June 2016

Reducing costs without compromising orebody value

  • By Erik Ronald MAusIMM, Geoscience Society Committee

Geoscientists have an important role to play in helping companies improve the bottom line and add value to projects

The previous 12-18 months in the mining industry have seen explorers and producers adjust to sliding market prices. Explorers have shifted their focus from high growth to capital preservation, while producers have changed their focus from being the biggest producer to being on the low end of the cost curve. At the moment, cash is king for explorers, and ‘C1 costs’ are the main topic of discussion at the cafes on St Georges Terrace. The C1 cost reported by mining companies is defined as the net direct cash cost, or simply the cost of production including the costs of mining, milling, concentrating, transportation, marketing, royalties and onsite administration. Commonly excluded from this calculation are exploration, research, depreciation, interest charges, amortisation and all other costs generally thought of as ‘overhead’ or indirect. Given the overall softening of commodity prices, it is understandable that preserving capital expenditure (capex) and C1 costs is now critical as companies aim to maintain positive margins and show the markets that they are running efficient operations.

Amongst the talk of restructures, layoffs and resizing, can geoscientists directly influence and improve a company’s capex and C1 costs without compromising orebody value? As a geoscientist, I believe that we are well-placed to directly contribute to cost reductions and add significant value in the current environment by working smarter. There are two ways for geoscientists to react: 1) get stressed and complain to co-workers, spouses or the family pet and potentially become the passive victims of cost cutting; or 2) take an active role in challenging the perceived notions of what can be done with reduced budgets and then provide real solutions. It is the responsibility of geoscientists to ensure that value is not destroyed when times get tough and contribute to ‘smart’ cost cutting while not sacrificing the quality of Mineral Resources or increasing mining risk. This article aims to provide industry geoscientists and management with examples on how geoscientists can conserve capital and improve C1 costs while adding to the orebody knowledge and increasing company value. These ideas are organised into mineral exploration (capex) and mining operations (C1 costs).

Mineral exploration

Although exploration and evaluation (E&E) activities are categorised as ‘indirect costs’, they are viewed as capital intensive and are therefore typically reduced or cut altogether when commodity prices fall. E&E is the true research and development (R&D) of the mining game. New discoveries and extensions to existing Mineral Resources are only found through greenfields and brownfields work. Unfortunately, E&E is also akin to R&D in that they both experience budget cuts when the market softens. Therefore, we cannot continue to operate under the same paradigm that worked during the previous boom years. Now is the time for geoscientists to be smarter and more creative with E&E.

Take advantage of the market being down as it is an excellent time to establish closer relationships and renegotiate agreements with contractors and consultants. Mining service providers have struggled lately and most are accommodating to price reductions when their options are limited. Drilling costs per metre, assay costs per sample, geophysical surveys and other costs have reduced significantly in tandem with metals prices over the past 18 months. From my time as a service provider, I can easily say that some work is better than none at all, and a company that is willing to negotiate, enter into longer-term agreements or find creative solutions would be well-received in today’s environment.

Exploration geologists should review current methodologies. Diamond drill core is hard to beat for gaining subsurface geological information, but if your budget has been dramatically slashed, there are other, less costly options available. Reverse circulation (RC) and air-core drilling are cheaper options if logging and assay are essential but core is not. Precollaring holes using RC or mud-rotary are good options if sampling overburden isn’t critical. Additionally, the use of downhole wedging from a parent hole when your target is deep can save total metres drilled.

For more greenfields work, surface geochemical sampling campaigns can be relatively cheap and effective and we mustn’t forget about good old-fashioned geological field mapping. If you are fortunate enough to have surface exposures, company geologists should be out in the field mapping. As an industry, we seem to have forgotten the art of creating 3D geological models without drilling or complicated technology. Mapping incurs minimal costs while allowing geologists to gain a detailed understanding of site geology.

Historical data reviews can be a treasure trove of orebody knowledge, with costs limited to finding, validating, scanning/digitising or simply incorporating the old literature, core or data. As the industry takes a breath after a boom, exploration teams tend to find an abundance of hastily collected data that wasn’t necessarily well interrogated. Personally, I have found unsampled core, geochemical samples not in a database, old hand-drawn underground maps, water bore logs, thin sections from graduate student projects, pit mapping on Mylar and archived reports. I even have one instance of a core re-logging program that ultimately found a new large-tonnage, low-grade target based on improved understanding of host mineralisation. All of these valuable data were incorporated into the overall orebody understanding, geological models and database at the cost of labour. It was merely a matter of geologists understanding what was useful and transferring that data into value for the business.

Revisit your prospect pipeline, interrogate the ‘tier-two’ exploration prospects with a more careful eye and kill off the ‘dogs’. Tier-two projects are often ranked below ‘high-priority’ projects during boom times and are therefore ignored. However, some of these tier-two projects will still be valid and highly prospective, but may have fallen out of favour due to outdated reasons and continue to be unjustly discounted. Inversely, review the lowest-tier projects in your pipeline and decide whether retaining the exploration licences is still valid. Instead of continuing to spend precious time and budget on these projects, simply relinquish the holding to effectively increase your budget to focus on more prospective ground.

Lastly, as suggested by McIntosh (2016), consider partnering to share the exploration load. Bringing on a joint venture partner to share the budget and risks and advance projects is a great way to improve your position for when demand and prices improve. This philosophy can help you to share new ideas and interpretations and learn from the different backgrounds of your joint venture partners.

