Abstract

HUTTON, C.. The economics of exhaustible mineral resources - concepts and techniques in optimization revisited. J. S. Afr. Inst. Min. Metall. [online]. 2015, vol.115, n.11, pp.1083-1096. ISSN 2411-9717.  http://dx.doi.org/10.17159/2411-9717/2015/v115n11a13.

The last commodities supercycle (2003 to 2011) was characterized by a belief in volume at any cost, where absolute output was deliberately prioritized over productivity considerations. This practice fuelled over-optimistic forecasting and planning, which in turn contributed to the economic crisis that followed. The sudden collapse of commodity prices has resulted in mining companies scrambling to find the right balance between optimizing current operations and preserving sufficient flexibility to grasp future opportunities. The runaway costs of building and operating mines have almost squeezed out profit margins, while lower ore grades are inflating production costs. Mining companies therefore need to look at the business with fresh eyes, and develop strategies to attract equity capital as traditional approaches are simply not working anymore. This is especially so in the context of a dwindling investor base that continues to demand greater returns, despite a significantly lower appetite for risk. This paper revisits the micro-economic concepts and demonstrates how pressure from shareholders to prioritize output contributed to spiralling costs and value destruction. Practical techniques are described to model cost curves to optimize a Mineral Resource endowment and address the need to right-balance a business and preserve agility.

Keywords : production prioritization; economies of scale; u-shaped cost curves; optimal rate of production; maximum Mineral Resource utilization; sustainable gains; sustainable shareholder returns.

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