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Project survey '94.

Bacteria and gold CD's--the future of the industry?

This year's mine and plant project survey reflects a continuing decline in the total number of announced mining projects in either the final feasibility or development phases worldwide. South American copper and North American gold, supported by discovery of new, high-grade Cu deposits and resurgent Au prices, remain magnets for investment with more than four dozen projects reported in these regions. However, sagging aluminum and lead prices have shoved plans for building or expanding Al and Pb refineries, smelters, and mines onto the back burner, while weak manufacturing and automotive markets continue to depress demand for iron and ferrous metals in the US, Europe, and Japan.

While the global economical malaise lingers, the mining industry has seemingly imploded, with many junior companies going out of business and others merging with larger firms. The industry's consolidation even extends to mergers among the major players. As this issue goes to press, final arrangements for the merger of Cyprus Minerals Co. with Amax Inc. are under way, leading to formation of what will be one of the world's largest multi-mineral mining companies. Newmont Mining Co. and Newmont Gold also announced plans to combine assets and operations. The ensuing entity will have gold reserves totaling 26M oz and a projected annual output approaching 2M oz by 1996. Although the Newmont Mining-Newmont Gold transaction "stops short of a full merger" to avoid a significant goodwill accounting charge, according to Ronald C. Cambre, vice-chairman and CEO of both companies, "it nevertheless is tax free and satisfies the operating and financial purposes of a full merger." These moves among the industry giants reflect mounting concerns among mining executives for operating-cost reduction and improved shareholder return on investment. Low market prices, combined with political uncertainty, shrinking demand and rising costs, have eroded the earnings of most primary metal producers, and the result appears to be fewer new projects on the drawing board, along with an increasing willingness to defer production decisions on anything but sure-bet projects until the markets sort themselves out.

Two recent announcements from opposite ends of the gold industry seem to hold relevance for the future survival and success of the mining industry in general. First, Newmont Gold reported in September that it had received a patent on a process to bioleach low-grade gold ore containing sulphidic materials. The presence of sulphidic constituents normally renders such ore unsuitable for dump leaching. Tests are under way on a second bioleaching process that can be applied to carboniferous gold ore which will prevent the carbon from removing dissolved gold from solution (preg robbing). Commercial-scale success of these patents will allow Newmont Gold to extract gold from nonreserve mineralization on its Carlin Trend holdings for which no large-scale metallurgical recovery process has previously existed.

Gold News reported in November that a California company has developed a gold-plated audio compact disc purported to offer better sound fidelity and superior resistance to playing-surface corrosion. A gold-plated surface eliminates the "pinholes" found in typical aluminum-plated CD's, according to the manufacturer, and thus requires less error processing by the CD player's microprocessor to reproduce the original sound. The gold surface is also not affected by typical contaminants such as salt spray or humidity.

How are these two developments related? Representing a commitment on one company's part to develop new process technology, and another's to develop new markets for old products, they're two planks in a platform that metals producers must build to bolster future earnings, says a Canadian business professor. According to Peter R. Richardson, Queen's University School of Business, Kingston, Ontario, mining executives have focused somewhat nearsightedly on strengthening their core business and striving to become the low-cost producer in their sector during the past decade, to the detriment of their companies' long-term health. Although his observations, presented at the International Congress on Mine Design held August 23-26 in Kingston, were mainly drawn from Canadian industry experience, many points seem germane to the industry in general.

The mediocre earnings reported by many international mining companies has restricted their ability to invest in the future, Richardson maintains, since such investment has to be funded either from profit margins or by increased debt. Thus, companies are finding it hard to

* Invest in exploration to ensure an adequate reserve position.

* Invest in market and product development to offset encroachment by substitute materials.

* Invest in new process technology to remain cost competitive.

* Build a high level of employee involvement and motivation to maximize productivity.

* Maintain a strong balance sheet to finance new developments and cushion the impact of troughs in the price/demand cycle.

Most of the larger Canadian companies were able to pursue these goals during the boom period of the late 1980's. As CANMET's J.E. Udd, another conference speaker, pointed out, Canadian miners gained a big increase in efficiency during this period by switching from highly selective, high-cost mining methods to lower-cost bulk mining techniques. The justification for investigating and implementing new mining techniques was simple: Only the mining part of the production cycle offered very rapid payback through investment in new technology. Processing plants and smelters had already been modernized and mechanized to the point that massive productivity improvements were not likely.
Table 1

Financial performance of selected international mineral producers

1991 FIVE-YEAR AVERAGE RETURN ON CAPITAL TEN YEAR AVERAGE RETURN ON CAPITAL

                     (After taxes)      ($C million)      ($Cmillion)

AUSTRALIA

BHP                      1,270              6.80              6.57
CRA Ltd.                  (29)              6.08              2.94
Mount Isa Mines            NA               3.82              2.30

CANADA

Cominco                   (41)              6.86              1.29
Falconbridge               21               7.40              2.80
Inco                       83              16.54              7.70
Noranda                  (133)              2.84              0.70

OTHER

Asarco                     56               9.05              2.30
CODELCO                     3.40           15.62              9.43
Outokumpu Oy             (145)              2.20              1.70

Note: Net earnings after provision for income taxes and minority interests,
but before extraordinary items.

