Five Key Levers to Improve Mining Margins and Beat the Cost-Price Squeeze

The following is from a presentation by AMC Director / Executive Lead - Advisory, Andrew Hall outlining ways to increase mining profitability.

Challenges in mining industry performance

The high metal prices that have prevailed for most of the last decade have triggered a chase for production. This has compounded the fundamental scarcity of some key inputs, such as experienced and skilled labour, and has pushed costs up over time. But recently, this has been accelerating, partly due to COVID-locked borders and supply chain issues, geopolitical factors such as war, and, most recently, sky-high inflation.

We are now seeing the prices for many minerals, while still relatively high, come off their recent peaks. The combined effect of increased costs and lower prices is squeezing margins.

The mining industry is facing some key challenges and it’s causing many to rethink their tactics.

I don’t have a crystal ball to predict what will happen to prices going forward. However, it is likely that many of the challenges mentioned earlier may stick for some time. So, it is timely for miners to look at ways to sustainably improve margins and de-risk their mines for the longer-term.

Employing good cost management and control, rather than cost cutting, will typically result in significant savings that can be sustained. The difference is that a deeper understanding of cost drivers can quickly identify and eliminate wastage and inefficiency without compromising quality or sustainability.

Getting the most out of the available mining data provides a substantial opportunity to improve productivity and performance. But to do this, setting the right KPIs to get data working for you is essential.

Developing a robust geometallurgical model is another key lever that results in more predictable ore and enables higher recoveries and reduced cost.

Reviewing the cutoff grade policy and moving away from break-even grades typically results in higher cash margins today to buffer against the challenges we are currently facing, and maximizes value over the long-term to de-risk the mine.

Good mine planning ensures you have a sound strategy and that you achieve your business goals.

There is always a temptation to cut costs fast and hard when under margin pressure. While short-term cost reductions are often achieved, they are rarely sustained. This is because most costs are associated with having and maintaining capability and capacity, and typical cost-cutting approaches reduce one, or both, of these critical enablers of performance. 

So, lazy ‘cost-cutting’ approaches tend to identify and target longer-term activities such as waste development and overburden removal, which aren’t essential to short-term production, but eliminating them will affect the mine's future ability to achieve its targets.

The rising costs of underground mining 

Consequently, we see that cost-cutting measures are generally ineffective and have to be reversed over time. But costs have been increasing alarmingly, and something needs to be done. AMC’s SmartDataTM (and more on this in point 2.0) shows that, on average, underground mining costs have been rising by more than $1.50 per ore tonne per annum above inflation for the past decade. 

Similarly, open pit costs have increased by $1 per tonne mined per annum above inflation in recent years. The overall impact is that unit mining costs at many mines have doubled in the last five years. While some of the cost increase can be explained by mines getting deeper, most are due to mines paying the price for expanded production to increase metal output, as well as rising input costs, which look likely to continue for a while yet. 

The importance of understanding mining costs 

More than 20 years of experience in cost estimation and undertaking benchmarking studies at mines worldwide has led me to observe that most mines don’t have a good understanding of their costs. 

Not enough emphasis is placed on management accounting, with too many costs allocated too early within accounting systems, which reduces transparency and understanding and often leads to the type of flawed short-term decisions described earlier. Fixing this isn’t hard, but you need to know what you are doing and understand how a mine works.

Understanding costs enables better control. Budgets should be prepared as bottom-up, direct-costed, first-principles estimates. Cost elements are used to build up activity costs, which are then integrated with the relevant cost driver to estimate total costs. This needs to be done at a detailed level so the costs are accurate for each activity, i.e. different development profiles.

Ensuring an accurate mining chart of accounts 

Once the budget estimates are accurate, the next step is to ensure the chart of accounts is structured to accurately capture costs at the equipment or functional level before allocations are made to relevant activities. 

Unfortunately, most accounting systems are set up for financial accounting rather than management accounting, so changes to the chart of accounts may be necessary. But even if you can’t change the chart of accounts, with a little bit of work and mining nous, the costs can be exported at an elemental level and restructured appropriately. 

We do this for every benchmarking study we undertake.

Mining quality cost control trumps broad cost-cutting 

Once complete, more accurate budget estimates can be calibrated to actuals, and thorough auditing and reconciliation can be undertaken. This enables the quick identification of cost variances and the root cause of wastage and inefficiency. 

Good cost management and control is a far better approach, both in the short and longer term, rather than the blunt instrument of cost-cutting, and it enables wastage and inefficiency to be targeted with precision.

New technologies allow us to continuously measure operations to ever-increasing levels of accuracy and gather massive amounts of data in real time. But if the data isn’t used to support good decision-making and improve what we are doing, then at best, it becomes a distraction and, at worst, leads to incorrect and flawed decisions.

