The economics of reliability: global extraction of metals and fertilizers

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Pinnacle has released a condensed version of its latest reliability report for the mining industry.

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 growing popularity of electric vehicles. Gold and silver are important means of storing wealth, in addition to various industrial applications. Aluminum and steel have countless uses in manufacturing, from food and beverage containment to automobile and aircraft manufacturing. Extracted fertilizers, especially phosphates and potash, are needed to improve the productivity of agriculture around the world, helping us to feed our growing global population.

Reliability – its definition and impact

What is Reliability? In its analytics, Pinnacle defines reliability as the measure of how often something runs when you want it to. When we think about the economics of reliability, it draws attention to how organizations invest to maintain or improve reliability. In other words, are they effective in their quest for reliability, or not?

In this report, Pinnacle analyzes the economics of reliability in the metals and fertilizer mining space, including the resource extraction, transportation and processing activities in which the world’s leading miners routinely engage. Specifically, the company considers the following base metals: aluminum, cobalt, copper, iron ore, lead, lithium, molybdenum, nickel, tin, uranium, and zinc. It also covers the precious metals gold, palladium, platinum and silver. Finally, Pinnacle considers the two main classes of extracted fertilizers – phosphates and potash.

Production, economic value and estimated reliability expenses

As the global economy continues to transform, more activities are digitized, and more efforts are made to decarbonize global energy infrastructure, metal and fertilizer miners are navigating particularly turbulent waters. . In addition to responding to secular shifts in demand that impact every industry in the world, these miners must also respond skillfully to unpredictable commodity price dynamics. This response often takes the form of putting mines into “care and maintenance” mode, where most mining activity is idle, but the site is actively managed to allow reactivation when economic conditions improve.

Responding to dramatic price swings is a known challenge in the resource extraction sector. For miners, the challenge is more dramatic in specific ways than for oil and gas producers, for example. In the oil and gas space, operators can limit or slow 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 mine sites, compared to the thousands of wells that oil and gas operators can manage. The stakes are high when management teams have to decide whether or not to move an entire site into care and maintenance mode. Then these teams have to manage the back end of the process, where these sites are either reactivated, sold or decommissioned.

Given the history of the commodity price crash of 2015 and the pandemic-induced demand crash of 2020, the tension in these results emerges. Pinnacle argued that in response to these market disruptions, miners would cut their reliability spending too quickly so they could use that money to pay off their previously excessive indebtedness. If many operators spend too much on reliability, is it really a problem for them to reduce their spending in this area?

Conclusion

Metals and fertilizer miners spend $55 billion on reliability initiatives, about 10% more than oil refiners spend.

  • For several reasons, reliability receives relatively less interest in mining than in refining. Through its economic analysis, Pinnacle has learned that across the globe there are more opportunities to make gains by optimizing ongoing efforts in mining than in oil refining.

Metals and fertilizer miners have focused on balance sheet management over the past five years, 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 studied by Pinnacle responded capably to these disruptions, reducing costs to maintain profitability and pay down excessive debt. Unfortunately, these drastic maneuvers have likely left holes in existing reliability programs that may negatively impact operational and financial performance in the future.

Some miners perform better while spending less on reliability, suggesting the best path is to spend less while targeting those expenses surgically.

  • In the miner wallets analyzed by Pinnacle, operators typically spend 4% to 10% of their revenue on reliability programs. Interestingly, operators who spent the least often recorded the largest margins, even when results were aggregated over three-year periods to smooth out single-year anomalies. From this, Pinnacle deduces that many reliability programs are bloated. In his experience, between 10% and 30% of this spending may produce no significant impact on performance. While these programs are almost certainly lighter than they were before the price crash of 2015 and the pandemic of 2020, there remains a substantial opportunity to further streamline and optimize these expenses. Intentional, multidimensional, system-wide analysis is the best tool to ensure that reliability investments are framed within an appropriate 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/

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