Source: P. R. Richardson, Int'l Congress on Mine Design.


There is no doubt that the Canadian industry become more efficient as a result of its experience in the up-and-down '80s. Canadian mine operations, and those elsewhere, became "leaner and meaner" through simplification of organization structures, a focus on eliminating positions that don't contribute directly to profitability, and increased interest in further mechanization and automation of routine mining tasks. The advent of computer-controlled process equipment, computer-aided drafting, and microprocessor-based one-man surveying systems has trimmed manpower requirements and increased the speed of data collection and distribution at many sites.

When prices started to fall after 1989, mining companies found it difficult to maintain the existing level of investment in exploration, market development, and other areas listed above. They instead renewed their focus on cost reduction, says Richardson, and resorted to traditional approaches to cost-cutting which have caused problems in the past. He contrasted the Canadian companies' performance with that of several major Australian producers--BHP, CRA Ltd., Western Mining Corp., and Mount Isa Mines--which operate in a domestic political and economic climate similar to that facing the Canadian companies. The Australians, he notes, have maintained and even expanded their exploration, technology development, and human resource programs, while discovering several world-class mineral deposits and positioning themselves to be long-term global competitors.

In comparison, Canadian mining executives apparently didn't learn a few vital lessons during the lean years of the '80s, according to Richardson. Foremost among these:

* Investment in exploration and new technology must not be treated as period costs and slashed during downturns. Such investment should be maintained at relatively consistent levels throughout the economic cycle.

* Traditional cost-reduction measures aimed at becoming "lean and mean" are usually only short-term solutions. Other cost-management strategies are required for long-term cost control.

* Market encroachment of substitute products can be resisted by cooperative market development programs and renewed product development efforts.

* Investment in marginal mines and facilities during boom years brings a premature close to high-price cycles and financial disaster in the subsequent troughs.

"Thin profit margins, weak balance sheets, and high debt loads" have forced executives to resort to traditional cost-cutting approaches, Richardson concedes, but while these measures improve the immediate efficiency of the company, they can be detrimental in the long run.

The nature of competition has also changed, says Richardson, and mining executives have been slow to recognize the shifts. There are a number of new competitors, including wilderness and environmental groups campaigning and competing for alternative land use; new industries, such as computers and telecommunications, competing for skilled employees; government and unions contending for the trust and loyalty of employees; and producers of engineered materials, pursuing markets and capital. As competition expands to encompass a broad spectrum of both mining and non-mining rivals, mineral producers need to adopt competitive strategies that look beyond cost minimization.

The alternative to pure cost competition is product differentiation. In an industry which produces commodities, the only form of differentiation for which customers are likely to pay consistently higher prices is for superior performance characteristics. Thus, says Richardson, the only way in which Canadian--and other--producers facing new competition can succeed is by differentiating themselves and their products from the competition.

In Canada, says Richardson, Inco and Falconbridge have dominated the premium-price nickel-plating market because they have developed processes and products that other nickel producers cannot replicate. Sherritt Gordon likewise holds a major share of the coinage market after developing products specifically designed for that purpose. "These premium-priced market segments," he notes, "though possibly small, tend to exhibit greater price stability than the |high-tonnage~ segments."

ABBREVIATIONS

JV joint venture ug underground op open pit OR ore reserves co concentrator cx complex mi mine pl plant pp pellet plant re refinery sm smelter av mi alluvial mining hp l heap leaching sx/ew solvent extraction/electrowinning si mi solution mining K thousand M million st/yr short tons per year mt/yr metric tons per year mt/mo metric tons per month lb/yr pounds per year oz/yr troy ounces per year |yd.sup.3~ cubic yards |m.sup.3~ cubic meters bbl/d barrels per day kg kilograms

CLASS SYMBOLS

A New project under construction

B Projects with development program but for which further financing may be required and for which construction has not yet begun

C Projects in the initial proposal stage

D Projects suspended or deferred

E Expanding current facilities

F Routine capital expenditure to maintain capacity and/or to modernize facilities

NOTE: Classifications were made on the basis of published information, and firm classification was not always possible. Where uncertainty existed, double letter classification has been made.

TABULAR DATA OMITTED
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Copyright 1994 Gale, Cengage Learning. All rights reserved.

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Title Annotation:mining industry
Publication:E&MJ - Engineering & Mining Journal
Article Type:Industry Overview
Date:Jan 1, 1994
Words:1753
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