When AMC first started benchmarking mines more than 25 years ago, the available data was limited, and the quality was often poor. Now, nearly all mines have real-time data gathering, providing accurate ‘live’ records of where equipment is and what it is doing, continuously flooding onto the mine’s servers.

But does this lead to a better understanding of how the operation is performing? And does it lead to better performance? Evidence suggests not.

When mining data is not leveraged 

Over the past two decades, AMC’s SmartdataTM shows that the main driver to increase mining profitability has been bigger and more powerful equipment. But, equipment operating hours and non-productive time have not materially changed in open pit or underground mines in the past 20 years. In underground mines, on average, the non-productive time for Jumbos and long-hole drills is 60% of total calendar hours. 

For LHDs and trucks, 35% of total calendar hours is non-productive. In open pit mines, the average non-productive time for production drills is 30%, while the non-productive time for trucks and loaders is approximately 25% of total calendar hours.

So, despite the shift to the ‘digital mine’, the information is not being used effectively to impact on a great opportunity and reduce non-productive time in the mining cycle. Why? Well, it comes down to having the right KPIs. 

Establish the right mining KPIs to effectively monitor mining industry data 

To effectively monitor mine performance, KPIs need to be holistic and link each activity to the overall performance of the mine. At present, most mines use too many simplistic KPIs that don’t adequately link the different activities in the mining cycle. The data too often becomes the KPI, and trying to optimize individual activities in short-time increments is driving poor decisions. The result is that non-productive time hasn’t improved. 

So, what are the right KPIs? In my opinion, the most important is compliance with the plan, but I will talk more about that later. The critical KPIs often not adequately measured are leading indicators such as ore stock levels. Maintaining adequate stocks such as drilled, broken, ROM, and exposed ore, as well as the long-term stock levels such as capital developed stocks, buffer interdependent activities and increase the ability of equipment to work.

High-performing mines consistently and predictably achieve their targets. And they do this by evaluating the performance of the whole mine by focusing on the right leading and lagging KPIs and understanding the links between the different activities that will enable them to reduce variance, be more productive, and achieve their targets.

Using the right KPIs shifts focus onto doing the right things to deliver the desired overall performance. This, in turn, enables an operating environment that supports high performance. Data and metrics are useful, but they must be used to inform the right KPIs and not become KPIs themselves.

Everything that happens in a mine depends on the orebody. And yet, many mines still lack a deep understanding about the mineralization prior to extraction. By leveraging the right data, orebody knowledge can be used to improve everything from grade control to metal production.

What is predictive geometallurgy? 

Predictive Geometallurgy is a proven process that leverages geology, metallurgy, data science and machine learning to produce a 3D block model of the orebody, which captures the response of ore to mineral processing. While the natural variability of the orebody can’t be changed, mining geometallurgy enables the most thorough understanding of the orebody. This is low-hanging fruit as most operating mines already collect the data needed to better understand and manage this critical issue and, in doing so, gain practical insights into orebody variability to increase recoveries, reduce operating costs, improve stability through more reliable mine planning, and ultimately improve cash flow.

Orebody uncertainty compromises performance outcomes 

Simplistically, orebody uncertainty in a mining operation costs money in two ways. 

Firstly, it leads to incorrect decisions at all scales, from short-term tactical decisions to long-term strategy. For example, if we consider a truckload of ore. If the estimated characteristics of the ore are exactly the same as the actual characteristics, the correct decision about where to send the truck is made every time. 

But uncertainty in the estimates means predicted and actual are rarely identical, so even in today’s ‘digital mines’ many trucks are sent to the wrong destination. This means that ore that should go to the heap leach can be incorrectly sent to flotation or to the waste dump. The losses are not recoverable.

Secondly, uncertainty in the orebody leads to mismatches between plant operating settings and the characteristics of the ore feed. Correct settings continuously lag the presentation of the ore. Again, the losses are not recoverable. Inadequate geometallurgy is increasing costs and reducing metal production at mines every hour.

Hill-of-ValueTM Strategy Optimization work conducted by AMC over the past 20 years has shown that by changing the cut-off grade policy, mines can typically improve cash margins and overall project NPV by 30%.

Sounds too good to be true? But it isn’t. So why aren’t more mines doing strategy optimization? The simple reason is that break-even grades are so entrenched in the industry that there is great resistance to thinking differently. Nearly every mining course and most of the textbooks we read present a break-even formula to calculate the cut-off grade.

Why the break-even formula is flawed 

So, what’s wrong with a break-even cut-off? 

