2017-02-06

Miners to Slash Costs with Technology

Introduction John Gravelle, a mining industry executive, independent director and former Global Mining Leader at PwC, isCentury’s guest author, again this week shares his thoughts on potential cost savings using new mining technology. John’s first article about mining technology was published two weeks ago. While I believe we are moving towards the use of more technology underground, some naysayers will have less confidence this will be widely adopted on the basis that the mining industry has a reputation for finding reasons not to adopt new technology. They will point out that the industry did adopt mechanized mining years ago but has had challenges adopting automated mining. Some notable exceptions where automated technology has been adopted: 1. Open pit mines such as those in the Pilbara area of Australia; 2. Dundee Precious Metals (their Chelopech underground mine in Bulgaria); 3. Boliden, the Swedish based major miner. But these are exceptions. The industries that have been most successful at automating are those with low margins. For example, the automotive parts companies are top of class. And they need to be since they are under such pressure with margins that they will not survive otherwise. Pharmaceutical companies on the other hand tend not to be so focused on manufacturing cost management but they don't have the same pressure to be. As long as their R&D groups can develop the products, patents will allow high margins so the manufacturing cost will not impact bottom line to the same extent. The mining industry has cost pressures when commodity prices are low but doesn't when they are high. So they are in the middle of the examples of auto parts and pharmaceutical companies. Does this mean they can afford to wait until the next super-cycle? Two significant gold miners (Barrick and Goldcorp) have recently announced the introduction of substantial new technology. Barrick has announced it will partner with CISCO to implement digitalized mining at Cortez. The use of digital technology can revolutionize this already low cost mine by allowing real time data to be used to determine operational changes to be implemented in real time to reduce costs and increase production. Another example is Goldcorp Inc. which is partnering with Sandvik, a major mining equipment supplier and Maclean Engineering to build its new Borden mine in Canada using only battery powered mobile equipment. These two examples can be transformational with respect to the use of technology to reduce costs and provoked additional benefits such as enhanced safety. My view is that mining is entering a long term period where low commodity prices will continually create margin challenges for companies that don't adopt new technologies. This doesn't mean that I don't believe demand from emerging markets will pick up. I think it's inevitable that the emerging markets will continue to urbanize and require large amounts of commodities. But margins will remain tight for companies that can't keep at the low end of the cost curve. Technology will allow companies to be at the low end of the cost curve and this will result in the high tech mining companies being able to bring new supply on line at a low cost which will keep commodity prices in check and create challenges for those mining companies that don't adopt new technology. Mining companies with underground mines need to push to automating and digitizing now to get costs to a level that will allow profitable operations.