Have you ever heard the term “hitting the wall”? Marathon runners and other endurance athletes can experience this when the energy stores in their bodies have been depleted but the race is not yet over. Technically, it is called glycogen depletion. It results in sudden fatigue, loss of energy and even the belief that they can’t continue the race.
Your company can hit the wall, too, if you run out of cash. In a mining downturn, this thought can be a paralysing fear for exposed companies.
In recession, our business drivers switch gear to cost reduction and cash protection. But what are the drivers of our mine planning process?
In a buoyant environment, hitting the wall is probably the last thing on our minds. When commodity prices are high, there seems to be a limitless stream of cash available to keep the wheels turning. Our key business driver is maximizing value, and maximizing NPV in particular. It follows that our mine planning process should be driven by maximizing NPV as well.
But what about in a depressed mining industry? Our business drivers switch gear to cost reduction and cash protection. Now what about the drivers of our mine planning process? What do you think will happen if our planning process is driven by maximizing NPV while our company’s business drivers are cost reduction and cash preservation? It may not exactly be a meeting of the minds between mine planning and business strategy.
Misalignment of Mine Planning with Business Strategy
A plan that maximizes NPV may involve investing in extra capital early on to achieve that optimal NPV over the life of the mine. But you may not have the cash to fund that extra capital expenditure. Maximum NPV mine plans have an associated cost and cash flow.
Maximum NPV mine plans have an associated cost and cash flow which can leave you exposed in a declining market.
That cost and cash flow can leave you exposed in a declining market. There is almost certainly a better plan in terms of cost and short-term cash flow that will provide some buffer if commodity prices fall even further.
Most prudent companies seek to weather the storm of a downturn, which at a minimum is remaining cash-flow positive while prices are low. So how can we do this and what impact does it have on our mine planning process?
There are at least two approaches for configuring your mine planning process in a low commodity price environment. They can be implemented individually or together.
- Minimize cost instead of maximizing NPV
- Model cash explicitly and put constraints on cash flow
Let’s talk about the first one now and the second will be covered in a follow-up article.
How to Minimize Net Present Cost
I remember during a previous downturn when a large Australian iron ore miner changed its business driver to minimizing Net Present Cost. They approached us at Minemax and asked how they could reflect that in their mine planning process. To explain how we answered them, let’s have a look at the nuts and bolts of an optimized mine planning system.
In an optimized mine planning system, there is something called the objective that measures how much value (positive or negative) a block contributes when it is mined and possibly processed. When you are optimizing NPV, for an ore block, the objective is the revenue obtained from selling the final product minus all costs.
When you optimize Net Present Cost, you use costs as the objective that measures each block’s value when it is mined and processed.
When you want to minimize Net Present Cost (NPC), you use the costs for the objective. Also, instead of maximizing the objective, you minimize it. But if that is all you do, what kind of mine plan do you think will result? You will get a mine plan that does nothing at all. Nada. Doing nothing will cost you nothing. Well, there are fixed costs, interest repayments, etc… but we’ll try to keep it simple for now. So how do you do something, yet minimize cost?
If your company’s ultimate business mandate is “Minimize costs”, then there must be some understood assumption regarding production. A coal miner would say “We will ship five million tonnes of coal per annum.” A gold miner might have promised shareholders, “We will produce one million ounces.” These are examples of production assumptions behind the statement that says, “We need to cut costs.”
Putting it all together
When commodity prices are low, you can align your mine planning process with your company’s business objectives by
- Configuring the objective to be the costs
- Minimizing the objective
- Setting a minimum production requirement
In an optimizing constraint-based mine planning system like Minemax Scheduler, you can let only costs contribute to the objective and define minimum production requirements. It is not difficult at all to switch from maximizing NPV to minimizing NPC. In fact, you can have each of them as alternative scenarios and compare the trade-offs of value and cash flow.
This is one of many ways you can align your mine planning process with your company’s business objective during a season of low commodity prices. In a follow-up article, we will look at how to model constraints on your cash flow.