Making sure that an exploration project or producing operation is properly supplied can be a challenge in its own right
By Simon Walker, European Editor
This Terex TR100 hauler is part of a convoy of new trucks ordered by Russian diamond producer Alrosa to augment its fleet at the Nyurba mine in the Sakha Republic. The successful delivery of the trucks followed a complex, 5,500-mile journal from Motherwell, Scotland, to the isolated mine in Russia’s Far East.
Logistics: the handling of the practical detail of any large-scale enterprise or operation (The Chambers Dictionary). The detailed organization and implementation of a complex operation; the activity of organizing the movement, equipment, and accommodation of troops (Oxford English Dictionary).
What is clear from these definitions is that logistics in all its senses is not something that can be taken lightly, or is ever likely to look after itself. In addition, the demands made by a project will be very different depending on the stage involved. A grassroots exploration exercise obviously has specific requirements in terms of transport, accommodation and supplies that differ substantially from those of an established mine.
Similarly, it would be naïve to assume that a supply system that works adequately at high altitude in Latin America could be transplanted successfully to Nunavut or Siberia. Both locations might have some aspects in common, but overall the requirements will be markedly different.
And again, a system that has to be set up from scratch brings with it much more onerous challenges and commitments than other operations might find by piggybacking on to infrastructure that already exists. In that type of scenario, it is not difficult to understand why companies that have invested large amounts of capex in new transport links will sometimes fight tooth and nail to ensure that potential competitors cannot subsequently gain access. To the outsider, the replication of railway lines (as in the Pilbara iron ore industry in Western Australia, for example) may appear wasteful in the extreme, but the rationale behind the attempts some years ago by Rio Tinto and BHP Billiton to thwart Fortescue Metal’s request to use parts of their existing networks for its own operations came down to basic commercial considerations.
Supplying—In and Out
At its most basic level, a supply chain fulfills the need for an operation to get in materials that it needs, and send out its products. In that respect, mines are no different from chicken farms or car factories. They just need a system that works.
However, geography often makes things vastly more complicated; mines today often open for business outside areas of good infrastructure, or where supply capabilities are at best restricted. Whether it’s in the Pilbara or Peru, establishing a supply chain and transport systems for mining involves much more effort than, for the sake of argument, in coastal New South Wales or Nova Scotia.
Mining has always been one of the lead industries, opening up new areas for subsequent development as firstly supply and service companies establish themselves with a local presence, then wider commerce moves in as well. In completely undeveloped areas, even taking the first step can be daunting. Having been involved with attracting investment into mineral-sector development in Mongolia in the 1990s, before Oyu Tolgoi was even discovered, a colleague who had been there looked at the set of country-wide air navigation maps being used and remarked that many of the roads shown on them simply did not exist. Tracks for crossing the steppe maybe, but nothing that could be used to move heavy machinery such as drill rigs or dozers.
Who outside mining today remembers that air freight began with transporting dredges in sections to the Bulolo gold fields in Papua New Guinea? E&MJ’s previous article on logistics (April 2012, pp. 32–38) provided some of the facts and figures about the operation, which marked a step-change from previous practice. True, railways had provided a means of moving heavy loads from the mid-19th century, but once transhipped at the rail head, horse power was the only option—as it had been for hundreds of years.
Establishing the Chain
In a recently published white paper on logistics in the mining sector, Pennsylvania-based PLS Logistics noted that: “The logistics challenges of mining companies are unique and complex. Despite this, investments in logistics people, processes and systems often take a back seat to core investments around finding, extracting and processing minerals.
“Logistics costs as a percent of a mining company’s total operating costs may be small, but mining companies can uncover literally millions of dollars in hidden profits by re-examining how they address logistics challenges. Fine-tuning a neglected function can drive profit,” the company added.
And PLS is not the only company that has highlighted the fact that the mining sector is often behind the game when it comes to organizing its supply chain. In an interview with the South African publication Mining Weekly in 2012 Martin Bailey, vice-president of the Chartered Institute of Logistics and Transport in South Africa, stated that “the mining industry is still behind the times regarding logistics management when compared with other sectors.” He noted, though, that “in the near future, the mining industry will begin to see its logistics management as a key component of its operations.
“This change is imminent,” he said, “as the cost of material going into a mine is getting close to the resources spent by mining companies on labor.” While Bailey was obviously speaking with reference to the situation in South Africa, his comments are equally valid throughout the rest of the mining world. In essence, unless a mining company optimizes the management of its logistics chain, it is wasting money—and that is something to be avoided whatever the position in the commodity cycle.
Aside from looking at how their existing supply chains are functioning, companies involved in mining and exploration need to focus tightly on how new logistics operations are set up. “Assess supply chain risks early when making offshore investment decisions,” advises management consultants A.T. Kearney in a white paper that looks at the potential pitfalls involved in supplying remote locations.
“Mining is just one of the natural-resource processing industries that are moving into more remote locations to be closer both to their natural resources and to their customers in emerging markets. Yet with limited on-site infrastructure, these locations present significant supply chain challenges and risks that must be addressed as an integral part of location decisions, project evaluation and feasibility studies,” the company noted.
“Supply chain costs in remote locations can be high and significantly differ between potential markets,” A.T. Kearney went on. And there can be other complications. “Supply chain assets are often in the hands of joint-venture partners, affiliated companies or even competitors. Ownership issues like these can influence a project’s success, and therefore must be factored into the equation at the evaluation stage.
“Also key to the decision are the lopsided risks—those that occur between the project owner and its customers. A project that is considered high-risk for a supplier (for example, one that has no influence with the state railway company) may be low risk for the customer (who may have substantial influence with the state railway—particularly if the customer is state-owned or a monopoly). In this situation, many companies would transfer supply chain risk to the party best able to mitigate it.”
