'tis the season (still) to be wary
Dr Graham Lumley*, 15 December 2011
I HAVE previously suggested the mine development process can be represented by the following Machiavellian formula: (Underestimated costs) + (Overstated benefits) = (Project Approval). The principles-based JORC Code and a lack of prescription of the process through the various feasibility studies support this outcome. As the industry tightened up the resource definitions and standards through the JORC code during the 1990s through to 2004, the deception didn’t stop. It just shifted.
Remember deception is not a new phenomenon.
A few weeks ago I mentioned Agricola who wrote the following in 1556: “A prudent owner, before he buys shares, ought to go to the mine and carefully examine the nature of the vein, for it is very important that he should be on his guard lest fraudulent sellers of shares should deceive him”. More than 300 years later Mark Twain was reported (unconfirmed) to have told an assembled group of miners at Red Dog, California, in 1866, that “a mine is a hole in the ground owned by a liar”.
Don’t stick your head in the sand. Deception does happen and it is happening right now. The following is an example of deception currently (yep, right now!) used in the coal industry. It is mostly used against higher level executive management.
The output of mining equipment in the Australian coal mines is described in terms of bank cubic metres. Equipment monitors measure tonnes and numbers of passes, loads, cycles, etc. Total output is tonnes per cycle multiplied by the number of cycles. To convert tonnes moved to BCMs one must divide the tonnes by the insitu specific gravity (SG). The output of a mine’s stripping fleet can and is being manipulated by the choice of insitu SGs. The use of a smaller SG increases reported output in BCMs. Conversely, in the development phase, the use of a higher SG means fewer tonnes to move and the required specification of trucks and loaders (and/or numbers of pieces of equipment) can be lower.
Further to this, the changing of SG over time in planning of new mines and in existing mines has been used to create an illusion of improving outcomes. An unnamed mine in Central Queensland and its mine manager received kudos for increasing mine overburden output. An investigation of the performance demonstrated over a three-year period the insitu SG had reduced from 2.40 tonne/cubic metre to 2.08 t/cu.m.
So if a new development manipulated SG over a period (or even right from the start) would you expect the mining analysts, who are paid to tell the large investors whether an investment makes sense, to pick this up? I don’t think so, and it could make a huge difference to the economics of the project.
By way of another example we look back a few years. A new technology was justified on assumptions which led to an indicated 25% increase in productivity. Many millions of dollars were invested in machine modifications and hundreds of millions of dollars were lost through commodity not available to be sold while equipment was under modification. The trial results were presented by the marketer of the technology (someone who had a direct financial interest in the further rollout of the technology) and the mine where the trial was held. The company which owned the mine also had a direct financial interest in the technology through a shareholding in the company which owned the IP. The industry was told productivity had improved by 28%. Verbal feedback provided by the operators suggested it was not that good. I analysed the data and found actual productivity had dropped by 14%. Apart from filtering, clustering and normalising done in the guise of “comparing like with like” there was also a simple 6% error in the calculations which interestingly pushed the result from below to above the level used for justification. An observer would not find a conclusion of deliberate deception too hard to arrive at (but maybe difficult to prove).
When you have analysed as many numbers as I have you will be entitled to the same jaundiced attitude that I have.
It needs to be emphasised that this discourse is directed at a portion of the Australian mining industry where deception is being perpetrated at single or multiple levels. Some boards of directors and executive management are complicit and some are just plain ignorant about what is happening. Some development teams and consultants are supporting them. However, some mining houses do conduct rigorous procedures and insist on honesty to ensure their projects are appropriately ranked for development. Unfortunately, they are also subject to deception by people with interests not tied to the financial return from the commodity in the ground but rather in the development process. The result is that boards of directors, financiers and shareholders cannot trust information provided to them about mine developments. There is a strong need to establish incentives and methods that produce more reliable information for the benefit of those providing money for developments.
A better way
It is clear that many mine developments are proceeding based on doubtful engineering and reform is needed. This has been recognised by the ASX (2011) and JORC (2011). It is a macro issue but comprises a series of micro problems. In this discourse the focus is on one of those micro areas: the use of accurate equipment rates in mine plans.
Until the Valmin Code, JORC Code and the ASX Listing Rules address the issue of mining and engineering inputs they will remain fatally flawed and won’t achieve their noble aims. Less error (deliberate or otherwise) and more accountability are needed in the estimation of prospective mine returns. Two key inputs are recommended to achieve this:
1. Better forecasting of equipment rates through benchmarking against industry standards.
2. More accountability of engineering input.
These, of course, must be and will be discussed in more detail in the next instalment.
*Dr Graham Lumley is chief executive officer of Australian mining consulting firm GBI. A qualified mining engineer and MBA graduate who has been involved with the mining industry for 24 years, Lumley established GBI in 1998 when he also started what is said to be the world’s biggest mining performance data collection.
Also in the December 15 - 21, 2011 edition
- AFRICA
- Eritrea risk narrows Zara field
- ASIA DESK
- Not all good as gold in China
- AUSTMINE
- MST buys Nixon Communications
- BREAKING NEWS
- Abenab progress for Avonlea
- Alara advances
- Alcoa declares divi
- Alcyone search boost
- Better news for St Barb
- Black Fire complies
- Bu Dun Hua copper
- Chief sees higher rating for Endeavour
- Cockatoo extension
- Impala sacks drillers
- Industrea win
- Kingston shines
- Maiden Rosie resource
- More Bass trouble
- More concerns on uranium supply
- Nany option exercised
- Newcrest output up
- Palito reassessment
- Pegasus finds copper
- PGM output up
- Radar on track
- Redhill expands holding
- Rio in control
- River attraction for Silver Lake
- Southern Cross ready to move forward
- Stonehenge sets sights high
- Straits gain
- Strategic permit
- Tanoyan update for Reliance
- Trafford's exploration boost
- Two Rivers death
- Ventnor copper hits
- WA uranium policy
- West Rand mines to merge
- Windfall at lake
- Winmar attracts investor
- Yellowhead on track
- CENTRAL ASIA
- Can miners really side-step a war?
- COAL
- Mardon's new year wish
- CONSULTING
- Consultants see room to grow in 2012
- Lory leads SKM mining into new growth phase
- CONTRACTING
- Contracting briefs: Redpath, Thiess, Decmil
- FINANCE
- A golden path to Dubbo development
- Copper deficit a fixture for the future
- Kagara opts for safety first
- Money’s almost too tight to mention
- Terramin view expected to become clearer
- FORUM
- How the JORC and Valmin codes work
- More must buy into JORC discussion
- FROM THE CAPITAL
- Capital management will be key 2012 theme
- GOLD
- Loyal to the cause
- Upside seen despite Teranga downslide
- HEAVY METAL
- Atlas Copco expands mining range
- ISSUES
- State-run miners: best of a bad bunch
- MINING
- Independence gloom unwarranted
- MINING IT
- Auto-money changes everything
- Innovation is the new black
- IT notebook: ARANZ Geo, Immersive Technologies
- IT notebook: Devex receives certification
- IT optimists
- Mining IT: 2011 rebooted
- Mining IT: product releases to fill 2012 calendar
- XPAC to lead dynamic software revival
- PEOPLE
- People on the move: Gindalbie Metals, Abcourt Mines, Carbon Energy
- SOUTH AMERICA
- Chili backers like its prospects
- VIEW FROM THE WEST END
- Bitten on the bum by a Black Swan
