a view from the trenches - ecopartners.co.za university beneficiation... · a view from the...

BENEFICIATION ECONOMICS: A VIEW FROM THE TRENCHES

Neale BaartjesMineral Economics Consultant

Diversifying a Mineral Based Economy

?

MINERAL ECONOMICRESEARCH

?RESEARCHPLATFORMS

Lab

ou

r Inte

nsiv

eIn

du

strie

s

FOCUS 3

BENEFICIATION ECONOMICS

•Thinking like a Mineral Economist

•Towards A Common Definition

•The MPRDA, The Charter and Beneficiation•The MPRDA, The Charter and Beneficiation

•The Beneficiation Strategy

•Looking at the Economics •Macroeconomic Cycle•Microeconomic Functions•Costs and Cost Strategy

•Examples•Aluminium (Caribbean)•Copper (West Africa)

•Thinking like a Mineral Economist

•Towards A Common Definition

•The MPRDA, The Charter and Beneficiation

•The Beneficiation Strategy•The Beneficiation Strategy

•Looking at the Economics •Macroeconomic Cycle•Microeconomic Functions•Costs and Cost Strategy

•Examples•Aluminium (Caribbean)•Copper (Central Africa)

Constructing your Economics Mind

What kind of Mineral Economist are you?

• Policy v Scientism

• The meaning of Ideas v The meaning of Numbers

• Issues of the Individual v Issues of Society• Issues of the Individual v Issues of Society

• Unrelated v Interrelated

• Describe today v Prescribe tomorrow

• Macro v Micro

• K v L

Why we don’t get it!

There is a need to constantly update your thinking

You need to approach it analytically AND objectively!

THE PEOPLE SHALL SHARE IN THE COUNTRY'S WEALTH!

The national wealth of our country, the heritage of all South Africans, shall be restored to the people;

The mineral wealth beneath the soil, the banks and the monopoly industry shall be transferred to the ownership of the

MINERAL ECONOMIC POLICY

monopoly industry shall be transferred to the ownership of the people as a whole;

All other industry and trade shall be controlled to assist the well-being of the people;

All people shall have equal rights to trade where they choose, to manufacture and to enter all trades, crafts and professions.

Freedom Charter, 1955

Foreign shareholders currently only get around 3% of the value that mines produce. DM 2011

MINERAL ECONOMIC REALITY

•Mining production for June 2011 decreased 0,7% year-on-year, according to

data released by Statistics South Africa (StatsSA) on Thursday.

•Seasonally adjusted mining production in the second quarter of 2011 dropped

1,1%, compared to the first quarter of 2011.

•StatsSA says the main contributor the drop was a 2,7% decline in the

production of platinum group metals (PGMs), while iron ore production rose by

1,3%.

•However, actual mining production increased 7% in the second quarter of 2011.

BD2011

•Thinking like a Mineral Economist

•Towards A Common Definition

•The Charter and Beneficiation

•The Beneficiation Strategy•The Beneficiation Strategy

•Looking at the Economics •Macroeconomic Cycle•Microeconomic Functions•Costs and Cost Strategy

•Examples•Aluminium (Caribbean)•Copper (Central Africa)

SOUTH AFRICAN JARGON

STAGE 1 STAGE 2 STAGE 3 STAGE 4

Mining Processing Refining Fabrication

Comminution Intermediate Goods

Final Goods

Robinson and Von Below, 1990

Rustomjee and Fine, 1996

SOUTH AFRICAN JARGON

HighHigh

The action of mining and producing an ore or concentrate (primary Product)

1

Capital

Intensity

Labour

IntensityProcess Flow-ChartMineral Beneficiation Process Category

Stage

HighHigh

The action of mining and producing an ore or concentrate (primary Product)

1

Capital

Intensity

Labour

IntensityProcess Flow-ChartMineral Beneficiation Process Category

Stage

Run-of Mine OresWashed and Sized

ConcentratesRun-of Mine Ores

Washed and Sized

Concentrates

Medium to High

Medium to High

The action of manufacturing a final product for sale

4

HighLow

The action of converting the intermediate goods into a refined product suitable for purchase by both small and sophisticated industries.

