By Arjen de Bruin
By focusing on their people, mines can future proof their profits when the commodity cycle spins around.
In a country that is, by now, quite jaded because of the sheer volume and frequency of bad news we seem to bear witness to, this year’s Budget Speech delivered a largely unexpected but well-received windfall, to the tune of around R300bn.
Due to a buoyancy in commodity prices – a direct result of the Russia-Ukraine war (that’s the not-nice bit) – the Finance Minister had the necessary wiggle room to pass on some desperately-needed relief to taxpayers. But as the Minister himself warned, the country couldn’t rely on this revenue for the long-term, given that commodity prices are determined by many macroeconomic variables.
And already, we’ve seen a shift over the past few months. While gold continues to shine, the price of iron ore has dropped, thanks to sluggish Chinese demand. Rhodium has plummeted by around 35% since the beginning of the year (triggering Northam Platinum to withdraw its offer to take control of Royal Bafokeng Platinum) while major mines have reported a slump in their profits. Earlier this year, Anglo American admitted that its 2022 profits had dropped by almost 50% on the previous year thanks to a soar in energy, while Rio Tinto announced a 41% decline in their 2022 net earnings, which it attributed to downward pressure on commodity prices.
What do these movements tell us? That mining remains cyclical, and at the mercy of macro-economics. As the World Bank states: Global macroeconomic shocks have become the main source of fluctuations in commodity prices, accounting for more than two-thirds of the variance of global commodity price growth. The swings in commodity prices witnessed in 2020-21 have brought to the fore the vulnerabilities of the many Emerging Market Developing Economies (EMDE), especially low-income countries (LICs), highly dependent on commodity exports. In other words, countries such as ours.
It goes on to say that global demand shocks account for 50% of the variance of global commodity price growth, while global supply shocks account for 20%.
In the past few years, the boom in commodity prices meant that mining organisations benefited. But as these recent market movements demonstrate, there is a very real danger in allowing our profits to be determined by a cycle which is just that – cyclical.
There’s not a thing that we, as an industry, can do about the price of gold, or platinum, or iron ore – or anything else. So where do we need to focus to keep our bottom line looking healthy?
Building a supervisor capability within the mining sector is vital in order to focus on helping mines control the cost curve. T
here’s an example that forms part of one of our modules, which goes something like this:
There are two mines that are largely the same. Same depth, mining the same reef, with the same labour force. Because these mines are the same, it will cost the same to take out 1 ton of rock (i.e. the same amount of labour, machinery cost etc.) The only difference is the grade or grams of gold per ton. Mine A mine yields 40g of gold per ton of rock, while Mine B yields 2g of gold.
Thus, Mine A must get out 25 tonnes of rock to yield 1kg of gold, while Mine B must get out 500 tonnes to produce the same amount. Therefore, it stands to reason that Mine A’s total production cost will be much lower to produce the same amount of gold.
The point of this story is to illustrate that we cannot control the amount of gold (or any other commodity) we yield per ton we extract, which will affect our costs and thus profitability. So we need to keep our eyes fixed firmly on what makes up our cost per ton, as this is something that is within our grasp. And this is where your people can make or break your bottom line.
What typically costs mines? While there’s always some variance between mines, these would typically be salaries and wages, leave/absenteeism, machinery and tools/equipment, injury and first aid supply costs, as well as theft and accidents.
This is where the mining supervisor plays a critical role. Through coaching them on how to plan properly and execute competently, we can have more effective blasts. We can promote a more efficient system. We can ensure our machines are well-maintained and working at optimal capacity. We can create contingency plans for absenteeism. It’s not necessarily about increasing yield: while the amount of tonnes we extract might be fixed, we can ensure that those tonnes are as profitable as possible by focusing on reducing our cost per ton.
Mines also deteriorate after a few years, which means that we need to be even more effective in our operations. This is where it becomes critical to keep our costs at the same level, not allowing wastage to happen. We need to look at where we spend time, making sure that it on activities that extract the most value.
By focusing on your people, you will safeguard and future proof your bottom line when the commodity cycle again spins around.
Arjen de Bruin is the Managing Director at OIM Consulting
** The views expressed do not necessarily reflect the views of Independent Media or IOL.