Economic Efficiency – Ready for Net Zero?

Atlantech’s experienced engineering team members consistently improve on their knowledge and skill sets in the mining and resources industry. This ensures we can deliver best in practice services to our clients. Most recently our Principal Mining Engineer Dean Sorley was impressed by industry presentations at the AusIMM Iron Ore Conference in Perth. In our latest blog, he shares some well-researched and thought-provoking insights and provides some advice for miners about how preparing for economic efficiency in reaching net zero can help with future challenges.

By Dean Sorley, Atlantech Principal Mining Engineer

At the recent AusIMM Iron Ore Conference I was struck by the incredible effort miners are making to help steelmakers such as Europe’s ArcelorMittal – the world’s largest steelmaker – to meet the challenges of achieving net zero carbon dioxide emissions by 2050.

Net zero means cutting greenhouse gas emissions to as close to zero as possible, with any outstanding emissions re-absorbed from the atmosphere, by oceans and forests for example.

The conference featured one presentation on mining, with most topics relating to actions that might help steel mills reach net zero. I learned more than expected about blast furnaces!

I also had time to reflect on how this fitted in with one of my favourite mining topics: economic efficiency.

Fundamentally, a mine is a tool to generate earnings for the owner. It does this by consuming a one-time use asset, which are the minerals in the ground. Capital is deployed to buy machines, to move things, or process them; to build the hole in the ground so the minerals can be accesses; and often to buy substantial amounts of surrounding land.

It is our job as operators and mine planners to do this as well as we can.

If you see the job of a mine as producing tonnes, your options to improve the mine typically revolve around getting as many tonnes extracted and sold as possible.

For some, getting more tonnes becomes the answer to everything. If prices are falling, the thought process for the mining company might be about winding the handle faster to get more tonnes to then reduce the unit cost of overheads. If prices are rising it might be to increase block cave mining systems (BCMS) to take advantage of those prices.

In 2014 I attended a conference where there was a panel discussion comprising a group of mining company CEOs. They discussed how they responded to the 2008 - 2011 minerals boom. One CEO summed things up, stating:

“We chased tonnes; they became a proxy for success. We let our costs get out of control and left billions of dollars on the table. Worse, when you look at our marginal costs it was clear those extra tonnes were losing us money.”

This presented sobering feedback about the dangers of chasing tonnes.

After the conference, I did an analysis of three major mining companies. I found that all had added tonnes to their output, at costs higher than they were selling those tonnes for in the market. The reports all highlighted achieving record production to their investors.

However, viewing a mine as needing to achieve an earnings target – rather than just tonnes – opens a much wider range of options about how to achieve that goal.

Consider if those CEOs had kept the same tonnage profile and controlled their costs from 2008 to 2011. The lift in prices would have added to their margins in the good times. The three companies I analysed in 2014 only needed to be able to capture the full price increase for 17% of their output to generate more earnings than they did by increasing tonnes. That approach would also have avoided the pain of removing those added costs during the following four-year decline where prices fell by more than 50% from the peak.

You can adjust costs, revenue, and even tonnes to get that earnings target. Many of the opportunities to increase earnings needed fewer capital investment than a typical “increase tonnes” option.

The week following the recent Iron Ore conference, I read a report in Bloomberg about how Carsten Spohr, CEO of German airline Lufthansa, reported that shifting to green fuel for its fleet would be possible, however doing so would consume half of Germany’s electricity production. He wryly noted: “I don’t think Mr Habeck (Germany’s Economy and Energy Minister) is going to give me that.”

Emerging analysis from various sources back up Herr Spohr’s comments.

The UK’s FIRES research group showed in March of 2023 that extreme energy shortfalls are likely because of the difficulty in developing an alternative energy system to achieve the UK’s climate commitments.

The article states: “When we hear people tell us that we ‘should just be more optimistic’ we think what they’re really saying is ‘we don’t want to think about a future in which we don’t have all the energy we want’.”

These points relate to specific countries however, climate targets, commodity and energy markets are global. Supply, demand, and pricing impacts are not restricted by lines on maps.

This paints a world fundamentally different to that of the last several centuries. We are entering a period of huge change – one where decarbonising is going to be a central focus from many of the world’s governments and possibly the dominant strategic condition.

Resources, especially energy, are forecast to be scarce and expensive – if you can get them at all.

Associate Research Professor Simon Michaux, of the Geological Survey of Finland, has been a pioneer in determining detailed analysis of what raw materials are needed to make net zero work on a global basis. His updated 2022 report makes sobering reading and is fabulous foundational knowledge of many of the strategic drivers for providing the world’s raw materials.  I encourage readers to look at his work. He demonstrates how creative KPIs can increase understanding of a situation or performance.

In summary, I believe competition for mining inputs will be fierce to meet the gigantic increase in mineral output required to achieve net zero. Relying on “more tonnes” as the go-to strategic response will be extremely difficult.

Every activity on a mine-site will generate CO2 until the world reaches net zero. The costs of generating CO2 are going to escalate dramatically. That activity also consumes energy which might be subject to rationing.

An economic efficiency awareness and focus fits neatly into the toolkit for miners responding to this type of environment. Every activity undertaken must clearly result in bringing earnings targets closer, rather than on embarking on an activity for activity’s sake.

Instead, if you are a miner, consider these questions:

1. How do you identify and understand your internal cost curves?
2. Which tonnes will you strip out of your operation which generate zero, or negative, earnings?
3. What changes to your mining operation can you make to change negative margin tonnes into healthy margin tonnes?

KPIs which relate to how you will achieve your earnings objectives in relation to inputs, such as energy or CO2 emissions, have the potential to transform operations and mine planning.

Start these conversations with your colleagues, associates or in the comments section of this blog to help leverage off our collective experiences and insights. Please reach out if you would like a one-on-one discussion or to help understand how looking at your project from an economic efficiency perspective can better set you up for future challenges.