3

HighLow

The action of converting a concentrate into a bulk tonnage intermediate product (example a metal alloy)

2

Medium to High

Medium to High

The action of manufacturing a final product for sale

4

HighLow

The action of converting the intermediate goods into a refined product suitable for purchase by both small and sophisticated industries.

3

HighLow

The action of converting a concentrate into a bulk tonnage intermediate product (example a metal alloy)

2Mattes/Slags/

Bulk Chemicals

Ferro Alloys/

Pure Metals

Steel/AlloysWorked Shapes and

Forms

Worked Shapes and

Forms

Worked Shapes and

Forms

Mattes/Slags/

Bulk Chemicals

Ferro Alloys/

Pure Metals

Steel/AlloysWorked Shapes and

Forms

Worked Shapes and

Forms

Worked Shapes and

Forms

COM

Employment Numbers are highest at start and end of the value chain

EMPLOYMENT ‘U’ CURVE

Jobs

1 42 3

Mining Processing Refining Fabrication

MINING: EMPLOYMENT ‘DOWNHILL’

500 000

600 000

700 000

800 000

900 000

0

100 000

200 000

300 000

400 000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Male Female

EMPLOYMENT ‘U’ CURVE

Jobs

1 42 3

Capital

Mining Processing Refining Fabrication

DOWNSTREAM AND SIDESTREAM

Linkages

Linkages

Mining Processing Refining Fabrication

Downstream: Following on from

Sidestream: Related or support industries

Linkages

Mineral

Expl. Capital Goods• Geophysical• Drilling• Survey etc.

Mining Capital Goods• Drilling• Cutting• Hauling• Hoisting, etc.

Processing Cap. Goods• Crushers/mills• Hydromet plant• Materials handling• Furnaces, etc.

Smelting & Value

Refining Cap. Goods•Smelters•Furnaces•Electro winning cells•Casters

Fabrication Cap.Goods•Rolling•Moulding•Machining•Assembling

THE MINERAL VALUE CHAIN

MiningMineral

ProcessingExploration

Exploration Services• GIS• Analytical• Data processing• Financing etc

Mining Services• Mine planning•Consumables/spares• Sub-contracting• Financing• Analytical, etc

Processing Services• Comminution• Grinding media• Chem/reagects• Process control• Analytical, etc

Smelting &

Refining

Value

Addition

Refining Services•Reductants•Chemicals•Assaying

Value adding services•Design•Marketing•Distribution•Services

•Thinking like a Mineral Economist

•Towards A Common Definition

•The MPRDA, The Charter and Beneficiation

•The Beneficiation Strategy•The Beneficiation Strategy

•Looking at the Economics •Macroeconomic Cycle•Microeconomic Functions•Costs and Cost Strategy

•Examples•Aluminium (Caribbean)•Copper (Central Africa)

Mining Charter

Revised Charter

•Mining companies must facilitate local beneficiation of mineral commodities by

adhering to the provision of Section 26 of the MPRDA and the mineral beneficiation

strategy.

• Mining companies can offset up to 11% of the value of beneficiation against the

ownership target.

•Thinking like a Mineral Economist

•Towards A Common Definition

•The MPRDA, The Charter and Beneficiation

•The Beneficiation Strategy•The Beneficiation Strategy

•Looking at the Economics •Macroeconomic Cycle•Microeconomic Functions•Costs and Cost Strategy

•Examples•Aluminium (Caribbean)•Copper (West Africa)

