BENEFICIATION ECONOMICS: A VIEW FROM THE TRENCHES
Neale BaartjesMineral Economics Consultant
Diversifying a Mineral Based Economy
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MINERAL ECONOMICRESEARCH
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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