Mine Value Chain Analysis – Part 3 End

This is the third and last article on Mine Value Chain Analysis which examines use of mining time and costs information from the activity and value analysis sessions on the mine operation value chains to get another perspective that can assist in determining business improvement focus area.  I will show one way to use the output document of this method by using the idea of generating at the maximum return of operational costs activities by using the Net Present Value concept.

In the second article of the mine value chain analysis series, we have done activity analysis of the value chains and document information on the input, the output, flow of activities and assigned score on the mine capability on the processes within the chains.  We can now use that information create a simplified view of the mine to port process and attached mining processing time and average operations costs information of the chain based on historical data.

Let use an example of a mine with surface and underground operation whose simplified value chain flow description may be described as value adding activities of its core business is to convert the potential metal in the mine to payable metal shipped to customers.  Other activities are directed to support the process of converting ore mined from the surface and underground mines to dried metal concentrate ready on board ships going to customers’ sites which translates to revenues.

The activity requires mobile or fixed equipments and parts, skilled labor for operation, equipment maintenance and support, and supporting materials such diesel, oil, power, grinding balls, and explosives to extract, load, and convert ore to dried concentrates. A few of the activities in this operation may be outsourced to contractors which may contribute to better capability of the operations to execute.  This may be controlled by a set of SLAs that are enforced in contractual agreements.

The core of the method is to measure the average time per unit time and average total cost of production per unit of time used for a unit of ore or metal to go through the mine operations value chain from the mine to shipping or to final destination.  In simpler language, I just want to know if I paint a block of rock with red at the mine and follow that rock through the value chain, how many days it takes to become payable metal on the ship or smelter and how much it costs per day when progressing though the process.  Granted the costs during each chain may be different per unit weight of the ore, but this is then the challenge.  The team doing this should understand the process capacity, the historical data sources, the plant installed capacity versus historical throughput and other specific knowledge of the operations.

Start at the short term mine planning stage for example to identify in average how long to identify and create plan for detail mining schedule.  This may take a few hours, a few days or a week to prepare plans and generate schedules for drill and blast sequence, equipment, shovel movement sequence and other things.  The time to do this may be vary from mine to mine depending on how detail the plans are and how sophisticated the technology and process infrastructure is at the mine supporting the planners.

Next, the drilling and blast activities require preparation of pad, drilling, surveys, and explosives’ loading, and blasting.  Consider how long it takes in average to prepare a broken muck for the next chain, excavation and hauling.  There are a lot of ways to measure this starting from simple arithmetic of calculating the process capacity of generating broken muck per day based on field notes and how long until the broken mucks are excavated by the shovel.  Another way is to get historical data and do a statistical analysis to arrive at a regression model that relates some mining variables to the ability of the process to generate historical muck tones.

Do the exercise along the chains to the downstream processes and then document the mining times for each of the chain considering each chain processing capacity and documenting variance of tonnages from the output point of one chain when it is fed to the next chain as input.  This will provides a high level overview of the average material “leaks” between processes which is what mining reconciliations focus on.  During this exercise you will appreciate the overall reconciliations issues that arise between chains from mine to ship or smelters when collecting data from different sources.  Sometimes for the same metric we can get different numbers depending on whether you are getting the information from the department responsible for the previous chain or from the division responsible for the next chain.

The next part and one of the more exciting and may be confusing part of this method is to determine the cost per day of a value chain.  The challenge is to relate cost components in the company accounting information system with the activities in the value chain to arrive at historical average cost per day spent the process.  When a mine employs activities based costing, the task of correlating costs to activities in the value chain is less daunting.  Start with a good flow sheet template for mining activities and work to associate costs from the company transactions journals to the activities if you have access to the financial details data.  If you have monthly or even yearly “official” information published by accounting or independent auditors, you can use that too and just divide by 365 to get the per day costs for each of the activities in the value chain.