BENEFICIATION STRATEGY FOR SOUTH AFRICA

1. Coal and Uranium

2. Iron

3. Chrome

4. Vanadium

BY COMMODITY

5. Nickel

6. Manganese

7. Titanium

8. PGM

9. Diamond

10.Gold

1. Energy Commodities

2. Iron and Steel

BY VALUE CHAIN

BENEFICIATION STRATEGY FOR SOUTH AFRICA

2. Iron and Steel

3. Pigment and Titanium Metal Production

4. Autocatalytic Converters and Diesel Particulate

5. Diamond Cutting and Polishing and Jewellery Fabrication

•Thinking like a Mineral Economist

•Towards A Common Definition

•The MPRDA, The Charter and Beneficiation

•The Beneficiation Strategy•The Beneficiation Strategy

•Looking at the Economics •Macroeconomic Cycle•Microeconomic Functions•Costs and Cost Strategy

•Examples•Aluminium (Caribbean)•Copper (West Africa)

BENEFITS OF

GGP and GDPOPPORTUNITY

CONVERTADVANTAGES

OFBENEFICIATION

BOPJOBS

ECONOMICGROWTH

Profit

PeopleEnvironment

MACROECONOMIC FRAMEWORK

Household Corporate

Labour Market

Government

TrC

TCTH

TrH

LD DemandLS Supply

Wages

Household Corporate

CommodityMarket

Government

Financial Markets

Foreign

SG

G

SF

Yield

Consumption

Import

GovernmentLabourSavingsTaxTransfer Export

Household Corporate

Labour Market

Government

TrC

TCTH

TrH

LD DemandLS Supply

Wages

MACROECONOMIC FRAMEWORK

Household Corporate

CommodityMarket

Government

Financial Markets

Foreign

SG

G

SF

Yield

Consumption

Import

Export

GovernmentLabourSavingsTaxTransfer

Household Corporate

Labour Market

Government

TrM

TCTH

TrH

LD DemandLS Supply

Wages

TrP

MACROECONOMIC FRAMEWORK

Household Corporate

Mining Plant

Government

Financial Markets

Foreign

SG

G

SF

Yield

Consumption

Import

Export

GovernmentLabourSavingsTaxTransfer

Production Plant

STAGE 1

Mining

STAGE 2

Processing

STAGE 3

Refining

STAGE 4

Fabrication

Profits Positive Externalities

Mining Processing Refining Fabrication

PollutionNegative Externalities

Pigovian TaxesPenalties

Factors of

Production

(Inputs)

PRODUCTION

PLANT

Products

(Outputs)

MICROECONOMIC FRAMEWORK

What to produce?

How much to produce?

How to produce?

Factors of

Production

(Inputs)

PRODUCTION

PLANT

Products

(Outputs)

Cost of Raw Material ����

Water Price ���� ����

Electricity Price ���� ����

Transport Costs ����

Skills Availability ����

Cost of Labour ����

Price of Land ����Price of Land ����

Cost of Finance ���� ����

RoC/RoI/RoE/Hurdle ���� ���� ����

Monopoly Profits ����

Subsidies ���� ����

Tax Incentives ����

Demand ����

Pigovian Tax ���� ����

Inventory Holding Cost ����

Tariffs ����

Market Structure ���� ���� ����

Predatory Pricing ����

Fixed Costs: Costs that do not change with changes in Output quantity.

Sunk Costs: A cost that once spent is usually never recoverable.

Variable Costs: Costs that change with changes in Output quantity.

VC

TC = FC+VC

R

Sunk Costs

Fixed Costs

FC

Q

Sunk Costs Fixed Costs Variable Costs

Research with no return Rental Raw material

Incomplete Developments Permanent Labour Salaries Contract Labour Salaries

BFS Insurance Transport Costs

Depreciation Depreciation Energy Costs

Permit Fees Building & Plant costs Water Costs

COST AND COST STRATEGY

Inputs

Cost of Raw Material

Water Price

Electricity Price

Logistics Transport Costs

HRSkills Availability

Cost of Labour

Incentives Price of Land

Profitability Cost of Finance

Income

RoC/RoI/RoE/Hurdle

Monopoly Profits

Subsidies

Tax Incentives

Expenses

Demand

Pigovian Tax

Inventory Holding Cost

Tariffs

CompetitionMarket Structure

Predatory Pricing

Issues to Overcome

VALUE(Impact/Profitability)

