Electricity and labour are the most important elements in the cost structure of the average Zambian copper mine, and together account for up to 50% of total operating costs.
It means that even small increases in these two cost components can have a disproportionate effect on a mine’s overall cost structure – and in extreme cases, can push a mine from profitability into loss virtually overnight.
The reason for their importance in the cost equation is a global phenomenon, and is down to the nature of mining. By virtue of the extensive mechanical and heat-treatment work involved in producing finished metal, mining is one of the most energy-intensive industries in the world. And although it has become highly mechanised through advanced technology and machinery, mining still employs large numbers of highly skilled people. The wage bill for a typical Zambian mine represents around one-third of total costs – and is as high as 50% for some of Zambia’s older mines.
Diesel fuel, which is used to power vehicles, equipment and machinery, is also a big cost component. For example, a big open-pit mine such as First Quantam Minerals’ Kansanshi Mine in Solwezi goes through about 200 000 litres of diesel fuel a day – that’s a hefty daily fuel bill.
After electricity, diesel, and labour, the other costs borne by Zambia’s mines are for explosives, maintenance of machinery and equipment, consumables (including spare parts), and various support services and administration.
“In order to produce finished metal in a competitive world market, mines constantly walk a tightrope between revenue and costs,” says John Dean, commercial manager at First Quantum Minerals’ new $2.1 billion Sentinel Mine, in North-Western province. “You can’t control the copper price, but you can try to control your costs – and even then, that’s not always possible.”
While electricity costs and erratic supply are well-known subjects of conversation in the current load-shedding environment, what is less known is that fuel costs are also significant.
Dean says Zambia’s fuel prices are among the highest in the world, mainly because of inefficiencies in the national procurement system, and the monopolies enjoyed by the outdated TAZAMA pipeline and Indeni refinery. “It’s heartening that Finance Minister Felix Mutati has acknowledged these inefficiencies in the recent 2017 budget speech, when he announced the government was getting out of the business of fuel procurement from March 2017 and handing it over to the private sector,” says Dean.
The current high price of diesel feeds not just into daily running costs, but also transportation costs – both for trucking copper out of Zambia to the nearest ports for export overseas, and for importing equipment, machinery and spare parts. These imports, which can run into hundreds of millions of dollars annually, attract both VAT and import duty, which is as high as 25%. “Import duty is very high, and we pay it on virtually everything – including many products that cannot be sourced from local manufacturers,” says Dean.
Throw in Mineral Royalty Tax (which is effectively a cash cost paid on every tonne of copper produced), depreciation and bank financing costs, and it becomes apparent that keeping a mine operating sustainably is a fine juggling act.
Eustus Munsaka, Chief Financial Officer at Chibuluma Mine on the Copperbelt, says a common misconception among industry observers is to see only the obvious, direct costs of mining. It’s like seeing only the tip of the iceberg, without realising that there is more underneath the surface.
“Mines constantly walk a tightrope between revenue and costs.”
“One has to look at costs holistically and see the overall picture,” he says. “And that includes other costs such as depreciation, financing costs, MRT and even Corporate Social Responsibility budgets.”
Munsaka says a mine’s overall cost structure is also affected by its size, its design and the peculiarities of its geology. For example, access to Chibuluma’s underground operations is via a decline or tunnel, rather than expensive shafts; and unlike other Copperbelt Mines, it is fairly “dry”, so there is no need for expensive operations to pump water to the surface; and finally, Chibuluma produces a very modest 10 000 tonnes of copper a year, and runs a fairly compact processing plant. These three factors combine to produce a lower energy requirement compared to other much larger Copperbelt mines. The flipside, however, is that the declines produce challenges of their own, such as damage to the expensive tyres of the loaders, as well as broken-down vehicles which can block the tunnels and cause costly work stoppages.
“We’ve always considered ourselves a low-cost mine,” says Munsaka.” “However, in the current low copper-price environment, we’re in survival mode and are carefully controlling our costs.”
Mopani Copper Mine, also on the Copperbelt, is at the other end of the cost spectrum. Mopani runs four shafts at its Nkana mine site, and another shaft and an incline at its Mufulira mine site. “We are a high-cost mine,” says Chief Financial Officer, John Chiwele. “But that is in the process of changing. We are in the midst of a billion-dollar modernisation programme aimed at improving our productivity and bringing our overall cost structure down.”
Mopani’s shafts were built in the 1930s. No matter how well you maintain them, says Chiwele, it’s old infrastructure. “You have to travel further to access the ore body. You do more work. Things break down. Grades get lower in most cases. Water has to be pumped to the surface. Ventilation is costly. You need more maintenance.”
Mopani is currently sinking three new shafts: two at Nkana mine site and one at the Mufulira mine site. This will address the problem of old infrastructure and also reduce the ore handling times from the old mines. “Currently, a piece of ore or rock is handled up to sixteen times from the time it is mined underground up to the point it is brought to the surface,” says Chiwele. “This is inefficient and very costly.”
Once Mopani’s new shafts are commissioned over the next couple of years, they’ll be the deepest and most modern in Africa, with state-of-the-art technology. Ore will be extracted and transported to the surface faster and more efficiently, and copper will be produced at lower cost.
The one blemish in this rosy picture is electricity, which Chiwele says represents an ever-increasing proportion of Mopani’s overall cost structure – nearly double what it was a few years ago. “It could soon reach the point where it becomes unsustainable,” he says.
The positive side of the industry’s current focus on consolidation, cost control and productivity is that it lays the foundations for future growth and investment once the commodity price cycle begins to turn – and there are signs that this has already started to happen.
“The seeds of cyclical recovery have been planted in the form of mine closures, cost savings and productivity improvement…” says Business risks facing mining and metals: 2015-2016, a report by professional services firm Ernst & Young. “To be in a position to take advantage of the next cyclical upswing, the decision to invest for future growth is now.”