Break-evens are based on the economic theory that when marginal revenue and the marginal cost of production are equal, profit is maximized at that level of output. A typical break-even formula is shown. The problem is that for a typical mine, there are simply too many dependent variables linked to the cut-off grade, and the other key inputs can be highly variable.

A simple example in an underground mine is that the cut-off grade influences the mining shapes, which in turn impacts the production rate, therefore affecting the operating and capital costs. So, when you change your cut-off, you also change your production rate and costs. We discussed some of the macro-economic challenges earlier, and just looking at the last five years, mines have experienced wide variations in prices, exchange rates and input costs. 

We also discussed the inherent variability in orebodies impacting recovery. These are factors miners have no control over. If we revisit the break-even formula, it is clear that all the inputs can be either highly variable, are out of our control, or are dependent. Break-even is broken!

So what’s the answer?

Understanding that you can’t calculate an optimal cut-off grade is the first step. And once that realization is made, many opportunities open up. I will spare you having to read all the theory and will summarize that optimal cut-off grade is much more strongly related to capacity and the grade distribution of the mineralization, than to metal prices or costs. This is good news as we typically can’t control prices, and we have limited control over costs, but we can control what we mine and at what capacity. 

Determining the optimal cut-off grade requires the development of the value curves for each different option. This example shows an actual Hill-of-Value evaluation for an open pit mine with NPV on the vertical axis and ore processing rate and total rock mining rate on the horizontal axis, at a constant cut-off grade. For this operating mine, increasing the processing rate by 30% and doubling the mining rate will substantially increase mining profitability, NPV and cash flow at the particular price assumption used.

How Hill of ValueTM helps maximize mining margins 

But understanding the shape of the curves is much more important than where the peak of the hill is, and here’s why. 

If we review the same options at a lower price scenario, the shape of the hill changes dramatically, as does the position of the peak. If we selected the options that maximized NPV at more aggressive prices, it barely makes money. 

But if we selected the safe option, that is, the option that maximizes NPV at conservative prices, we still make good margins at the lower price, and we realize nearly all of the upside during higher prices. The Hill of Value™ approach not only helps to maximize margins but it enables the selection of a strategy that de-risks the mine.

HoV saves time and money by reducing the manual mine planning effort. As all the potential options are considered and evaluated for all scenarios, there is no rework or further investigation required at the back end of the study.

Getting the cut-off grade policy right is a significant lever in improving margins throughout the price cycle and de-risking the mine over the long term.

Good performance is about achieving a good plan. That is delivering the corporate strategy day in and day out. 

Mine planning, when functioning well, pulls everything together. Strategy optimisation can provide the right strategic direction, but good mine planning materializes this in practice through practical and achievable mine plans that identify risks so they can be effectively managed and opportunities for improvement incorporated. 

It should break the plan down to the right level of activities that can be executed by operations and align all key stakeholders. And finally, good mine planning involves routine reconciliation and monitoring of compliance to ensure the operations stay on track.

Why spatial compliance is key to mine planning 

In my opinion, the most important KPI is spatial compliance to plan, as nothing adds more value than close alignment between strategy and operations. But the opposite is also true. The biggest risk to most mines is misalignment between strategic intent and what is happening at the face. Unfortunately, this is all too common, driven by simplistic analysis and short-term thinking.

Good mine planning is essential to high performance as it balances the needs of ensuring future targets can be achieved by delivering on targets today. For example, we typically see significantly more excavator moves in open pit mines than planned due to a lack of orebody knowledge and grade control issues. 

Greater priority is placed on chasing metal today, and the plan is ignored. This type of short-term thinking results in increased non-productive time and lost production that can never be recovered. A similar example in underground mining is congestion, being a major impediment to productivity. The root cause is often a lack of timely waste development, resulting in a small number of working areas, so too many activities are happening in one place at one time, creating a bottleneck to production. 

Simply preparing and adhering to a good mine plan addresses most of the common operational issues and inefficiencies and facilitates high performance. So, making sure that mine planning is functioning well should be a priority for all mines.

In conclusion, we, as an industry, are facing challenges and uncertainty, and this could last for some time. But through these five levers, there is a significant opportunity to improve margins by repositioning operations and mining smarter. We need to focus on what matters, not what is easy to measure.

The five key levers where I see significant opportunities to sustainably improve margins are to avoid cost-cutting and focus on cost management and control, set the right KPIs and get more out of the available production data, understand the orebody better through Predictive Geometallurgy, undertake Strategy Optimization and review the cut-off grade policy, and remember break-even is broken, and get mine planning in order so what’s planned gets done.

Those five levers provide a great opportunity to improve and sustain profit margins.

Is this advice insightful for your mine operation? If so, reach out to our team today for a no-obligation 15-minute discovery session. Let’s see how AMC Consultants can help you mine smarter.