High

Do FirstFirst Reduce

Required Effort

VALUE-EASE MODEL

COST AND COST STRATEGY

(Impact/Profitability)

EASE OF IMPLEMENTATION(Time required/Resources required)

Low

High Low

Only pursue opportunities

Do Last

VALUE(Impact/Profitability)

High Do FirstFirst Reduce Required Effort

VALUE-EASE MODEL���� Cost of Raw Material

� Water Price

� Electricity Price

� Transport Costs

� Skills Availability

� Cost of Labour

� Price of Land

Cost of Finance

RoC/RoI/RoE/Hurdle

� Monopoly Profits

���� ��������

����

��������

����

��������

����(Impact/Profitability)

EASE OF IMPLEMENTATION(Time required/Resources required)

Low

High Low

Only pursue opportunities

Do Last

� Monopoly Profits

� Subsidies

Tax Incentives

� Demand

� Pigovian Tax

� Inventory Holding Cost

� Tariffs

� Market Structure

� Predatory Pricing

�������� ��������������������

•Thinking like a Mineral Economist

•Towards A Common Definition

•The MPRDA, The Charter and Beneficiation

•The Beneficiation Strategy•The Beneficiation Strategy

•Looking at the Economics •Macroeconomic Cycle•Microeconomic Functions•Costs and Cost Strategy

•Examples•Aluminium (Caribbean)•Copper (West Africa)

•Aluminium smelter costs are energy dependant (30-50% of costs areenergy)

•When Trinidad was delivering at US$0.04 the smelters wanted it atUS$0.015

ALUMINIUM - CARIBBEAN

US$0.015

•Deal signed but then fell through. Later deals were secured.

•Benefit hoped for was (sidestream) industrial deepening and(downstream) broadening

•Net Value Add

•Maximise linkages

ALUMINIUM - CARIBBEAN

•Local technology development not just Operational and Maintenance involvement

•Need to develop two competing units (one private sector and one government owned)

•Preferred copper ore is the Cu-S family. Less popular is the Cu-OH family (e.g.malachite). Problem was large amounts of chrysocolla also recovered in mining.

•Volumes of oxidised ores keep increasing and processing is limited to economical extraction.

•Mass production of sulphuric acid enabled the processing of

COPPER – CENTRAL AFRICA

•Mass production of sulphuric acid enabled the processing of chrysocolla ore.

•This they called beneficiation!!

•Complex orebodies can now be exploited for local projects and longer process chains means that diversification can be considered.

•Decision to be made is does the SOE establish a new company to retreat the dumps, or should it give it to an existing market player…

Greenfields Client Brownfields Client

Cut-off 1.3% 3%

Acid consumption 200kg/mt 120kg/mt

LOM 20 years 15 years

Annual Revenue $101-million $86-million

COPPER – CENTRAL AFRICA

Annual Revenue $101-million $86-million

Annual OpEx $61-million $60-million

Capital Cost $204-million $117-million

NPV @ 10% $8.8 million $13-million

DCFROR 10.6% 15.2%

Hurdle Rate 12% 15%

Result Project Rejected Project Accepted

Area Recommendation

Legal •Write the Beneficiation Act of South Africa

Beneficiation Strategy •Use evidence led analysis to inform implementation guidelines•Develop an interface between Policy and Analysis

Taxes and Subsidies •Use Pigovian Subsidies wherever Pigovian Taxes are imposedTaxes and Subsidies •Use Pigovian Subsidies wherever Pigovian Taxes are imposed

Employment •Make investment in Stage 2 and Stage 3 activities attractive

Costs •Provide SME support by removing Fixed Costs

Spatial Development •Declare coastal belt development nodes for specific commodities