rising costs of both consumables and compliance and other factors of production put profitability under severe pressure.
With the benefit of 20/20 hindsight, the downturn was quite predictable and almost inevitable. The players did little to avert it, and perhaps even embraced it. The predictability comes from basic economics and the way miners sit in terms of industry economics. Fundamental economic theory of the firm asserts that there is a supply and a demand curve for the industry and the individual supplier within that industry. The slope of the supply curve reflects the elasticity of the suppliers – ie their ability to change the quantity supplied for various changes in demand.
Traditionally, miners have very low elasticity of supply, mainly because of the long lead time required to create productive capacity (and the high capital cost of that capacity) along with the mandate to produce as a much as possible (ie fully utilise the capital). This is not generally considered a bad thing, as the theory of the firm also asserts that both the short-run and long-run average cost of production can be minimised for a specific cost/quantity set point. This is normally associated with full utilisation of capital and maximum shareholder return.
But what happens when the operating conditions change? When things such as costs of consumables, skills availability, transport costs, commodity prices or technology change? When any one or several of those things change, the miner is no longer operating at the minimum cost; this represents lost opportunity, lost profits, and lost shareholder value.
The inability for the miner to change either the short- or long-run costs in any meaningful way quickly represents collapse of the market. With modern automation technology, connected mining and the ‘internet of things’, the disastrous consequence of rapidly moving operating conditions can be changed. By connecting the work at the face (and even exploration) to the market and the operating environment, along with all the components in between, the industry can capitalise on the opportunities created by the changing operating conditions, rather than suffer because of them.
Lessons from the manufacturing industry
When applied to mining, analogies drawn from manufacturing are sometimes not welcome and not seen as relevant. Mining is different from producing widgets; however, miners have become adept at using manufacturing paradigms to benefit operations (for example Lean manufacturing, Six Sigma and now instrumentation and automation).
What follows is a manufacturing analogy, which is instructive. The Ford Model T started production in 1908 and finished in 1927. This car represented a revolution in manufacturing, as it was produced on a production line. This resulted in drastically reduced costs of production and meant that cars were affordable to the middle class. So this car created two revolutions. It represented the systemisation of manufacturing, the production line, and the automotive industry.
However, if you wanted a Model T it had to be black with four seats and two doors. In fact, everything was standardised to the point where all Model Ts were the same. This standardisation underpinned the production line. It would not have been possible without it. One hundred years later, it takes most modern automobile manufacturing facilities about 18 hours to produce a car. But not just the same car – each car is pretty unique. It can be one of several colours, it can have special lights, gears, transmission, motor, wheels, fuel, seating, etc.
The intense competition in the automotive industry (and manufacturing in general) has led it to meet the market in order to create competitive advantage for shareholders. There has been certain enabling technologies that have facilitated this transformation. Primarily, these technologies are instrumentation (the ‘internet of things’) and automation.
These technologies are now real and reliable in the mining industry. The mining industry is becoming automated and it is becoming instrumented across its supply chain. However, many miners are not responding to these technological breakthroughs appropriately. Many miners are not becoming more flexible. Many miners do not use these technologies to meet ever-changing market conditions with the vigour and relish that they could.
Doing so is not easy. It takes at least five years to develop a mine; mines are very capital intensive and miners are motivated to make the most of the scarce capital made available by conservative markets. This means the resulting mine plans and infrastructure established find it difficult to adapt to changing underlying operating conditions. This is pretty much the reaction Ford had when he was asked for a different Model T. Ford would have talked about re-tooling, changing the whole production line, re-training, etc.
Mining is different – right?
Today it takes billions of dollars to build a car manufacturing facility. It takes five years and a huge investment to get a car from concept to production ( just like a mine). These are the same kind of numbers associated with mine development. The difference today is that in automotive manufacturing, flexibility is built in – it is expected and anticipated. The automotive industry builds in the assumption that they will be meeting the market when it comes to production of that model.
In mining this kind of thinking has been around for a while, particularly in feasibility studies. Some feasibility studies include stochastic modelling to assess the resilience of the study to random changes in operating conditions, the goal being to choose the study option with higher resilience (ie lower risk) rather than the study option with the highest net present value (NPV) – or at least understand the exposure of a chosen option to risk. However, not many developers chose a high resilience option; developers normally choose the highest NPV option as the capital markets are tight and the highest NPV project is the one likely to attract the capital. Unfortunately, the highest NPV option is typically the least resilient, the least flexible, and of course, when developed, leads the industry to inelastic supply and eventual market collapse when the inevitable changes in operating conditions occur.
If you build it they will come
This short-term view needs to change in order for long term, sustainable, consistent shareholder returns to be delivered. A broader, longer term view of capital markets would lead a mining company to the conclusion that by building a portfolio of operations with built in resilience to changing factors of production, they will be able to demonstrate to investors that long-term wealth creation can be achieved in the face of volatile markets. This should be attractive to investors. A mining company that has this approach will seek out technologies that connect the market to the face, and select options that include resilience and flexibility.
Connected mining in action
Imagine a large block cave copper mine that sells a shipment of concentrate with specific properties because of knowledge of both the market and the ore currently available at all the draw points. After receiving the order for the concentrate, the mine produces the ore from the cave using autonomous loaders and blending technology. The mine crushes, hoists and concentrates the ore (with full knowledge of material properties of both the ore and the concentrate required), produces the concentrate shipment, and dispatches it to the customer, all within a matter of days. Some producers are implementing this kind of technology and connectedness now.
Imagine a coal marketing department that identifies an opportunity to fill a ship with a niche coal specification that they happen to know the mine can fulfil because they are appropriately connected to the mine operations. This shipment was not part of the plan, but an opportunity presented itself. Marketing will sell that shipload on the basis of its availability.
The mine fulfils the order on time and on budget without undue disruption to operations. Consequently, the company achieves extraordinary profits.
In underground metal mining, it is common practice to use commodity prices and costs guidance to set cut-off grades. Those grades define the material to be included and excluded in production. The guidance is often given annually. Due to the volatility of the commodity prices (along with costs of production), this guidance is often hopelessly out of date when the time comes to design and drill out the stopes. The result is that in a dropping price/increasing cost environment waste is mined as ore and processed, destroying shareholder value. In a rising commodity price scenario, profitable material is classed as waste and left behind, often sterilised, once again destroying shareholder value. It is commonly thought that underground mining has huge lead times and that cut-off grades must be set well in advance in order for sensible designs to be made and then developed. This is somewhat true; however, underground mines can be designed and developed with more flexibility. By doing this it provides the opportunity for production engineers to design stopes that reflect current cost/revenue conditions, thus maximising profit and minimising waste mined – in effect connecting production to the markets.
The future is now
With current advances in high precision mining, autonomous mining, fleet management systems, plant control systems, and overarching cost and supply chain modelling systems, connected mining is not only possible, it is inevitable and is happening now on a limited basis.
The mining industry should get used to the idea of producing new, detailed life-of-mine plans and budgets in hours – not weeks – based on ever-changing assumptions. The industry should be able to reconfigure the mobile and fixed plant on-the-fly to meet the demands of the market. These technologies are available, they are just not (often) used in this way.
When the mining industry has end-to-end integration, along with automation and control ( just like in car manufacturing), the connected mining operator will be positioned to enjoy a new level of sustained profitability, which will inevitably be compelling for investors, and should result in increased shareholder value.