One reference site that I find very useful in providing a guideline on the costs of activities of a mine is Minecost.com web site at http://www.minecost.com where there is a lot of information of yearly historical cost structures of mines all over the world and whose information may be purchased for your mine.  Minecost.com is a forum of world mine finance data exchange which provides mine costs spreadsheets model and operating costs information based on verifiable engineering and production data and peer review by mining industry analysts from around the world. However, use the data wit a grain of salt since if you are at the inside of your company, you should have much better access to more detailed financial data but it will help to keep an eye of the numbers if the gap is too wide just as a check.  The following graph shows how the cost of a mine compares to other mines around the world available of Minecost.com.

Example of cost components for the example mine adapted from the Minecost.com flow sheet template in a simplified version is shown below and by no means reflect your mine situations.

•    Surface Mine

1. Drill and Blast (Ore and Waste)
2. Load and Haul (Ore and Waste)
3. In Pit Crushing
4. Ore Transport to Mill
5. Stockpile Store and Reclaim
6. Mine Services
7. Mine Administration

•    Underground Mine

1. Development
2. Mining
3. Underground Crushing
4. Ore and Waste Haul
5. Ore Transport
6. Ventilation and Dewatering
7. Mine Services
8. Mine Administration

•    Ore Processing Plant

1. Washing and Screening
2. Crushing, Grinding, Flotation, Thickening, and Fitration
3. Tailing Disposals
4. Mill Services
5. Mill Administration
6. Ore Stockpile and Reclaim

•    Concentrate Handling

1. Slurry Pipeline Concentrate Transport
2. Concentrate Thicken and Drying
3. Stockpile Store, Reclaim, and Ship
4. Plant Services and Administration

•    Product Shipping
•    Supports, Administration, and other direct operation costs are included
•    Revenues from payable metals

The process of collecting information and filtering usable data from myriad of internal and sources can be a little bit difficult but since this is a quick exercise to arrive at ballpark figures to determine improvement opportunities, do not exhaust yourselves with too much analysis and get drowned in too much data.  The challenge is as I mentioned in the first article of the series, knowledge of data integration and data analysis with some statistics savvy but more important is the familiarity of the mining operations and understanding of how the mine operates reflected through its accounting information system.

Now that we have done the exercise we should arrive at the following simplified table which we will use to plot a graph showing the relationship between mining days and cost per day.

Time Variable	Average time (days)	Cost per day $
Process 1	T0	C0
Process 2	T1	C1
Process 3	T2	C2
Process 4	T3	C3
Process 5	T4	C4
Process 6	T5	C5
Process 7	T6	C6
Process 8	T7	C7
Process 9	T8	C8
Process 10	T9	C9
Process 11	T10	C10
Process 12	T11	C11
Process 13	T12	C12
Process 14	T13	C13

Plotting the data in the table we can see for an imaginary mine that the cash flow has been negative until the payment for the metal delivered is realized.  Using Net Present Value (NPV) calculation we understand that the longer the revenue is realized the lower the revenue contributes to positive NPV.  Therefore it means that for maximum NPV we need be able to shorten the mining time from planning to accrual of revenues.  Moreover we need to reduce the costs of each of activities therefore bringing the curve upward and the position of costs of T13 (revenue) higher in the graph as shown in the next graphs.

Target areas for business improvement activities can be identified in line with our objectives of shortening the time to accrual of revenues and reduction of costs.  I will look of areas with for example steepest gradient which means activities that consumes the most operational cash per days or consuming largest cost in shortest time and those that has the least steep gradient meaning low cost with longest time.  We can then adjust how much of cost increment we want to pay for faster process or how much costs we want reduced in return for longer process time.  This then becomes an art which management should be able to work on for optimum mining time and costs/revenue combination.  If the metal price at the spot market is good then there is a bigger incentive to accelerate process or may be the costs of business improvements will not justify the incremental benefits.

This brief article shows another perspective on finding opportunities for business improvement target areas during the mine value chain analysis.  Of course the articles in this series are academic work with no promise of success when implemented in the field due to so many variables that can affect the outcome of business improvement initiatives.  As mentioned, the success of any productivity improvement projects largely depends on management commitment as well as the organization capacity to align its people, process and technologies to business objectives.  Hope the articles is useful for you and drop me a note at agus_daniel@yahoo.com if you like.