Identifying potential supply-chain risks is therefore an extremely important part of the feasibility study for any new project, and especially one being built in an area of poor existing infrastructure. A.T. Kearney noted a number of key points to consider:
- Make sure that government-run institutions can deliver;
- Evaluate the various transport routes;
- Size up sovereign risks; and
- Identify hidden costs early.
Aside from the other focus points on the list, selecting the right transport options, both to bring in material—whether it is diesel for haul trucks or frozen peas for the canteen—and ship out products for sale, can make or break a mine. And, of course, the differences in and out can be substantial, especially for high-value products such as diamonds or gold. On the other hand, bauxite, coal and iron ore need a different level of bulk-handling infrastructure from, say, base-metal concentrates.
The Value of Good Logistics
In most cases, there will be a significant volume or tonnage imbalance between an operation’s needs and its output. While this can work in either direction, depending on the type and value of the product involved, both aspects warrant careful appraisal in order to optimize the structure and reduce costs wherever possible.
PLS Logistics provides an example of the impact that cutting freight costs by 10% could have. Working on the assumption of a $1-billion operation with a 5% profit margin, and logistics costs of 10% of revenue ($100 million, of which freight transport makes up $63 million), a 10% saving in freight costs comes to $6.3 million—or a 12% increase in profits. To generate the same profit impact, the operation would need to increase sales by $126 million, PLS points out.
From that, it is clear that big bottom-line benefits can be won by understanding how to fine-tune logistics systems. However, there is often a major stumbling block here, in that—as PLS highlights—mining companies focus their resources, both human and capital, on finding, extracting, processing and selling minerals. Functions like transport are often handled by employees as an added responsibility to a non-logistics position, with the inevitable consequence that buying leverage is lost.
“The global world of logistics consists of many complexities today, whereas in the past businesses could rely on anyone to move their products without the technical aspects of today’s logistics industry. As a result, we need people who are trained in logistics,” said Martin Bailey in his 2012 interview.
“There are gaps in the qualifications offered by educational institutions. If this can be addressed, it could benefit the mining industry’s logistics and supply chain systems,” he suggested.
The Benefits of Outsourcing
A century ago, the miners of La Plata in Colorado outsourced their supply chain to burro-train operators, and today an increasing number of mining companies are realizing the security and reliability that making use of third-party logistics (TPL) providers can bring. Some of these firms operate internationally, others regionally, but they all bring management expertise that is invariably now backed up by state-of-the-art systems for ordering, monitoring and verifying freight moving in and out from an operation.
In an interview in 2012, Milo Stojkovski, camp construction and management manager at the Australian-based Toll Group, stated that the most important aspect of using TPL services is the logistics provider’s local and regional network. This provides back-up should problems arise with critical aspects of a logistics supply chain. “If you have a provider that has a good network of depots and transport routes and assets in the regions that you’re operating in, that’s really what you need so that you can support the operation both on a standard day-to-day basis but also, very importantly, when there is an issue,” he said. “You can really feel the pinch if the provider themselves doesn’t have the capabilities or networks.”
As an example of how long-term TPL relationships can work, in March Toll bought ODT Australis—which had provided BHP Billiton’s Olympic Dam mine with industrial services and logistics support for nearly 30 years.
Toll also gives the example of its involvement with an unnamed Australian gold producer, which needed a reliable supply chain for delivering general freight from its suppliers to its mines in Western Australia and the Northern Territory. The offsite receipting system adopted involves checking supplier goods ordered by the mining company at Toll’s consolidation depot, and receipting them into the client’s enterprise resource planning system before transporting the freight to the individual mines.
Toll claims that the benefits achieved included greater visibility of deliveries through the supply chain, fewer order fulfillment errors, and quicker availability of orders to the end users.
Dark Clouds on the Horizon?
The logistics industry worldwide has been at the forefront of introducing information technology as the foundation for streamlining its business and making it both more efficient and more responsive to its customers’ requirements. The benefits are obvious, but there are risks as well, especially in relation to cyber-security. In a presentation to the 2014 Gartner Security and Risk Management Summit in Australia, Mike Rothery from the country’s Attorney-General’s department identified mining and logistics as being among the industrial sectors with the least well-developed understanding of managing SCADA security risk.
Writing in the February 2015 edition of Pipeline & Gas Journal, information security systems expert Steven Bjarnason noted, that, “in today’s technology-driven society, the threats abound but the single most important element involved in avoiding cyber attacks is the people responsible for the maintenance and use of computer assets, networks, applications and databases.
“The technology to secure SCADA systems exists today. A key reason that SCADA systems are being targeted [by hackers] is that many of the systems now in operation remain vulnerable. Operators simply haven’t yet implemented all their security measures,” explained consultant Kevin Finnan in the same publication.
And while these authors were focusing on the oil and gas industry in this context, the close inter-relationship between mining and logistics means that their comments are equally germane here. Whether the intention is mischief-making or industrial sabotage, the potential vulnerability of IT and control systems to outside interference is indeed serious. In addition, links within and between separate systems provide the opportunity for hacking access, so it behooves mining companies and their service providers to ensure that their systems include top-notch security.
That is not, of course, to imply that specific individual logistics providers have weak security control, nor that their customers in mining and exploration are un-aware of the growing threat of control- and corporate-systems vulnerability. Nonetheless, every chink in the armor is a hacker’s way in, and at the moment—if Mike Rothery is to be believed—there’s plenty of housekeeping still to be done.