The economics of reliability: global metal and fertilizer mining

The health of our global economy depends critically on the success of metal and fertilizer miners. Metals like copper, nickel, and lithium are increasingly in demand given the exploding popularity of electric vehicles. Gold and silver are important means of wealth storage, in addition to various industrial applications. Aluminium and steel have countless uses in manufacturing, from food and beverage containment to automobile and airplane fabrication. Mined fertilizers, specifically phosphates and potash, are necessary to improve the productivity of agriculture worldwide, helping us feed our growing global population.

Reliability – its definition and impact

What is reliability? In its analyses, Pinnacle defines reliability as the measure of how often something runs when you want it to. As we think about the economics of reliability, this draws into consideration how organisations make investments to maintain or improve reliability. In other words, are they being effective in their pursuit of reliability, or not?

In this report, Pinnacle analyses the economics of reliability in the metal and fertilizer mining space, including the resource extraction, transportation, and processing activities in which large global miners commonly engage. Specifically, the company considers the following base metals: aluminium, cobalt, copper, iron ore, lead, lithium, molybdenum, nickel, tin, uranium, and zinc. It also covers the precious metals of gold, palladium, platinum, and silver. Finally, Pinnacle considers the two major classes of mined fertilizers – phosphates and potash.

Production, economic value, and estimated reliability spend

As the world economy continues to transform, more activity is being digitised, and more effort is being steered toward decarbonising global energy infrastructure, metal and fertilizer miners are navigating particularly turbulent waters. In addition to responding to the secular demand shifts impacting every industry around the world, these miners must also deftly respond to unpredictable commodity price dynamics. This response often comes in the form of putting mines into ‘care and maintenance’ mode, where most mining activities are idled, but the site is actively managed to allow for reactivation when economic conditions improve.

Responding to dramatic price inflections is a known challenge across the resource extraction sector. For miners, the challenge is more dramatic in specific ways than it is for oil and gas producers, for instance. In the oil and gas space, operators can throttle or idle production at the level of individual wells, allowing for some nuance in calibrating production against prevailing economic conditions. In the mining space, operations are concentrated in relatively few active mining sites, compared with the thousands of wells that oil and gas operators may manage. The stakes are high when management teams must decide whether to transition a whole site into care and maintenance mode. Then, these teams must manage the back end of the process, where these sites are either reactivated, sold, or decommissioned.

Given the history of the 2015 commodity price crash, and the 2020 pandemic-driven demand crash, the tension in these results emerge. Pinnacle has argued that, in response to these market disruptions, miners would too hastily cut reliability spending so that they could use that cash to pay down their previously excessive debt loads. If many operators are over-spending on reliability, then is it truly problematic for them to cut their spend in this area?

Conclusion

Metal and fertilizer miners spend $55 billion on reliability initiatives, which is about 10% more than is spent by petroleum refiners.

• For a few reasons, reliability receives a relatively smaller spotlight in mining than it does in refining. Through its economic analysis, Pinnacle learned that across the world, there is more opportunity to make gains in optimising ongoing efforts in mining than in petroleum refining.

Metal and fertilizer miners have been focused on balance sheet management over the past half-decade, likely creating vulnerabilities in their existing reliability programs.

• Commodity prices began to crash in late 2014 and languished through most of 2015. The pandemic then dramatically suppressed demand through 2020. The miners Pinnacle studied responded capably to these disruptions, cutting costs so they could preserve their profitability and pay down excessive debt. Unfortunately, these drastic manoeuvres have likely left holes in existing reliability programs that can negatively impact operational and financial performance going forward.

Some miners achieve better results while spending less on reliability, suggesting the best path is to spend less while targeting that spend surgically.

• In the portfolios of miners analysed by Pinnacle, operators typically spent 4% to 10% of their revenue on reliability programs. Interestingly, the operators that spent the least often saw the largest margins, even when results were grouped in three-year periods to smooth out single year anomalies. From this, Pinnacle infers that many reliability programs are bloated. In its experience, anywhere from 10% to 30% of this spend may not produce any material impact on performance. While these programmes are almost certainly leaner than they were before the 2015 price crash and 2020 pandemic, substantial opportunity remains to further rationalise and optimise this spend. Intentional, multi-dimensional, system-wide analysis is the best tool to ensure reliability investments are framed in a proper returns-based context.

To download Pinnacle’s full reliability report, click here.

Read the article online at: https://www.globalminingreview.com/mining/04022022/the-economics-of-reliability-global-metal-and-fertilizer-mining/