‘Explore the innovation imperative‘ declared the Deloitte report Tracking the Trends for this year.
Each year, Deloitte publishes a report for the mining sector, highlighting the top 10 trends for the industry.
It also offers vague solutions for each trend, but that’s not the point.
In a nutshell, they’re simply saying to resource firms, ‘innovate or go bust’.
While I’m keen to see companies adapt and innovate as much as possible, there’s only so much small miners can do with limited capital.
The thing is, it’s not that easy for mining companies to just jump on board with the latest technology.
Just getting a plot of land to the exploration stage is a red tape nightmare.
And then there’s the millions of dollars they need to spend on plant and equipment.
How much are those enormous yellow trucks you see on sky news? A million or so, for a used one.
A drilling rig, depending on the company’s needs and the age of the rig, can start from $200,000 and go as high as $2 million.
Add in other site equipment and staff and an explorer may have burnt through $10 million…and that’s before they’ve even stuck the drill in the ground.
A junior miner doesn’t have the extra capital to throw at new ideas when they’ve yet to produce a tangible product.
However, Deloitte is right that innovation in this sector is important in the long term. Simply because miners that don’t invest in new technology will be left behind. Money spent on technology today can reduce a company’s costs in the long term.
So a major innovation that could reduce a resource company’s bottom line would be something the sector would jump at, right?
In theory yes, but the reality is a little more complicated…
The Hidden cost for Mining Stocks
Take this for example.
Something as simple as energy creation and storage is a major factor when planning for a mining site. The long term costs of generating electricity are huge. In fact, it can account for anywhere from 40%-60% of a mine’s total budget.
So you think the industry would be falling all over privately owned American firm SolarReserve LLC’s latest offering. Launching into the Aussie market with vigor last year, they’re convinced they have the perfect solution for remote mining sites when it comes to generating electricity. After all, the sun is free, right?
The solar power photovoltaic (PV) system is capable of producing power on demand as well as storing it for later. Using their molten salt energy system, a mine site can operate at full megawatts during the day, while the system simultaneously charges the batteries so the site can operate during the night as well.
Effectively, they created a solar power unit with high powered energy storage.
On paper, this sounds like a great solution, as one of the biggest problems many remote mines face is generating electricity. Let me explain.
Check out the map below. It shows the Australian electricity grid.
As you can see, almost three quarters of this sunburnt country has no connection to the main electricity networks.
That big brown part, which is off-grid, mostly uses natural gas to generate electricity. In fact 74% of the off-grid network relies on the gas pipelines for electricity.
While this is great for the big mines and remote towns, what about the seriously remote parts of the country?
Well, they rely on diesel generators to power the sites.
Before any test hole or exploration can begin, the engineers and bean counters have to work out how to power the drilling equipment. For decades they used diesel generators. Mostly because fuel was cheap and there wasn’t really another option.
However one drawback to diesel power is the cost. Like I said before, energy generation alone can swallow roughly half of the ongoing budget.
In short, it’s not cheap to keep all that equipment working.
But when the nearest natural gas pipeline is 500kms away, what other option do they have?
With few alternatives, companies have just sucked it up and paid the fuel prices.
But looking ahead, diesel may no longer be the best option for generating electricity.
Blown Tyre Causes Supply Shock
You see, the diesel price is more volatile than ever. What’s more, this fuel is subject to supply shocks and the political climate.
And I’m not talking about global supply shocks. Something as simple as a fuel tanker blowing a tyre can bring a mine site down for a day…costing a company thousands in lost productivity.
Add to that a fluctuating exchange rate and unpredictable long term prices. Even the best number crunchers don’t a have crystal ball on what the market will do next.
Now this doesn’t matter as much when your cost projections are six, or even 12 months ahead. But many mine site costs estimates are on a five to 10 year basis.
Take last year as an example. At the start of 2013, the Aussie dollar was hovering around parity with the US dollar. Yet the Aussie has fallen 15 cents since then. And in the past twelve months Brent Crude futures have swung between a high of US$112 to a low of US$98.
$14 doesn’t sound like a wild difference. But when some sites chew up 120,000 litres of diesel every 24 hours, it adds up.
It’s these costs which affect a company’s competitiveness, and in turn the ability to generate capital growth for shareholders.
Given the price extremes and complications that can arise with diesel generation, will this push companies towards solar?
Right now, it’s unlikely. For two reasons.
Firstly, there’s the upfront cost.
Solar power can be expensive to install. In fact, most of the costs for solar power are the upfront costs. Compare that to diesel where costs are spread over the life of the mine, or even an entire mine site. So the small guys with little capital to burn aren’t in a hurry to spend millions on upfront energy infrastructure. I mean, in the short term firms would rather spend money on better equipment, or skilled staff and further exploration rather than on a costly solar energy set up.
It Has to be The Right Technology
Don’t get me wrong, in the long term solar is cheaper. Mining & Power’s website estimated the total cost of both here. Based on a few engineering assumptions, these guys reckon the upfront cost of solar would come to $470 million over ten years. Compared to diesel generation for the same period, and same amount of power would equate to $700 million.
In spite of the significant long term saving, the other problem for solar is space. Again, Mining & Power estimate panels capable of producing 20Mw (a general base load requirement) would need to cover a square kilometre. That’s a huge amount of land!
There’s also lag time in waiting to have the installation set up. Oh, and I can’t imagine the solar panels are easily portable.
Simply put, the mining sector is due for an upgrade. And the costs are falling for solar power; it’ll have to fall further before you’ll see the small miners keen to take up this technology.
Yes, resource firms will need to innovate, or they risk becoming uncompetitive. But it has to be with the right technology…and a productive use of their capital.
Editor, Money Weekend