Mining operations

Operational mines can realise significant improvements and efficiencies through the collaborative work of mine geology with geometallurgy, geotechnical engineering/structural geology and resource geology. Mine geologists have the accountability of determining ore types from waste and represent the final decision on material movement, thus influencing the strip ratio (SR) in open cut operations. The data collected on close-spaced blasthole patterns are invaluable in mining operations maximising ore recovery and ensuring that dilution and misclassification don’t destroy value while driving up C1 costs. Additional value may be gained by recovering out-of-design ore, delineating high-grade zones and optimising dig directions to maximise recoveries. The following quote by Matthews (2015) should be stamped on every mine geologist’s desk: ‘If the amount of recovered product for a patch of ground at a given cut-off grade or product specification can be increased, then the operation can become more efficient and the unit cost will fall.’

If you’re reading this article, chances are that you’re in the business of digging up rocks and crushing the big ones into little ones. This is an over-simplified statement about mining but we as an industry often fail in our understanding of the physical properties of the rocks that make up our business. Mine geologists working alongside geometallurgists can improve the understanding and prediction of the physical characteristics of ore to ensure that the mill maximises throughput and recovery. Logging blast cones for rock type and mineralogy provides a variety of geometallurgical information for metallurgists to improve comminution, handleability and tracking of materials that negatively affect floatation or beneficiation. Producing a geometallurgical model to predict these characteristics for blending and optimising mill feed can realise real cost savings, increase throughput and improve metal recovery. Beyond the mill, many other operational teams benefit from the accurate prediction of rock properties, including drill and blast, conveying/hoisting, heavy mobile equipment (HME), environmental and closure teams.

A close working relationship between mine geologists and geotechnical engineers can greatly contribute to improvements in pit design, geological and structural models and, in some cases, pit designs with reduced SR. Geological pit mapping to improve the understanding of structural controls of an orebody may enhance the geotechnical design parameters in open pit mines. It is industry standard for geotechnical engineers and mine planners to use a slope angle design based on assumptions of rock type and known structures to achieve an acceptable factor of safety. If structural data supports a steepening of slopes by even a single degree, this can result in a significant reduction of the SR and thus reduce C1 costs associated with waste removal. Alternatively, detailed pit mapping and analyses may suggest slope angles should be reduced due to problematic geometries. In these cases, a minor cost increase may be required to reduce the risk of a major failure with the potential for loss of ore, expensive clean-up, HME loss or, in a worst-case scenario, the loss of human life.

As geoscientists are the accountable custodians of the orebody, they should be a major stakeholder in finalising mine plans. In order for planners and managers to make well-informed decisions, they rely on geoscientists to actively communicate the geological uncertainty in the mine plan. An optimised mine plan that accounts for both grade and geological risks will realise improved performance to plan and help minimise the unnecessary costs associated with the under-prediction of tonnages, ore dilution or mining in high-risk zones. I have found that some of the best short- and long-term planners are the ones who appreciate geological complexity and have a strong working relationship with knowledgeable geologists. The key is to be able to incorporate geological risk in order to communicate it into broader business risk to management.

Blasthole sampling costs (and even resource drilling) may be optimised in well-informed and low-variability areas of an orebody. For example, if an entire shot of predicted high-grade ore is supported by blasthole cone logging and historic data, it likely does not require 100 per cent sampling coverage to confirm what the mine geologist already knows. Geoscientists should be using all available data to assess each shot as to whether a reduction in samples will change the acceptable risk to ore recovery by understanding the geological variability. Conditional simulation can provide additional support for these cases and is further described by Haylett (2015).

Resource geologists accountable for the modelling, estimating, classifying and reporting of Mineral Resources can add value to models for low costs and effectively evaluate the returns on orebody knowledge investment. First, incorporating available data from surface mapping through to production data into models can greatly improve the reliability of the model. Many resource geologists seem to forget that there may be significant amounts of published data available on neighbouring properties or regional work that can be easily and cheaply incorporated into models. Second, modelled variables should be reviewed to ensure that elements important to the business are being predicted and reconciled. I have seen cases where the laboratory was testing for a large suite of elements but many were not incorporated into the model, resulting in lost opportunity to track penalty elements. Lastly, a close working relationship between the various geoscience disciplines in collaboration with the Competent/Qualified Person(s) should address the effectiveness of drilling, mapping and other data collection campaigns. Questions such as ‘are we over- or under-drilling our Mineral Resources?’ should be regularly asked to ensure that today’s limited budgets are being used most effectively.

To summarise, geoscientists in both exploration and production roles can greatly influence capex and C1 costs without compromising orebody value. Empowering geoscientists to think, be creative and work smarter means that quality data is used to best inform decisions during times when budgets are constrained and cash is king. Our roles as geoscientists are central to ensuring that mining is performed in the most economic, efficient and effective way possible while maximising the recovery of ore. Understanding where we can control costs while maintaining the quality of our work by incorporating historic data, working collaboratively, challenging dogma and finding creative solutions will ultimately contribute to the company’s bottom line and lift our profile within the mining industry.  

References

Haylett M, 2015. Managing geological variability, AusIMM Bulletin June 2015. Available from: <www.ausimmbulletin.com/feature/managing-geological-variability>

Matthews G, 2015. The other half of the cost per tonne equation, AusIMM Bulletin October 2015. Available from: <www.ausimmbulletin.com/feature/the-other-half-of-the-cost-per-tonne-equation>

McIntosh S, 2016. Exploration – never a better time to partner, AusIMM Bulletin February 2016. Available from: <www.ausimmbulletin.com/opinion/exploration-never-a-better-time-to-partner>

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